SEC Proposes to Rescind Investment Adviser Pay-to-Play Rule

On September 3, 2026, the U.S. Securities and Exchange Commission (SEC) proposed rescinding Rule 206(4)-5 under the Investment Advisers Act of 1940 (the “Advisers Act”)—commonly known as the “pay-to-play” rule—in its entirety, together with the rule’s related recordkeeping requirements. If adopted, the proposal would replace the existing rule’s framework with a principles-based approach under the Advisers Act’s existing anti-fraud, fiduciary duty, compliance, and code of ethics requirements.

Key Takeaways

• Rule 206(4)-5 remains in effect unless and until the SEC adopts the proposal. Investment advisers should continue to follow their existing pay-to-play policies and procedures, including related recordkeeping policies, in the meantime.
• Rescission of the pay-to-play rule would eliminate the two-year advisory compensation “time out,” the rule’s restrictions on certain paid solicitors and coordinated contributions, the covered investment pool provisions, and the associated Rule 204-2(a)(18) recordkeeping requirements.
• Rule 206(4)-5 also applies to exempt reporting advisers and foreign private advisers. If the rule is rescinded, those advisers would no longer be subject to formal pay-to-play restrictions, although Advisers Act Section 206 and other applicable anti-fraud laws would continue to apply.

Background

Adopted in 2010, Rule 206(4)-5 generally prohibits an investment adviser from receiving compensation for providing advisory services to a government entity for two years after the adviser or certain “covered associates” make a contribution to an official of the government entity who can influence the award of advisory business or a candidate for such office. The rule also restricts payments to certain third parties that solicit government entities for advisory business, prohibits specified solicitation and coordination of political contributions, and treats investment advisers to certain pooled investment vehicles in which government entities invest as though they were advising the government entity directly. Registered investment advisers are subject to related political contribution recordkeeping requirements under Rule 204-2(a)(18).

Why the SEC Is Proposing Rescission

The SEC states that more than 15 years of administering the pay-to-play rule have exposed significant unintended consequences. Among other concerns, the SEC points to the rule’s operational complexity, its de facto strict liability effect (which can lead to situations where small contributions or compliance “foot faults” can trigger severe consequences), difficulties identifying which persons fall within the definition of “officials” and “covered associates,” and hiring or promotion constraints created by the rule’s lookback provisions. The SEC believes that some investment advisers have responded by prohibiting political contributions more broadly than the rule requires, raising concerns about unnecessary restrictions on political speech. Finally, the SEC said that rescission of the pay-to-play rule may lead to government entities being able to select from a larger pool of investment advisers as well as lower prices for the provision of investment advisory services to public pension plans.

What the Proposal Would Change

The proposal would rescind Rule 206(4)-5 in full. As a result, the rule-specific two-year compensation ban and lookback framework, de minimis thresholds and returned contribution cure provisions, restrictions on certain third-party solicitors, coordination prohibitions, and covered investment pool provisions would no longer apply. The SEC also proposes to delete Rule 204-2(a)(18), which currently requires registered investment advisers to maintain specified records concerning covered associates, government clients, political contributions, and regulated persons soliciting government business.

The rescission would not, however, eliminate pay-to-play compliance obligations. The SEC emphasizes that quid pro quo political contributions made to obtain or retain advisory business may violate Section 206 of the Advisers Act and an adviser’s fiduciary duty. Registered investment advisers also would remain subject to Rule 206(4)-7 (the “compliance rule”) and Rule 204A-1 (the “code of ethics rule”). Under these rules, registered investment advisers would still be expected to assess their particular pay-to-play risks and determine whether controls such as contribution pre-clearance, contribution thresholds, monitoring, controls around third-party solicitors, or remedial procedures are appropriate. The SEC expressly contemplates that some investment advisers may choose to retain their existing pay-to-play framework if their risk assessment supports doing so.

Practical Implications for Advisers

For now, the proposal does not change existing obligations. Investment advisers should continue to comply with Rule 206(4)-5. If the rule is ultimately rescinded, investment advisers should consider a deliberate, risk-based review rather than automatically removing existing controls. In particular, investment advisers that manage assets for state or local governments, solicit public pension plans, use placement agents, or operate through broker-dealer or municipal-adviser affiliates should review the federal, state, local, FINRA, MSRB, and other political contribution restrictions that may continue to apply. Registered investment advisers also should document the pay-to-play risk assessment supporting any changes to their compliance policies or code of ethics.

The proposed rescission may be particularly significant for exempt reporting advisers and foreign private advisers because they are currently within Rule 206(4)-5 but generally are not subject to the Advisers Act compliance rule or code of ethics rule. The SEC acknowledged this distinction and requested comment on whether rescission could increase pay-to-play risk for those advisers.

Looking Ahead

Comments on the proposal are due 60 days after the proposing release is published in the Federal Register. The SEC is requesting comment not only on full rescission, but also on alternatives such as retaining a more principles-based pay-to-play rule, modifying specific provisions of Rule 206(4)-5, or imposing enhanced disclosure or compliance requirements.

Please contact the authors of this alert or your usual MoFo contact with any questions.