SEC Proposes Rescinding 2010 'Pay‑to‑Play' Rule for Investment Advisers

The Securities and Exchange Commission on Thursday proposed rescinding a 15-year-old “pay-to-play” rule that bars investment advisers from doing paid business with a government client for two years after certain political contributions.

The rule, known as Advisers Act Rule 206(4)-5, applies when an adviser or certain employees and executives, called covered associates, contribute to an official who can influence the hiring of advisers. It also restricts advisers from paying third parties to solicit government clients unless those solicitors are regulated under substantially equivalent rules.

The SEC’s action is only a proposal, not a final rule. That means advisers’ compliance obligations do not change now, and the pay-to-play rule remains in effect unless and until the agency completes the rulemaking process and adopts a final rescission. The SEC said the public comment period will stay open for 60 days after the proposal is published in the Federal Register.

In the same proposal, the agency said it would amend the Investment Advisers Act recordkeeping rule to remove provisions tied to Rule 206(4)-5. The SEC said it now believes the pay-to-play rule has caused “significant unintended consequences,” is operationally difficult to implement and effectively creates a strict-liability regime.

SEC Chairman Paul S. Atkins said in a statement: “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. … Advisers’ implementation of the rule has effectively resulted in the suppression of political speech.”

Atkins added that such matters are “more properly governed by local ordinances, state laws, and federal election regulations—not by the SEC.”

The SEC first adopted the rule in 2010 to address concerns that political donations were influencing which firms won government investment business. The restrictions matter for advisers that seek or manage public money, including government mandates tied to pension-related assets and other public-sector pools of capital.

If the commission ultimately votes to rescind the rule, that would eliminate the federal two-year timeout that now can follow certain political contributions linked to officials with hiring influence. But the SEC said removing Rule 206(4)-5 would not change other obligations that still apply to advisers under the Advisers Act, including anti-fraud provisions, fiduciary duty requirements, the compliance rule and the code of ethics rule.

A final rescission also would not automatically erase other pay-to-play restrictions outside the SEC’s rulebook. Separate state laws, as well as some self-regulatory restrictions administered through FINRA and the Municipal Securities Rulemaking Board, may still apply in some circumstances.

For now, the practical takeaway for advisers is straightforward: the existing rule remains on the books. The immediate next step is the comment process, after which the SEC would have to decide whether to move forward with a final rule rescinding the requirement and the related recordkeeping provisions.