SEC Proposes Rescission of Investment Adviser “Pay-to-Play” Rule

On September 3, 2026, the US Securities and Exchange Commission (“SEC” or the “Commission”) proposed the rescission of Rule 206(4)-5 under the Investment Advisers Act of 1940 (the “Advisers Act”), widely known as the “pay-to-play” rule. The SEC will solicit comments on the proposal for 60 days following publication in the Federal Register.

Rule 206(4)-5, adopted in 2010, generally makes it unlawful for an investment adviser to receive compensation for providing investment advisory services to a state or local government entity for two years after the adviser or any of its “covered associates” makes a political contribution to an official with direct or indirect authority to select investment advisers for that entity. The rule also reaches advisers to pooled investment vehicles in which a government entity invests, and applies to contributions to candidates for office as well as to sitting officeholders. The rule provides de minimis exceptions and an adviser may apply to the SEC for an order exempting it from the two-year ban, but the SEC contends in the proposal that the de minimis exceptions are too low, and that the exemptive process has proven too costly and time-consuming for market participants.

In the release proposing the rescission (the “Proposing Release”), the SEC takes the view that the rule’s burdens may not be justified by its benefits, and that existing antifraud provisions and other regulatory frameworks are sufficient to address pay-to-play practices. The SEC suggests that permitting investment advisers to address their pay-to-play risks in a principles-based manner consistent with other existing obligations under the Advisers Act would be appropriate. In other words, the SEC believes that other existing requirements of the Advisers Act and its associated rules operate to require investment advisers to address pay-to-play practices, but retain the flexibility to design tailored compliance policies and procedures and codes of ethics in accordance with their own business models and risk profiles, taking a more holistic approach.

SEC’s Rationale for Proposing Rescission

The SEC identified several reasons for the proposal, including, among others:

• Chilling effect on political participation: The rule has had significant unintended consequences for the political speech of investment advisers and their employees. Rather than calibrating contributions to the de minimis thresholds, many firms have responded with blanket prohibitions on all political contributions by their personnel.¹
• Operationally burdensome and lacking clarity: The rule’s complex framework for identifying covered associates, tracking contributions, and monitoring lookback periods is operationally challenging for advisers and lacks clarity. The SEC provided a number of examples in this regard, which highlight a number of questions that advisers and practitioners have raised regarding certain specific aspects of the rule’s requirements.
• De facto strict liability standard: The rule lacks a scienter requirement and creates a strict liability regime in which minor or inadvertent “foot faults,” such as small donations or contributions by covered associates or by employees who only later become covered associates, trigger the full two-year compensation ban. Enforcement cases under the rule have rarely involved actual quid pro quo corruption.
• Outdated de minimis thresholds: The de minimis exemption amounts—$350 per election for an official the contributor is entitled to vote for, and $150 per election for an official the contributor is not entitled to vote for—were set in 2010, and have never been adjusted for inflation. They now sit far below the Federal Election Commission’s 2025–2026 individual limit of $3,500 per election per candidate.
• Hiring impediments: Before hiring or promoting an individual into a covered associate role, an adviser must review that person’s contributions over the preceding six months, or two years if the individual will solicit clients. A contribution above the de minimis threshold in that window, including one made at a prior employer, can trigger a two-year ban on compensation from an existing government client, leaving advisers unable to hire or promote strong candidates who present no material pay-to-play risk.

Pay-to-Play and Advisers Act Fiduciary Duty

The Poposing Release explains at length that pay-to-play practices fundamentally breach an investment adviser’s fiduciary duty under the Advisers Act, and provides examples. The SEC explained that when political contributions, rather than competence, cost, and performance, drive the selection of investment advisers for public pension plans, the nearly $6 trillion in public pension assets may be managed by less-qualified advisers or be subject to higher fees. Such arrangements can harm plan beneficiaries and taxpayers, create conflicts of interest, compromise the adviser’s fiduciary obligations of loyalty and care, and may constitute fraud under Sections 206(1) and 206(2) of the Advisers Act.

Potential Benefits of Rescission for Government Entity Clients

The SEC suggests that rescinding the rule could benefit government-entity clients by expanding the pool of investment advisers willing and able to compete for public pension plan-advisory mandates. The SEC also states that government entities could select from a larger pool of advisers, and that increased competition may lead to lower advisory fees and permit plans to retain advisers better tailored to their specific investment needs.

