Client Alert
Game Over? SEC Proposes to Rescind the Pay-to-Play Rule
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The U.S. Securities and Exchange Commission (SEC) on September 3 proposed to rescind Rule 206(4)-5 under the Investment Advisers Act of 1940 (Advisers Act), commonly known as the “pay-to-play” rule.[1] The pay-to-play rule has been subject to criticism since its adoption in 2010 for, among other reasons, its de facto strict-liability standard and First Amendment implications. If rescinded, investment advisers would need to consider amendments to policies and procedures to broadly address pay-to-play risks consistent with their obligations under various sections of the Advisers Act.
Background
The pay-to-play rule was intended to curtail the potential for investment advisory personnel to make campaign contributions in order to improperly influence the award of contracts for the management of public pension plan assets and similar government investment accounts.[2] The SEC acknowledged, however, that there have been various unintended consequences of the pay-to-play rule and that violations of pay-to-play practices could be addressed under other SEC rules and other federal, state and local laws and regulations.[3]
Key Takeaways
- If the rule is rescinded, investment advisers should consider amendments to policies and procedures designed to address the prescriptive requirements of Rule 206(4)-5. In the proposal, the SEC provides a list of factors that an investment adviser could consider while reviewing its policies and procedures:
- Compliance with applicable law. An investment adviser’s policies and procedures should address “pay-to-play” practices that violate various rules of the Advisers Act and other federal securities laws.[4]
- Risk identification. An investment adviser’s policies and procedures should take into account the risks associated with governmental relationships and the nature of the personnel at the investment adviser who may make a political contribution.
- Pre-clearance and periodic monitoring. An investment adviser, depending on its size, could consider incorporating a process of pre-clearance of any political contribution made by the investment adviser or its personnel to officials of a government entity.
- Remedial steps. An investment adviser’s policies and procedures should include steps to address political contributions that are inconsistent with the investment adviser’s policies and procedures.
- Code of ethics. An investment adviser also should consider whether amendments to its code of ethics are appropriate.
- Rescission would not eliminate other parallel rules for broker-dealers, municipal advisors, and securities- and commodities-based swap dealers. In addition, many states have laws prohibiting pay-to-play conduct and some state pension plans have written policies addressing such conduct, including provisions similar to the pay-to-play rule.
- The SEC requests comment on whether the rule should be rescinded in its entirety or amended to be more principles-based; whether compliance policies and codes of ethics are sufficient to address improper behavior; and whether other federal, state and local laws are sufficient to deter improper conduct.
- The pay-to-play rule remains in place and continues to apply to the 2026 midterm elections.
The public comment period will remain open for 60 days following publication of the proposing release in the Federal Register. The SEC has sent additional proposed rulemaking relating to custody and performance-based fees to the Office of Management and Budget for review, and these proposals should be published in the coming weeks.
[1] “Political Contributions by Certain Investment Advisers” (September 3, 2026), Release No. IA-6994.
[2] See SEC Chairman Mary Schapiro, “Opening Statement at the SEC Open Meeting” (June 30, 2010).
[3] See SEC, Fact Sheet, “Rescission of Political Contribution Rule for Investment Advisers” (September 3, 2026); see also SEC Commissioner Mark Uyeda, “Statement on Proposed Rescission of Rule 206(4)-5 under the Investment Advisers Act” (September 3, 2026).
[4] While the SEC suggests an investment adviser could include provisions to address local, state and other federal laws, Rule 206(4)-7 only requires policies and procedures to be reasonably designed to prevent violations of the Advisers Act and rules thereunder.
