SEC Proposes Rescission of Political Contribution Rule for Investment Advisers

Rule 206(4)-5 under the Advisers Act was adopted in 2010 to reduce the possibility that campaign contributions and other support of elected officials and candidates for public office by investment advisers and covered associates would result in fraudulent "pay-to-play" practices or arrangements in which political contributions influence the selection of investment advisers to manage public assets. The rule applies to SEC-registered investment advisers, advisers required to be registered, foreign private advisers, and exempt reporting advisers.

Reasons for Proposed Rescission

The SEC identified significant unintended consequences and operational challenges since the rule's adoption in 2010. In the SEC's view, the rule's prescriptive requirements can impose substantial burdens without appropriately accounting for the circumstances or pay-to-play risk profile of a particular adviser.

• De facto strict liability: Advisers have indicated that the rule is operationally challenging to implement and creates a de facto strict liability standard, which can lead to situations where small donations or "foot faults" potentially trigger substantial prohibitions.
   
• Blanket contribution bans: Some advisers have imposed outright prohibitions on all political contributions rather than navigate the rule's complexities. A 2024 survey found that 12.41 percent of responding investment advisers prohibit all political contributions, effectively suppressing political speech.
   
• Hiring and promotion barriers: Advisers may be prevented from hiring or promoting qualified individuals into covered associate roles for six months to two years following a contribution, even where the contribution has no relationship to pay-to-play practices.
   
• Harm to government clients: Public pension plans may be unable to hire the most qualified or cost-effective advisers, or may lose an existing adviser, because of covered associate contributions during the lookback period.
   
• Definitional difficulties: Determining who qualifies as an "official" who is directly or indirectly responsible for or can influence the outcome of adviser hiring requires analysis of government-entity oversight structures, appointment authority, and the scope of government duties. The definition of "covered associate" may also have been applied more broadly than intended.
   
• First Amendment concerns: Contributions to political candidates are protected speech under the First Amendment. The rule's restrictions affect core political speech, and the relevant constitutional concern is whether a restriction is necessary to prevent quid pro quo corruption or its appearance.
   
• Costly exemptive process: The SEC's exemptive process can be costly and time-consuming and therefore may not provide a practical remedy for every inadvertent or low-risk contribution.

Chairman Atkins stated:

"Today, by proposing to rescind the 'pay-to-play' rule (Rule 206(4)-5 under the Investment Advisers Act of 1940), the Commission is clearly reiterating that the SEC is not the nation's elections regulator."

"After more than 15 years of experience administering the rule, it is clear that it is overly prescriptive and has produced a host of unintended consequences."

"Although the current rule includes a de minimis allowance, in practice, many firms simply impose blanket prohibitions on employee political contributions rather than navigate the rule's complexities. Such practice discourages full participation in the electoral process through contributions to candidates. People should not have to choose between their political speech rights and a job in a particular industry."

"Since day one of my Chairmanship, I have pledged to return the agency to its core mission and Congressional intent. Today's proposal marks an important step toward realizing that goal."

What the Proposal Would Do

If adopted as proposed, the proposal would:

• Rescind Rule 206(4)-5 in its entirety: This would eliminate the two-year compensation ban, the prohibition on paying non-regulated persons to solicit government entities, the prohibition on coordination of contributions, and the covered investment pool provisions.
   
• Amend Rule 204-2: The proposal would eliminate paragraph (a)(18), which requires registered investment advisers to maintain lists and records of covered associates, government entity clients, contributions to officials, state political parties and PACs, and payments to regulated persons soliciting government business on the adviser's behalf.
   
• Shift to a principles-based approach: Advisers would address pay-to-play risk through the existing regulatory framework, including tailored compliance policies and procedures and codes of ethics.

What Remains in Place

The SEC emphasizes that rescinding Rule 206(4)-5 would not leave a regulatory void. Existing protections would continue to apply, including:

• Antifraud provisions: Sections 206(1), (2), and (4) of the Advisers Act prohibit fraudulent, deceptive, and manipulative practices.
   
• Fiduciary duty obligations: Pay-to-play practices remain inconsistent with an adviser's fiduciary duties under the Advisers Act.
   
• Compliance Rule (Rule 206(4)-7): Advisers must adopt and implement written policies and procedures reasonably designed to prevent violations of the Advisers Act and its rules and review those policies and procedures at least annually.
   
• Code of Ethics Rule (Rule 204A-1): Advisers must establish standards of business conduct reflecting their fiduciary obligations.
   
• Other federal, state, and local laws and regulations: Anti-corruption and pay-to-play requirements, including MSRB Rule G-37, FINRA Rule 2030, Exchange Act Rule 15Fh-6, and various state and local laws and regulations, would remain in effect.
   
• SEC enforcement authority: The SEC could continue to bring enforcement actions under the antifraud and fiduciary-duty provisions.
   
• SEC Whistleblower Program: The program would remain available to provide information regarding potential violations of the federal securities laws.

As Chairman Atkins stated:

"Rescinding the rule would not open the door to fraud because sufficient protections exist (and have always existed); for example, investment advisers are subject to the Investment Advisers Act antifraud requirements, fiduciary duty obligations, and rules requiring them to maintain compliance policies and procedures and codes of ethics."

"Ultimately, matters involving political contributions are more properly governed by local ordinances, state laws, and federal election regulations – not by the SEC."

Next Steps

In light of the proposed rescission, investment advisers and other market participants should consider the following steps:

(1) Monitor the rulemaking process and the 60-day comment period; (2) consider submitting comments; (3) assess the firm's pay-to-play risk profile; (4) review and evaluate current compliance policies and procedures; (5) review the code of ethics; (6) evaluate the impact of applicable state and local pay-to-play laws; and (7) assess arrangements with third-party solicitors and placement agents.

The public comment period will remain open for 60 days following the date of publication of the proposing release in the Federal Register. Comments may be submitted electronically through the SEC's website or by email to rule-comments@sec.gov, referencing File Number S7-2026-31. The current rule remains in effect unless and until a final rescission becomes effective.

Additional Information

For any questions regarding the SEC's proposed rescission of the political contribution rule for investment advisers, please contact Paul J. Foley, John M. Faust, Kiki Scarff, and Cole Beaubouef.