Existing Regulatory Safeguards

The SEC emphasizes that rescission of the rule would not legalize pay-to-play practices. Multiple legal and regulatory frameworks would continue to address such conduct:

• Antifraud Provisions: Sections 206(1) and 206(2) of the Advisers Act broadly prohibit fraudulent, deceptive, or manipulative conduct by investment advisers, including pay-to-play arrangements that compromise fiduciary duties. These prohibitions apply independently of Rule 206(4)-5 and would be unaffected by its rescission. The SEC noted its history of bringing pay-to-play enforcement cases before Rule 206(4)-5 was adopted.
• Compliance Rule and Code of Ethics: Rule 206(4)-7 (the “Compliance Rule”) requires registered advisers to adopt and implement written policies and procedures addressing pay-to-play practices that would violate the Advisers Act, and to review their adequacy and effectiveness at least annually. Rule 204A-1 (the “Code of Ethics Rule”) requires a code of ethics setting a standard of business conduct that reflects the adviser’s fiduciary obligations.
• Federal and State Criminal Laws: 18 U.S.C. § 201 (bribery of public officials) and 18 U.S.C. § 666 (theft or bribery concerning programs receiving federal funds) continue to reach bribery and quid pro quo schemes involving public officials, as do various state criminal laws.
• State and Local Laws: Many states and localities maintain their own pay-to-play restrictions that would remain in force.²

Investment Adviser Compliance After Rescission

As stated above, in the absence of Rule 206(4)-5, registered investment advisers will remain subject to the ongoing obligation under the Compliance Rule to adopt and implement written compliance policies and procedures reasonably designed to prevent violations of the Advisers Act (including the anti-fraud provisions thereof), and the Code of Ethics Rule requires advisers to establish codes of ethics that include standards of business conduct.

The Proposing Release makes clear that if the proposal is adopted and the rule rescinded, then advisers could choose to retain their existing pay-to-play compliance policies as they are, or could replace them with updated policies and procedures tailored to the specific risk levels and business models of their firms. The SEC identified the following factors relevant to that exercise. Some describe matters an adviser’s policies and procedures would need to address; others are measures an adviser could adopt depending on its risk assessment, and the extent to which any of them applies would depend on each adviser’s particular facts, circumstances and pay-to-play risks:

• Compliance with Applicable Law: Policies would need to address pay-to-play practices that would violate the Advisers Act, and could also address compliance with state, local or other federal political-donation and anti-corruption laws governing existing or prospective public pension plan clients.
• Risk Identification: Policies must identify and assess the risk of the adviser or its personnel engaging in pay-to-play practices, including contributions to government officials, political parties, and political action committees (“PACs”). Factors bearing on that assessment include:
• Governmental Relationships: Whether the adviser has, seeks, or has begun pursuing relationships with government entities or government officials; and
• Personnel: Distinguishing higher-risk roles (advisory, senior decision-making, business-development) from lower-risk back-office, administrative, or clerical roles.
• Pre-clearance: Advisers could consider pre-clearance of contributions by the adviser or its personnel to government entity officials, and whether to maintain reports documenting contributions by personnel, depending on the firm’s risk assessment.
• Risk Mitigators: Policies and procedures designed to address the risks identified—for example, permitting contributions during a window the adviser determines to carry low pay-to-play risk, or setting contribution thresholds below which certain controls, such as pre-clearance, do not apply.
• Third-Party Solicitors: Addressing the pay-to-play risks of third-party solicitor arrangements, potentially by requiring the adviser’s chief compliance officer to approve of engagements or requiring any solicitor to be a registered investment adviser, broker-dealer, security-based swap dealer or municipal advisor that has not contributed to the government entity being solicited.³
• Periodic Monitoring: Monitoring compliance with, and the effectiveness of, any pay-to-play controls the adviser has adopted—for example, auditing pre-clearance requests against the contribution reports described above.
• Remedial Steps: A framework for addressing contributions that are inconsistent with the adviser’s policies and procedures, such as seeking return of contributions within a specified timeframe or imposing disciplinary or other appropriate action in response to violations of applicable policies and procedures.

This risk-based approach would afford advisers significantly greater flexibility than the current rule’s prescriptive, one-size-fits-all framework. Advisers with minimal government entity business might consider adopting streamlined policies, while those with significant public pension plan relationships might determine to maintain or develop more robust programs.

Impact on Exempt Reporting Advisers and Foreign Private Advisers

Rule 206(4)-5 currently applies not only to SEC-registered advisers but also to exempt reporting advisers (“ERAs”), including private fund and venture capital fund advisers, and to foreign private advisers (“FPAs”) exempt from registration under Section 203(b)(3) of the Advisers Act. The Compliance Rule and the Code of Ethics Rule, by contrast, apply only to registered investment advisers. After rescission, therefore, ERAs and FPAs would no longer be subject to any rule specifically addressing pay-to-play practices, nor to the compliance and code of ethics framework the SEC identifies as partial substitutes for it.

