On September 3, 2026, the U.S. Securities and Exchange Commission (SEC or Commission) proposed to rescind in its entirety Rule 206(4)-5 under the Investment Advisers Act of 1940 (Advisers Act), commonly known as the pay-to-play rule. The proposal would also amend the recordkeeping rule (Rule 204-2) to eliminate related recordkeeping requirements. Comments are due 60 days after publication in the Federal Register.
What is the pay-to-play rule?
Adopted in 2010, the pay-to-play rule generally prohibits an investment adviser from receiving compensation for advisory services to a government client for two years after the adviser or any “covered associate” makes a political contribution to certain elected officials or candidates who can influence the hiring of investment advisers. The rule was designed to address concerns that political contributions could distort the adviser selection process, causing contracts to be awarded based on contributions to government officials rather than adviser competence and cost.
The rule also generally restricts the use of third-party solicitors and prohibits advisers from coordinating contributions to officials of government entities. It applies to SEC-registered advisers, exempt reporting advisers, and foreign private advisers, subject to limited exceptions, including de minimis contribution thresholds and a returned-contribution exception.
Reasons for the proposed rescission
The Commission identified several reasons for the proposed recission:
- Suppression of political speech: In the Commission’s view, the rule’s complexity has led many firms to impose blanket prohibitions on all employee political contributions rather than navigate its requirements.
- Operational complexity: The Commission observed that the rule is operationally challenging to implement.
- Unjustified burdens: According to the Commission, the rule imposes burdens that may not be warranted given its objectives. For example, it can bar advisers from hiring or promoting qualified personnel based on past contributions that pose no material pay-to-play risk. Market participants have also observed that the rule’s lookback provisions can impede job mobility, as individuals who have made political contributions may be effectively precluded from joining firms that advise government clients or manage covered investment pools.
- De facto strict liability: The Commission stated that the rule lacks clarity and effectively creates a strict liability framework in which minor donations or inadvertent “foot faults” can trigger substantial prohibitions.
The Commission’s proposed principles-based approach
The Commission proposes to rely on existing Advisers Act requirements to address pay-to-play risks through a principles-based approach, rather than maintaining the current prescriptive framework. These include the antifraud provisions of Sections 206(1), (2), and (4) of the Advisers Act, as well as the code of ethics rule (Rule 204A-1) and the compliance rule (Rule 206(4)-7). Pursuant to the compliance rule, “a registered investment adviser would still be required to have policies and procedures reasonably designed to prevent fraudulent practices, including pay-to-play practices, though the adviser would have the flexibility to either tailor those policies in a manner that differs from the specific prescriptive requirements of the political contribution rule or maintain those policies consistent with the compliance rule.”
The Commission also noted that federal, state, and local anti-bribery and procurement laws would continue to apply independently.
Recordkeeping amendments
The proposal would eliminate Rule 204-2(a)(18), which requires advisers to maintain records of covered associates, government entity clients, and political contributions.
Practical implications for investment advisers
If the rescission is adopted, advisers with government clients should consider:
- Evaluating whether to replace prescriptive pay-to-play compliance provisions with policies tailored to their specific risk profiles
- Reviewing codes of ethics to align with any updated compliance policies
- Conducting a thorough review of applicable state and local pay-to-play requirements, which vary significantly and will continue to apply independently
Advisers should continue to comply with the existing rule until any final rescission takes effect.
As mentioned above, comments are due 60 days after publication in the Federal Register. We will monitor the publication and further developments related to this proposal.
