SEC Proposes Rescinding Investment Adviser Pay-to-Play Rule
The SEC has proposed replacing its prescriptive ban on political contributions by investment advisers with a principles-based approach relying on existing anti-fraud and compliance rules.
The U.S. Securities and Exchange Commission has proposed a full rescission of its 'pay-to-play' rule for investment advisers, Rule 206(4)-5 under the Investment Advisers Act. The 2010 rule currently prohibits advisers from receiving compensation from government-entity clients for two years after the adviser or a covered employee makes a political contribution to an official who could influence the awarding of advisory contracts. Citing concerns that the rule unduly suppresses political speech, imposes significant operational complexity, and creates a 'de facto strict liability' framework, the SEC is advocating a shift to a principles-based approach. Instead of the prescriptive ban, advisers would rely on existing anti-fraud provisions and their own compliance programs to mitigate pay-to-play risks. While this offers flexibility, it places the onus on firms to design and implement defensible policies. Advisers with government clients must also remember that numerous state and local pay-to-play laws would remain in effect regardless of federal action. The proposal, which also eliminates related recordkeeping mandates, is open for comment for 60 days after its publication in the Federal Register.