SEC proposes scrapping adviser pay-to-play rule

The SEC’s Sept. 3 proposal isn’t a tweak to Rule 206(4)-5—it is a proposal to rescind the rule. The agency formally proposed rescinding the “pay-to-play” restriction on investment advisers, along with the related recordkeeping provisions under the Advisers Act.

The rule dates to 2010. If an adviser or a “covered associate” makes a political contribution above a de minimis threshold to certain state or local candidates or officials who can influence the adviser’s selection, the adviser is barred from receiving compensation for advising that government entity for two years.

That two-year clock is the central mechanism the proposal would eliminate. A contribution that currently starts it would no longer trigger Rule 206(4)-5’s ban on compensated advisory services to the affected government client—if the repeal goes through.

The current thresholds aren’t symmetrical. Contributors can give up to $350 per election for an official they can vote for, but only $150 for others—a $200 gap. The lower threshold is roughly 42.9% of the higher one. Anything above those amounts can start the two-year clock under the current rule.

The proposal would remove those provisions of Rule 206(4)-5 alongside the related recordkeeping requirements if adopted, so the practical effect reaches beyond an adviser’s own donations.

What it wouldn’t do is make pay-to-play conduct legal everywhere. Commissioner Hester M. Peirce wrote that such practices “are and would still be prohibited by other laws, including the antifraud provisions of the Advisers Act,” according to her Sept. 3 SEC statement. Parallel restrictions remain in MSRB rule G-37, Rule 15Fh-6 under the Securities Exchange Act for security-based swap dealers, and FINRA rule 2030 for certain FINRA members.

The SEC’s stated rationale is operational. Advisers have described the rule as difficult to implement and effectively a strict-liability standard. The agency’s release also says the rule has produced unintended consequences since 2010, including firms flat-out prohibiting employee contributions at the state and local level.

Chairman Paul S. Atkins defended 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,” he said, citing penalties for small donations and contributions made before an employee joined the firm. Implementation had, in his words, “effectively resulted in the suppression of political speech.”

Peirce’s framing was constitutional. “Although ensuring that campaign donations are not driving adviser selection makes sense, the rule effectively functions as a restriction on political speech,” she wrote. “The SEC, even when its motives are good, must tread carefully in curtailing such speech.”

Atkins also argued the SEC isn’t the right venue for this kind of oversight. “Ultimately, matters involving political contributions are more properly governed by local ordinances, state laws, and federal election regulations—not by the SEC.”

For compliance teams, the most immediate benefit—contingent on adoption—would be losing a contribution-monitoring regime that can reach back before a person ever joined the firm. The “covered associate” and “look-back” provisions under the current rule can sweep in older contributions, violations carry strict liability, and cure options are limited, according to Stinson LLP’s account of the rule. If the rescission is finalized, those contributions would no longer trigger this rule’s government-client compensation ban, although other laws would still apply, while conduct intended to influence the selection of government advisers could remain subject to other applicable laws.

The SEC added possible pay-to-play rule amendments to its Reg Flex Agenda on July 3, 2026, then moved to formal rescission on Sept. 3. Rule 206(4)-5 and its recordkeeping requirements stay in effect until final action.