However, all investment advisers, including ERAs and FPAs, are—and would nonetheless remain—subject to the antifraud provisions of Advisers Act Section 206, which broadly prohibit fraudulent and deceptive practices, including “pay-to-play” conduct that compromises fiduciary duties. ERAs and other advisers to pooled investment vehicles would remain subject to Rule 206(4)-8, which prohibits the making of false or misleading statements of material fact to current or prospective investors in the pooled investment vehicle, or otherwise engaging in any fraudulent, deceptive, or manipulative conduct with respect to those investors, which could include pay-to-play-related conduct.

Proposed Changes to Recordkeeping Requirements

The proposal would also amend the provision of Rule 204-2 under the Advisers Act (the “Recordkeeping Rule”) tied specifically to Rule 206(4)-5 compliance. Registered investment advisers would no longer need to maintain lists or records of their covered associates, government entity clients, contributions to officials, payments to state political parties and PACs, or payments to regulated persons soliciting government business on their behalf. The Recordkeeping Rule would still require advisers to keep copies of their compliance policies and procedures, records documenting the required annual compliance review, their codes of ethics, and written agreements with government entity clients, third-party solicitors and placement agents.

Next Steps

For many advisers, the proposal is a welcome regulatory development. That said, rescission would not curtail other existing criminal and civil laws and regulations regarding public sector corruption, whether Federal, state or local. Similarly, the SEC’s ability to bring cases against investment advisers for fraudulent practices and violations of fiduciary duty for engaging in pay-to-play practices, as it did prior to the rule’s adoption, would remain unchanged. As is usually the case in the regulatory arena, there are trade-offs—a principles-based approach provides flexibility and possibility of tailoring, but it also creates uncertainty and can heighten regulatory risks. Ultimately, advisers will need to try to create a control environment that reasonably distinguishes between “quid pro quo” corruption and, using the SEC’s phrase, “core political speech protected by the First Amendment.” In this regard, the SEC states that, in the context of providing or seeking to provide investment advisory services to state and local governments, quid pro quo corruption arises when (a) political contributions influence the selection of an adviser to provide investment advisory services to state and local governments, including by constituting a prerequisite to competing for an advisory role, or (b) investment advisers seek to influence an elected official’s award of advisory contracts by making or soliciting contributions to that official. Newer market participants may question—as some participants did in 2009 when the rule was first proposed—why this type of corruption is not first and foremost, or even solely, a problem for state or local governments to address with their officials and employees. However, the SEC firmly believes—as it did in 2009—that this is a problem that falls on investment advisers to address, at least in part. 

In terms of timing, due to the time constraints inherent in notice-and-comment rulemaking, rescission of Rule 206(4)-5 will not take effect before the 2026 midterm elections. Accordingly, advisers should plan on the existing rule governing their contribution activity through at least the remainder of the current election cycle. There could certainly be more significant ramifications for the 2028 presidential election, where the expected wide-open primaries for both political parties could see several current holders of statewide elected office throw their hats into the ring, and potentially not be subject to restrictions on contributions from investment advisers and their personnel arising from Rule 206(4)-5.

Those wishing to comment on the proposal will have 60 days from its publication in the Federal Register to do so.

¹ According to the 2024 Investment Management Compliance Testing Survey conducted by the Investment Adviser Association, ACA Group, and Yuter Compliance Consulting—which was cited by the SEC in the Proposing Release—12.41% of respondents reported engaging in this practice.

² According to the Proposing Release, for example, Rhode Island requires a state vendor with a contract of $5,000 or more to file an affidavit if the vendor contributed more than $250 in a calendar year to specified officials within 24 months; South Carolina prevents persons awarded non-competitive bid contracts from making political contributions; Philadelphia Code § 17-1402 imposes disclosure requirements for non-competitively bid contracts; and New York Retirement and Social Security Law § 424-A prohibits the New York Common Retirement Fund from investing with managers that use placement agents. A further example is Illinois Procurement Code § 50-37, which prohibits business entities with certain state contracts, including certain of their affiliated entities and affiliated persons and the spouses of such affiliated persons, from making political contributions to the officeholder or candidates for the office responsible for the applicable state contract. In addition to these state and local laws, many government entities have adopted their own formal policies regarding political contributions by (and gifts and entertainment to and from) investment advisers and other vendors, and their personnel.

³ At this time, FINRA-member broker-dealers that act as placement agents would also of course remain subject to FINRA Rule 2030, which places restrictions on political contributions by brokers providing distribution or solicitation activities on behalf of investment advisers. It remains to be seen whether FINRA would rescind or modify Rule 2030 if the Proposal is adopted. In addition, other similar rules, such as MSRB Rule G-37 (applying to certain brokers and dealers, and to municipal securities dealers and municipal advisors) and the CFTC’s Regulation 23.451 (applying to swap dealers) also currently remain in place.