SEC Proposes Rescinding Adviser Pay-to-Play Rule
The SEC has proposed to eliminate its pay-to-play rule for investment advisers, citing significant unintended consequences and First Amendment concerns after more than 15 years of enforcement.
The Securities and Exchange Commission has proposed rescinding Rule 206(4)-5 of the Investment Advisers Act, commonly known as the “pay-to-play” rule, along with its associated recordkeeping requirements. The rule currently imposes a two-year ban on an adviser receiving compensation from a government entity if the adviser or its associates make a political contribution to an official in a position to influence the award of advisory business.
According to the SEC, the rule has proven operationally difficult and has functioned as a strict-liability standard, imposing severe penalties for small or inadvertent contributions. Commissioners also raised First Amendment concerns, arguing the rule chills protected political speech and has led many firms to enact blanket bans on employee contributions. If the rule is rescinded, the SEC states that pay-to-play conduct would still be policed through the Advisers Act’s general antifraud provisions, fiduciary duty obligations, and compliance rules, as well as federal and state election laws.
The proposal is open for a 60-day public comment period, and advisers should continue to comply with the existing rule while monitoring the rulemaking process.