SEC proposes to rescind pay-to-play rule

Background

Rule 206(4)-5 under the Investment Advisers Act of 1940 establishes a bright-line regulatory framework designed to address pay-to-play practices in the investment adviser industry. The prophylactic rule imposes a two-year compensation ban on investment advisers who made political contributions exceeding de minimis thresholds to government officials in a position to influence the award of advisory contracts. Critically, the rule includes a two-year lookback provision, meaning that contributions made within two years before the adviser began seeking compensation from the government entity could trigger the time-out period. The rule also prohibits an adviser from coordinating or soliciting others to make 1) contributions to certain government entity officials or 2) payments to certain political parties. The rule also restricted the use of third-party solicitors to solicit government entity clients and imposed recordkeeping obligations related to political contributions.

The Proposal: Full Rescission

Rather than amending or modernizing the existing rule, the Commission proposed the complete recission of Rule 206(4)-5. If adopted, the proposal would remove the prescriptive contribution limits, the two-year time-out provisions, the two-year lookback provision, the third-party solicitor restrictions, the prohibitions on coordinating or soliciting contributions or payments and the related recordkeeping requirements.

The Principles-Based Replacement Framework

Under the proposed framework, advisers would rely on the following existing regulatory requirements to address pay-to-play risks:

• the Advisers Act’s general antifraud provisions; 
• fiduciary duties owed to advisory clients;
• the code of ethics rule, which requires advisers to establish standards of conduct for supervised persons; and
• the compliance program rule, which requires advisers to adopt and implement written policies and procedures reasonably designed to prevent violations of the Advisers Act

The SEC noted in the proposal to rescind Rule 206(4)-5 that it expects advisers’ compliance policies and procedures under this principles-based approach would address, among other things:

• compliance with applicable federal, state and local laws governing political contributions;
• identification and assessment of pay-to-play risks based on the adviser’s business activities;
• the nature and extent of the adviser’s governmental relationships;
• risk mitigators, such as competitive bidding processes used by government entities;
• oversight of third-party solicitors who interact with government entities; and
• periodic monitoring of compliance with internal policies

Key Implications for Investment Advisers

The proposal represents a fundamental shift in the SEC’s regulatory approach to pay-to-play compliance. Key implications include:

• a transition from prescriptive, rules-based compliance to a principles-based framework requiring individualized risk assessment;
• the need for firms to develop tailored pay-to-play policies and procedures, rather than relying on a set of uniform bright-line standards;
• increased burden on chief compliance officers to exercise judgment regarding whether and under what circumstances to restrict political contributions and payments to political parties;
• greater SEC staff discretion during examinations, as enforcement shifts from clear rule-based violations to assessments of the reasonableness of compliance programs; and
• strategic decisions for firms regarding whether to maintain existing blanket contribution bans or adopt more permissive internal policies and procedures

Impact on Exempt Reporting Advisers

The pay-to-play rule is one of the relatively few substantive provisions under the Advisers Act that applies to exempt reporting advisers (ERAs) as well as investment advisers registered with the SEC (RIAs). Rescission therefore would be particularly meaningful for private fund advisers that operate as ERAs. RIAs would continue to be subject to the anti-fraud provisions of the Advisers Act, the compliance program rule and the code of ethics rule. Since ERAs are not subject to those requirements, the principal federal constraint for them would be the antifraud provisions of the Advisers Act and other statutory provisions, such as those prohibiting bribery of government officials. The SEC acknowledges in the release that the reduction in deterrence could therefore be greater for ERAs than for RIAs and expressly requested comment on that point.

Other Pay-to-Play Regimes Remain in Effect

Importantly, even if Rule 206(4)-5 is rescinded, advisers must continue to navigate a range of other pay-to-play regimes at the federal, state and local levels, including:

• MSRB Rule G-37 (governing municipal securities dealers and advisors);
• FINRA Rule 2030 (governing broker-dealers);
• Exchange Act Rule 15Fh-6 (governing security-based swap dealers);
• 18 US Code §201 (governing bribery of federal public officials); and
• various state and local pay-to-play laws

The compliance challenges associated with political contribution restrictions do not disappear with the SEC’s proposed rule rescission.

Recommended Action Items

In light of the proposed rescission, investment advisers should consider taking the following steps:

1. review existing pay-to-play policies and procedures. Evaluate whether current policies and procedures should be maintained, modified or replaced with a more tailored, risk-based approach
2. evaluate governmental relationships and risk exposure. Map the firm’s relationships with government entities and officials and assess the pay-to-play risks associated with each
3. ensure compliance programs address enumerated factors. Align policies and procedures with the SEC’s articulated expectations, including risk identification, solicitor oversight and periodic monitoring
4. monitor other regulatory regimes. Continue to track obligations under MSRB, Exchange Act and FINRA pay-to-play rules (if applicable) and applicable state and local requirements
5. monitor the rulemaking process. Track the comment period and any developments in the rulemaking, and consider submitting comments to the SEC

Next Steps

The comment period closes November 9, 2026. The SEC has requested comment on whether the proposed principles-based approach is sufficient to address pay-to-play risks, how rescission would affect ERAs and whether additional regulatory guidance or safeguards are needed to address political contributions, government relationships, third-party solicitors or compliance oversight.

Our team is monitoring these developments closely and is prepared to help clients assess the proposal’s operational impacts and prepare comment submissions. Please contact us with any questions.

__________

If you have any questions about this Legal Briefing, please feel free to contact any of the attorneys listed or the Eversheds Sutherland attorney with whom you regularly work.