SEC Moves To Scrap Pay-to-Play Rule

On Sept. 3, the U.S. Securities and Exchange Commission (SEC) proposed rescinding Rule 206(4)-5, the SEC’s “pay-to-play” rule for investment advisers (Pay-to-Play Rule).¹ Since its adoption in 2010, the Pay-to-Play Rule has been a focus area of SEC examination and enforcement–often “where small donations or ‘foot faults’ potentially trigger substantial prohibitions and fines."² Indeed, rescission of the rule will be welcome news to the rule’s many critics³ and to the investment advisory industry by eliminating compliance and recordkeeping costs attendant to a rule that can impose severe fines and penalties for inadvertent and minor mistakes. Importantly, however, the proposed rescission of the Pay-to-Play Rule will not become effective until at least 60 days from the publication of a final rule in the Federal Register–meaning that the Pay-to-Play Rule in its current form will remain in effect throughout the entirety of the 2026 midterm election cycle.

The Pay-to-Play Rule

The Pay-to-Play Rule is a preventive measure aimed at addressing pay-to-play abuses by certain investment advisers and/or their “Covered Associates”⁴ with regard to government officials⁵ who have influence over the selection of investment advisers to manage government client assets (e.g., state or public pension plans, state and local government employees’ retirement plans, and state-sponsored university endowment funds). Accordingly, the Pay-to-Play Rule prohibits SEC-registered investment advisers and exempt reporting advisers from offering investment advisory services for compensation (i.e., receipt of management fees and carried interest) to a government client/investor for two years following a contribution made by the adviser or one of their Covered Associates to a government official or a candidate who is (or will be if their campaign is successful) in a position to influence the selection of certain investment advisers (subject to certain exceptions). The term Covered Associates includes a person who becomes a covered associate within two years after a contribution is made (even if the individual was not yet affiliated with the adviser when the contribution was made) (Look-Back Provision).⁶ Importantly, the Pay-to-Play Rule is a strict liability rule, which means it does not mandate that the SEC demonstrate that there was a quid pro quo arrangement or that anyone acted with the actual intent to improperly influence the government official or candidate.

The SEC’s Policy Justifications for Rescinding the Pay-to-Play Rule

While the Pay-to-Play Rule “was intended to deter fraud by prohibiting investment advisers from providing compensated investment advisory services to a government client for two years after making a political contribution to certain elected officials or candidates … it has proven only to be needlessly penalizing, burdensome and complex to implement, and misaligned with the SEC’s mandate.”⁷ The Pay-to-Play Rule “has produced a host of unintended consequences,”⁸ including:

• The imposition of serious penalties for small donations to candidates in both parties. Due to the potentially severe consequences of a “foot fault,” many advisory firms have imposed a blanket prohibition on all employee political donations at the state and local levels.⁹ Thus, the Pay-to-Play Rule suppresses political contributions, which have been deemed to be political speech protected by the First Amendment in other contexts.
• The Look-Back Provision can adversely impact an investment adviser’s ability to recruit, hire, and promote qualified individuals into roles where they would be considered Covered Associates.¹⁰
• Public pension plans may be unable to hire the most qualified or cost-effective advisers or may lose the services of an existing adviser.¹¹
• It can be difficult for an adviser to identify which government officials are directly or indirectly responsible for or can otherwise influence the outcome of a decision to hire an investment adviser.¹²
  
  

Furthermore, according to the SEC, the regulation of political donations is better suited to local, state, and federal election regulators. Finally, rescinding the Pay-to-Play Rule “would not open the door to fraud because sufficient protections exist” under an investment adviser’s existing obligations to comply with the anti-fraud provisions of the securities laws and other applicable campaign finance laws, regulations, and rules.¹³ For example, investment advisers and their employees still will remain subject to applicable federal, state, and local campaign donation limits, and the Municipal Securities Rulemaking Board’s version of the Pay-to-Play Rule will remain in effect.¹⁴

What Happens Next?

The public comment period will remain open for 60 days following the publication of the proposed rule in the Federal Register.

Important Takeaways for Investment Advisers

First and foremost, the Pay-to-Play Rule will remain in effect in its current form throughout the entirety of the 2026 midterm election cycle. Because the Pay-to-Play Rule is still in effect, investment advisers should continue to review and approve employee political donation requests in accordance with their internal compliance policies and procedures and consistent with the Pay-to-Play Rule’s legal requirements.

