On September 3, 2026, the Securities and Exchange Commission (“SEC”) voted to propose rescinding in its entirety Rule 206(4)-5 under the Investment Advisers Act of 1940, the agency’s longstanding “pay-to-play rule” applicable to investment advisers. If finalized, the proposal would eliminate the most significant federal political law compliance regime for investment advisers and reverse a regulatory framework that was adopted in 2010 and took effect in 2011.
Advisers should not view the proposal as signaling the end of pay-to-play compliance obligations, however. In announcing the proposal, the SEC emphasized that investment adviser policies and procedures should continue to address pay-to-play risks. Further, several other federal pay-to-play rules, as well as a substantial network of state, local, and industry-specific pay-to-play restrictions would remain in effect. As a result, rescission of the SEC’s investment adviser rule may not substantially reduce the need for existing political contribution compliance controls for many financial firms, but it would treat as unrestricted many contributions that previously would have been restricted.
Comments on the proposal will be due 60 days after publication in the Federal Register, which has not yet occurred. Given the rulemaking timeline, any final rescission will not go into effect until November at the earliest, and so is unlikely to open the floodgates of political giving during the 2026 election cycle. If the proposal is adopted, future cycles will likely see increased political giving from financial industry personnel and fundraising efforts directed at investment advisers and senior executives.
Pay-to-play rules are designed to prevent political contributions from influencing, or appearing to influence, the award of government contracts. Rule 206(4)-5 generally prohibits an investment adviser from receiving compensation for advisory services from a government entity for two years following certain political contributions by the adviser or its “covered associates,” a defined term which includes executives and certain others affiliated with the investment firm. The rule also restricts the solicitation and coordination of certain political contributions and payments and prohibits doing indirectly what cannot be done directly under the rule. The rule was adopted in response to a series of scandals in which investment advisers and placement agents allegedly secured government investment business through political contributions and connections rather than on the merits of their investment services. Since its adoption in 2010, the rule has been a central component of compliance programs for investment advisers and many private fund sponsors with public pension fund, public endowment fund, and other governmental investors.
The SEC’s proposal would rescind the rule in its entirety and remove related recordkeeping obligations, eliminating the most consequential federal restriction on political activity in the financial services industry. Other Advisers Act requirements, including the antifraud provisions, fiduciary obligations, compliance program requirements, and code of ethics requirements, would remain unchanged. The proposal reflects the current SEC leadership’s view that the rule has proven more burdensome than beneficial and has strayed beyond the agency’s core regulatory mission. In a statement accompanying the proposal, SEC Chairman Paul Atkins argued that the rule has become “needlessly penalizing, burdensome and complex to implement” and has produced a variety of unintended consequences including the “suppression of political speech.” Other negative consequences of the rule that the SEC identified include advisers being unable to hire or promote qualified individuals into covered associate roles following a covered contribution; public pension plans being unable to hire the most qualified or cost-effective advisers; and the challenge of determining who qualifies as “covered officials” and “covered associates” under the rule. The SEC also noted that the two-year compensation timeout can impose financial penalties far in excess of the amount of the triggering contribution, which can be as low as $150.01.
According to the proposal and Chairman Atkins, the rule has operated as a de facto strict liability regime under which relatively modest contributions may trigger severe business consequences, leading advisers to adopt broad restrictions on employee political activity, including outright bans on state and local political contributions. The SEC further argues that regulation of political contributions is more appropriately addressed through federal, state, and local election laws rather than by the SEC, and that existing Advisers Act antifraud, compliance, and fiduciary duty provisions, as well as other federal securities laws, provide sufficient protection against corrupt practices involving government clients. In this way, the proposal would remove the prescriptive, prophylactic restrictions on certain political contributions while relying on other SEC regulations and other federal, state, and local regimes to guard against improper influence in the selection of government investment advisers. The proposal is somewhat of an abrupt about-face—just two years ago, the SEC issued a nearly $100,000 fine for a violation of the rule.
Although the proposal would remove a significant restriction, investment advisers that do business with government entities are likely to continue facing significant pay-to-play compliance obligations. At the same time, rescission of the rule would meaningfully expand the universe of political contributions that advisers and covered associates may make, even if many contributions would remain subject to review and some would remain prohibited under state, local, and other federal pay-to-play regimes.
