SEC to Rescind Investment Adviser Pay‑to‑Play Rule

The SEC has formally proposed rescinding Rule 206(4)-5 of the Investment Advisers Act, the so‑called pay‑to‑play rule that bars advisers from taking government‑entity compensation for two years after a covered associate makes a contribution to an official. The rule was criticized for its strict liability standard, narrow de‑minimis thresholds, and broad definition of "official," forcing many firms to shut down political giving.

Re‑rescission would not legalize political contributions, but it would remove the bright‑line ban and shift the burden back to advisers' own fiduciary and anti‑fraud duties. Firms should therefore keep existing programs in place while the proposal is pending, carefully evaluate which controls can be trimmed, and develop internal policies that address the more nuanced "quid pro quo" considerations the SEC cites.

Deliberations are still underway; regulators encourage advisers to document their compliance reasoning and to remain vigilant about potential enforcement actions that could arise as the SEC clarifies how the Advisers Act's antifraud provisions apply to political contributions. The next steps for counsel include reviewing current pension‑plan relationships, consulting with regulators if pending exemptions, and watching for the SEC's final rule or further amendments before the 2027 deadline.