CLIENT ALERT: SEC Proposes Rescission of the Investment Adviser Pay-to-Play Rule

 

For more than 15 years, the SEC’s investment adviser “pay-to-play” rule has been one of the industry’s most consequential restrictions on political activity, requiring firms to carefully monitor and often limit political contributions by executives, marketers, and other covered personnel. Now, in a notable policy shift, the SEC has proposed eliminating the rule altogether, concluding that its costs, compliance burdens, and unintended consequences may outweigh its benefits. On September 3, 2026, the Securities and Exchange Commission proposed rescinding the rule, specifically, Rule 206(4)-5 under the Investment Advisers Act. If adopted, the proposal would represent a major shift for advisers that currently devote significant compliance resources to monitoring political contributions, preclearing donations, maintaining records, and administering lookback reviews.

The current rule can prohibit an adviser from receiving compensation for providing advisory services to a state or local government entity for two years after the adviser or a covered associate makes certain political contributions. It also restricts the solicitation and coordination of contributions and the use of certain third parties to solicit government business. These requirements can also affect advisers to private funds and other covered investment pools in which government entities invest or are solicited to invest.

According to the SEC, the rule has produced significant unintended consequences since its adoption in 2010. The SEC noted that some advisers have effectively prohibited certain political contributions altogether and that the rule can operate as a de facto strict liability regime, where relatively minor violations or administrative “foot faults” may result in severe business restrictions and substantial penalties. In addition, the SEC notes Advisers have indicated that the rule is operationally challenging to implement in practice.

The SEC believes that existing antifraud, fiduciary, compliance and Code of Ethics requirements may provide a more appropriately tailored means of addressing improper pay-to-play activity. As a result, the SEC is proposing to shift away from a highly prescriptive compliance regime in favor of a risk-based approach that allows advisers greater flexibility in designing their controls.

What Would Change?

If the proposal is adopted as written:

• The two-year compensation prohibition and related lookback requirements would be eliminated.
• The rule’s specific restrictions on soliciting and coordinating political contributions would be removed.
• The special restrictions on using third parties to solicit government advisory business would no longer apply under Rule 206(4)-5.
• The SEC would eliminate Rule 204-2(a)(18), which currently requires records concerning covered associates, government clients, political contributions and certain solicitors.
• Advisers could replace highly prescriptive political-contribution procedures with controls tailored to their actual business and pay-to-play risks.

The proposal would not, however, make pay-to-play activity per se permissible. Advisers that use political contributions to improperly influence the award or retention of government business would remain subject to the Advisers Act’s antifraud provisions, fiduciary obligations, and other federal, state, and local laws. This includes campaign-finance, lobbying, procurement, anti-bribery and pay-to-play laws, as well as FINRA and MSRB political-contribution rules, which would continue to be relevant to broker-dealers, municipal advisers, dual registrants and certain placement arrangements.

What Should Advisers Do Now?

The proposal is not yet effective. Rule 206(4)-5 and its recordkeeping requirements remain fully applicable unless and until the SEC adopts a final rescission. Advisers should therefore continue following their existing preclearance, certification, employee-screening and recordkeeping procedures.

If the rescission becomes final, advisers should not simply delete their political-contribution policies. Instead, each adviser should conduct and document a risk assessment addressing matters such as:

• Whether it manages assets for, or solicits business from, government entities or public pension plans;
• Whether government entities invest or may invest in its private funds or other covered investment pools;
• The political activities of executives, solicitors and business-development personnel;
• The use of placement agents, consultants or other third-party solicitors; and
• Applicable state and local contribution, lobbying and procurement restrictions.

Based on that assessment, an adviser may decide to retain its existing preclearance program, narrow it to higher-risk personnel or contributions, or adopt another risk-based approach. Any changes should be reflected consistently in the compliance manual, Code of Ethics, employee training, certifications and annual compliance review.

The proposed rescission could provide meaningful flexibility and reduce administrative burdens, particularly for advisers with little or no government-related business. For advisers seeking public pension or other government mandates, however, political-contribution compliance will remain an important fiduciary, regulatory and reputational issue even without Rule 206(4)-5.

The proposal is available in SEC Release No. IA-6994. Comments are due 60 days after publication in the Federal Register.

Article written by Libby Liebig, Senior Compliance Adviser, LLiebig@FiSolve.com.