Advisers Act Compliance Obligations Will Not Be Fully Eliminated
Because the antifraud provisions of the Investment Advisers Act would continue to prohibit making political contributions in exchange for government investment contract awards, the SEC’s proposal emphasizes that even if the pay-to-play rule is rescinded, investment advisers “would still be required to have policies and procedures reasonably designed to prevent fraudulent practices, including pay-to-play practices.” In pursuing a more “principles-based approach” to pay-to-play compliance, the SEC noted that reasonable policies and procedures may still include “a process of pre-clearance of contributions by the adviser or its personnel to officials of government entities depending on its risk assessment, the nature of its business, and its particular facts and circumstances.” As a practical matter, if the rule is rescinded, investment advisers should revisit their pay-to-play rule policies to assess whether they adequately address general antifraud concerns and whether existing restrictions on political activity remain necessary in light of the removal of the rule’s strict liability provisions. Rescission could also provide firms greater flexibility in hiring executives, investment professionals, and other personnel with prior political contribution histories that might otherwise have created Rule 206(4)-5 concerns.
State and Local Pay-to-Play Laws Remain Widespread
About fifteen states and dozens of local jurisdictions maintain their own pay-to-play laws that restrict or require disclosure of political contributions by government contractors, investment managers, placement agents, executives, employees, affiliated PACs, and other covered persons. Covington maintains a 463-page survey of these state and local laws and regulations. State and local pay-to-play regimes are often broader and more restrictive than the better-known SEC rule. State and local laws may impose restrictions without de minimis exceptions; cover broader groups of employees, officers, directors, owners, affiliated persons, or family members; restrict contributions to a wider range of candidates, political committees, or officeholders; and apply to contractors, vendors, and other entities that are not subject to federal pay-to-play regimes. Accordingly, as the SEC’s proposal recognizes, many investment advisers that do business with state pension funds, municipalities, public authorities, or other governmental entities would likely need to maintain contribution tracking, preclearance, and diligence procedures even if the SEC rule is ultimately rescinded.
FINRA, MSRB, and CFTC Rules Are Unaffected
The SEC’s proposal does not affect related federal pay-to-play rules that restrict political contributions in connection with certain other government-facing financial services activities. Financial Industry Regulatory Authority (“FINRA”) Rule 2030 regulates political contributions by broker-dealers seeking certain government investment adviser business. Likewise, Municipal Securities Rulemaking Board (“MSRB”) Rule G-37 imposes pay-to-play restrictions in connection with municipal securities and municipal advisory business; Commodity Futures Trading Commission (“CFTC”) Rule 23.451 applies to swap dealers; and SEC Rule 15Fh-6 applies to security-based swap dealers. As a result, firms that operate through affiliated broker-dealers, municipal advisors, or other regulated entities may remain subject to pay-to-play restrictions even if the SEC rule is rescinded.
An open question is whether FINRA, the MSRB, the CFTC, or the SEC itself will revisit parallel pay-to-play rules that were modeled on, or influenced by, Rule 206(4)-5. The SEC’s proposal could prompt broader reconsideration of federal pay-to-play regulation across the financial services industry.
The SEC’s proposal represents a significant shift in federal regulation of political contributions by investment advisers. If adopted, the rescission would remove a compliance regime that has shaped adviser political activity policies, and even elections themselves, for more than fifteen years.
At the same time, advisers should not assume that pay-to-play compliance programs can be dismantled. The SEC emphasizes that pay-to-play activities still violate the Investment Advisers Act and that investment firms must still adopt policies and procedures to prevent such violations. State and local pay-to-play laws remain widespread and, in many cases, are broader than the SEC rule. In addition, FINRA, MSRB, and CFTC pay-to-play restrictions would remain in effect unless separately amended or rescinded. Accordingly, many firms, particularly those that conduct business with state and local governments or operate through affiliated broker-dealers, municipal advisors, or swap dealers, should maintain robust political contribution compliance programs regardless of the outcome of the SEC rulemaking.
If you have any questions concerning the material discussed in this client alert, please contact the members of our Election and Political Law practice.
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