SEC moves to scrap 15-year-old pay-to-play rule for investment advisers

The US Securities and Exchange Commission (SEC) has proposed rescinding its long-standing “pay-to-play” rule, a regulation that has governed the relationship between investment advisers and government clients for more than 15 years. The rule, formally known as Advisers Act Rule 206(4)-5, currently prohibits advisers from providing compensated services to government clients for two years after making political contributions to specific elected officials or candidates.

In a statement, SEC Chairman Paul S. Atkins described the rule as “overly prescriptive,” arguing that it has produced significant unintended consequences since its adoption in 2010. Atkins contended that the regulation imposes serious penalties for small, often impulsive donations to candidates from both parties and routinely punishes advisory firms for an employee’s donation made even before joining the business.

The Commission determined that the rule creates a de facto strict liability standard, meaning that minor “foot faults” can trigger substantial prohibitions and fines. Advisers have indicated that the rule is operationally challenging to implement, with some firms imposing internal bans on political contributions at the state and local level to avoid potential breaches. Atkins stated that these implementation measures have effectively resulted in the suppression of political speech.

The proposal seeks to rescind Advisers Act Rule 206(4)-5 and amend the Advisers Act recordkeeping rule to eliminate corresponding provisions. If enacted, all other requirements of the Advisers Act would continue to apply, including prohibitions on fraud, fiduciary duty requirements, the compliance rule, and the code of ethics rule.

Atkins argued that matters involving political contributions are more properly governed by local ordinances, state laws, and federal election regulations rather than by the SEC. The move reflects a broader institutional view that the current federal framework is ill-suited to manage the nuances of political giving.

The proposal is not yet final and remains subject to further Commission action. A 60-day public comment period will commence once the proposing release is published in the Federal Register, allowing stakeholders to review the potential impact on the advisory sector.