The Securities and Exchange Commission has proposed rescinding the political contribution rule for investment advisers, commonly known as the pay-to-play rule.

If adopted, the proposal would eliminate Advisers Act Rule 206(4)-5 and its corresponding recordkeeping requirements. However, the proposal does not change firms’ current obligations. The existing rule remains in effect while the SEC considers public comments and determines whether to issue a final rule.

What Does the Current Rule Require?

Rule 206(4)-5 is designed to prevent political contributions from influencing the selection of advisers managing government assets. It generally requires firms to:

  • Observe the two-year compensation restriction following certain contributions
  • Monitor contributions, solicitations, and payments involving political parties
  • Maintain required records and restrict third-party solicitation activity

The rule also includes a lookback provision, meaning contributions made before an employee joins a firm or enters a covered role may still create compliance concerns.

Why Is the SEC Proposing Rescission?

The SEC adopted the rule in 2010 to address political contributions that could improperly influence the selection of investment advisers by government entities, including public pension plans.

The Commission now says the rule is operationally difficult to implement and has produced unintended consequences. Small donations or compliance “foot faults” can potentially trigger significant restrictions, leading some firms to prohibit political contributions more broadly.

The proposal announced September 3 would rescind Rule 206(4)-5 in its entirety and remove the related Advisers Act recordkeeping requirements.

What Should Firms Do While the Proposal Is Pending?

The proposal is not a final rule, and current obligations remain in effect. Until any final change becomes effective, firms should:

  • Maintain existing policies, preclearance, monitoring, and escalation procedures
  • Continue tracking contributions, covered associates, government clients, and solicitation activity
  • Review contribution history when employees enter covered roles
  • Monitor the rulemaking process, including any effective date or transition period

Even if Rule 206(4)-5 is rescinded, antifraud, fiduciary, compliance, and code-of-ethics obligations would remain. Federal election laws and state or local pay-to-play requirements may also continue to apply.

Compliance teams can begin identifying affected policies, forms, and workflows. For now, firms should preserve required records and wait for final SEC action before making substantive changes.