If and when the proposed rescission of the Pay-to-Play Rule goes into effect, then SEC- registered and exempt reporting advisers should undertake a review of their compliance policies and procedures, hiring processes, and side letters with public pension funds and other government-affiliated investors. Importantly, as noted by the SEC, even if the Pay-to-Play Rule is rescinded, investment advisers and their employees will still be obligated to comply with the anti-fraud provisions of the securities laws as well as all applicable federal, state, and local laws related to campaign finance. Accordingly, investment advisers should contemplate keeping some reporting and recordkeeping procedures for political contributions.

¹ See Chairman Paul S. Atkins, “Statement on Proposal to Rescind ‘Pay-to-Play’ Rule,” SEC (Washington, D.C., Sept. 3, 2026), https://www.sec.gov/newsroom/speeches-statements/atkins-statement-proposal-rescind-pay-play-rule-090326.
² Id.; see also, Moss and Lazarevic, “SEC’s Pay-to-Play Crackdown: Settlement Sends Strong Message on Political Contributions,” Lowenstein Sandler LLP (Sept. 4, 2024), https://www.lowenstein.com/news-insights/publications/client-alerts/sec-s-pay-to-play-crackdown-settlement-sends-strong-message-on-political-contributions-im; Moss, “SEC Pay-to-Play Rule Rears Its Head Again in Time for Election Season,” Lowenstein Sandler LLP (April 23, 2024), https://www.lowenstein.com/news-insights/publications/client-alerts/sec-pay-to-play-rule-rears-its-head-again-in-time-for-election-season-im.
³ See, e.g., Commissioner Hester M. Peirce, “First Amendment Sense and Sensibilities: Statement on Proposed Rescission of the Pay-to-Play Rule,” SEC (Washington, D.C., Sept. 3, 2026) (“I am thrilled that we are proposing to eliminate rather than simply amend the rule, which always has bothered my First Amendment sensibilities.”), https://www.sec.gov/newsroom/speeches-statements/peirce-statement-pay-play-090326.
⁴ Covered Associates include (i) any general partner, managing member, executive officer, or other individual with a similar status or function; (ii) any employee who solicits a government entity for the investment adviser and any person who supervises, directly or indirectly, such employee; and (iii) any political action committee controlled by the investment adviser or by any of its covered associates. See 17 CFR §275.206(4)-5(f)(2).
⁵ “Officials” are defined as individuals who either hold or are seeking to hold political offices with the ability to directly or indirectly influence the hiring of investment advisers (or appoint individuals capable of doing the same) on behalf of a government entity. See 17 CFR §275.206(4)-5(f)(6).
⁶ See 17 CFR §275.206(4)-5(b)(1).
⁷ Chairman Paul S. Atkins, “Statement on Proposal to Rescind ‘Pay-to-Play’ Rule,” SEC (Washington, D.C., Sept. 3, 2026), https://www.sec.gov/newsroom/speeches-statements/atkins-statement-proposal-rescind-pay-play-rule-090326.
⁸ Id.
⁹ “Fact Sheet: Political Contributions by Certain Investment Advisers,” SEC (Washington, D.C., Sept. 3, 2026), https://www.sec.gov/files/ia-6994-fact-sheet.pdf.
¹⁰ See Proposed Rule; Rescission, “Political Contributions by Certain Investment Advisers,” SEC (Washington, D.C., Sept. 3, 2026), https://www.sec.gov/files/rules/proposed/2026/ia-6994.pdf.
¹¹ See id.
¹² “Fact Sheet: Political Contributions by Certain Investment Advisers,” SEC (Washington, D.C., Sept. 3, 2026), https://www.sec.gov/files/ia-6994-fact-sheet.pdf.
¹³ Chairman Paul S. Atkins, “Statement on Proposal to Rescind ‘Pay-to-Play’ Rule,” SEC (Washington, D.C., Sept. 3, 2026), https://www.sec.gov/newsroom/speeches-statements/atkins-statement-proposal-rescind-pay-play-rule-090326.  
¹⁴ See MSRB Rule G-37, 17 C.F.R. § 240.15Ba1-1.