SEC Proposes Full Rescission of Adviser Pay-to-Play Rule

The Securities and Exchange Commission has proposed the full rescission of Rule 206(4)-5, its ‘pay-to-play’ rule for investment advisers. The move would eliminate restrictions on political contributions by advisers and their associates to officials of government entities, as well as the automatic two-year ban on receiving compensation from that entity following a prohibited contribution. The SEC’s proposal argues the rule’s ‘de facto’ strict-liability standard imposes a disproportionately severe penalty for what are often small, inadvertent violations. The agency also cited First Amendment concerns, noting the rule has prompted many advisers to prohibit all employee political contributions. If the rule is rescinded, the SEC suggests that existing anti-fraud provisions under the Advisers Act and other general anti-corruption laws are sufficient to address pay-to-play risks. The proposal is open for public comment for 60 days following its publication in the Federal Register, and the SEC is specifically asking whether targeted amendments would be preferable to a full repeal.