SEC Proposes Rescinding Pay-to-Play Rule for Investment Advisers

The Securities and Exchange Commission on September 3, 2026, issued a proposal to rescind its “pay-to-play” rule for investment advisers, a regulation in place since 2010 that prohibits advisers from providing compensated advisory services to a government client for two years after the adviser or one of its covered associates makes a political contribution to certain elected officials or candidates.

The proposal, designated Release No. IA-6994 and File No. S7-2026-31, would rescind Rule 206(4)-5 under the Investment Advisers Act of 1940 in its entirety and amend the Advisers Act recordkeeping rule to eliminate the corresponding provisions. The public comment period will remain open for 60 days after the proposing release is published in the Federal Register.

What the Rule Currently Requires

The political contribution rule imposes several express prohibitions, according to the proposing release. It makes it unlawful for an adviser to receive compensation for providing advisory services to a government entity for two years after the adviser or any covered associate contributes to an official of a government entity whose office can influence the award of advisory business. The rule defines a “covered associate” as any general partner, managing member, or executive officer; any employee who solicits a government entity for the adviser and any person who directly or indirectly supervises that employee; and any political action committee controlled by the adviser or its covered associates.

The rule also bars advisers from paying third parties that are not “regulated persons” to solicit government entities for advisory business, prohibits coordinating or soliciting contributions to officials of government entities the adviser serves or seeks to serve, and treats an adviser to a covered investment pool in which a government entity invests as though it were providing services directly to that entity. A de minimis exception permits individual covered associates to contribute up to $350 per election to an official for whom the individual is entitled to vote and up to $150 per election to an official for whom the individual is not entitled to vote.

The rule applies to registered investment advisers, foreign private advisers, and exempt reporting advisers.

The Commission’s Stated Rationale

The Commission determined that the rule, since its adoption in 2010, has produced significant unintended consequences, according to the press release. Advisers have indicated the rule is operationally challenging to implement and creates a de facto strict liability standard, which can lead to situations where small donations or “foot faults” potentially trigger substantial prohibitions and fines. The Commission’s fact sheet states that some advisers responded by prohibiting all political contributions at the state and local level. The proposing release cites a 2024 Investment Management Compliance Testing Survey finding that 12.41 percent of responding investment advisers prohibit all political contributions.

The release identifies additional consequences: advisers may be blocked from hiring or promoting qualified individuals into covered associate roles for six months or two years following a contribution; public pension plans may be unable to hire the most qualified or cost-effective advisers, or may lose an existing adviser, because of contributions by covered associates during the two-year lookback; and advisers may struggle to determine which persons qualify as an “official” under the rule, a determination that can require analysis of government oversight structures and appointment authority with little publicly available information.

The proposing release also notes that the de minimis dollar thresholds have not been updated for inflation since the rule’s adoption 16 years ago and are significantly lower than contribution limits under federal campaign finance law, and that the exemptive application process may be costly and time-consuming.

What Would Replace It

All other requirements of the Advisers Act and its associated rules would continue to apply, including prohibitions on fraud, fiduciary duty requirements, the compliance rule, and the code of ethics rule. The Commission stated its view that these existing requirements, along with other federal, state, and local laws, are likely sufficient to address pay-to-play practices while allowing advisers to tailor compliance policies to their particular risks. The Commission’s ability to bring enforcement actions against advisers for fraudulent practices and fiduciary duty violations involving pay-to-play would remain unchanged, and rescission would not curtail any existing criminal and civil laws against public sector corruption.

The proposing release notes that advisers may still face solicitation restrictions under other rules, including the MSRB Political Contribution Rule, FINRA Rule 2030, and Exchange Act rule 15Fh-6, where those apply. A rescission would also eliminate the recordkeeping rule’s paragraph (a)(18), which requires registered advisers to maintain lists of covered associates, government entity clients, contributions, and payments to regulated persons soliciting government business.

State and local government assets, including nearly $6 trillion of public pension plan assets, are administered by government employees and elected officials, according to the proposing release, which cites the Census Bureau’s 2024 Annual Survey of Public Pensions.

SEC Chairman Paul S. Atkins said in a statement accompanying the proposal: “After more than 15 years of experience administering the ‘pay-to-play’ rule, it is clear that it is overly prescriptive and has produced a host of unintended consequences. Beyond operational implementation challenges, it has imposed serious penalties for small, often impulsive donations to candidates in both parties, and routinely punishes and handicaps advisory firms for an employee making a donation even before joining the business. Furthermore, advisers’ implementation of the rule has effectively resulted in the suppression of political speech.” Atkins added that “matters involving political contributions are more properly governed by local ordinances, state laws, and federal election regulations—not by the SEC.”