On September 3, 2026, the Securities and Exchange Commission (SEC) issued a proposal (the Proposal) to rescind Rule 206(4)-5, commonly referred to as the Pay-to-Play Rule (the Rule), in its entirety, eliminating the two-year time-out on compensated advisory services to government clients following a covered political contribution. The Proposal would also amend Rule 204-2, commonly referred to as the Recordkeeping Rule, to remove related provisions requiring investment advisers to make and keep political donation records.
If the Rule is rescinded, SEC-registered investment advisers, exempt reporting advisers, and foreign private advisers would no longer be subject to the prescriptive, strict liability prohibitions in the Rule that, among other things, place limits on certain political contributions by covered associates. Instead, investment advisers would be required to address their pay-to-play risks using a principles-based approach that the Proposal notes is consistent with other existing obligations under the Investment Advisers Act of 1940, as amended (the Advisers Act).
The Proposal makes clear that the SEC is not proposing to permit wholesale previously prohibited pay-to-play practices.[i] Indeed, the Proposal specifically states that payments to state officials as a quid pro quo for obtaining advisory business, as well as other forms of pay-to-play, violate the antifraud provisions of Section 206 of the Advisers Act. The Proposal emphasizes that such practices remain generally subject to scrutiny under the antifraud provisions of the Advisers Act — which the SEC has previously used to bring pay-to-play enforcement actions — and may also need to be addressed under an investment adviser’s code of ethics.
The Proposal ties pay-to-play practices to conflicts of interest and fiduciary duty concerns, noting that public plan beneficiaries are harmed when a government official fails to “disclose that the government official has directed the investment of [a plan’s] assets into a pooled investment vehicle not because of the adviser’s qualifications … but rather because the official has received a contribution.” Furthermore, the Proposal notes that under Section 203 of the Advisers Act, if advisory personnel engage in pay-to-play practices, the SEC may charge the investment adviser and its individual supervisors for failure to reasonably supervise.
Although the Proposal would rescind the Rule, analogous pay-to-play restrictions would remain in effect for other market participants, which could in turn affect investment advisers: Broker-dealers would remain subject to comparable FINRA rules; registered municipal advisers would remain subject to the Municipal Securities Rulemaking Board’s pay-to-play prohibitions (which served as the model for the Rule); security-based swap dealers would remain subject to Rule 15Fh-6 promulgated under the Securities Exchange Act of 1934, as amended; and commodity-based swap dealers would remain subject to the Commodity Futures Trading Commission’s pay-to-play rule. In addition, investment advisers that engage third-party placement agents for government entity business should note that such intermediaries would remain subject to pay-to-play restrictions.
Additionally, other federal, state, and local laws and regulations regarding the public procurement or lobbying processes — including the awarding of investment advisory mandates — exist independently of the Rule and would not be limited or otherwise impacted by its rescission. Separately, large public pension plans often require investment advisers to agree to pay-to-play restrictions as a contractual matter, and such restrictions would remain in effect notwithstanding a rescission of the Rule.
Background on the Rule
Adopted in July 2010, the Rule was designed to reduce the risk that campaign contributions provided by investment advisers and/or their “covered associates” to elected officials or candidates could result in fraudulent inducements to award public pension plan advisory business. As stated in its adopting release, the Rule’s intention was to “reduce the occurrence of fraudulent conduct resulting from [pay-to-play practices and to protect] public pension plans, beneficiaries and other investors from the resulting harms.”
The Rule currently prohibits investment advisers from receiving compensation for advisory services to “government entity” clients within two years after a triggering contribution — which is defined to include any “gift, subscription, loan … or anything of value made for the purpose of influencing an election.” The two-year ban is automatically triggered once a covered contribution is made; only in the exemptive relief process under Rule 206(4)-5(e) will the SEC consider the facts and circumstances, including whether the contribution was intended to influence government business. Investment advisers have often found the exemptive relief process expensive, onerous, and time-consuming.
SEC’s Stated Concerns
In the Proposal, the SEC acknowledged that the Rule has led to what it believes are significant and unintended consequences, including:
- Implementation challenges from the Rule’s de facto strict-liability standard, under which small donations or inadvertent “foot faults” can trigger substantial prohibitions
- Barriers to hiring or promoting qualified individuals into “covered associate” roles for six months or two years after an in-scope contribution, even if the contribution predates their employment as a “covered associate” or there is no evidence of actual quid pro quo corruption or intent to induce government business
- Barriers to public pension plans’ hiring the most qualified or cost-effective investment advisers, or loss of existing investment advisers, because of covered associate contributions during the lookback period
- Difficulty identifying which elected officials and candidates qualify as “officials” who can influence a government entity’s investment adviser hiring
- Political-contribution thresholds not updated for inflation since the Rule’s adoption, so contributions as little as $150 can trigger its two-year ban despite being unlikely to influence investment adviser selection
- Difficulty using the returned-contribution exception, which requires the contributor to obtain the contribution’s return within 60 calendar days of the investment adviser’s discovery and leaves the adviser dependent on the recipient to satisfy the exception
- Blanket prohibitions on all state and local political contributions by investment advisers and their employees to avoid inadvertent violations
- Difficulty interpreting the “covered associate” definition
- Cost and time required to seek exemptive relief from the Rule’s prohibitions
- Impacts on core political speech protected by the First Amendment
With respect to the SEC’s last observed concern, various parties have brought lawsuits challenging the validity of the Rule since its inception, without success.[ii] The SEC appears to have grounded its thinking in the proposed rescission of the Rule in part on the basis of First Amendment principles.
Considerations for Investment Advisers Following a Rescission
Under the Proposal, if the Rule is rescinded, investment advisers would be expected to address their pay-to-play risks through a principles-based approach consistent with other existing obligations under the Advisers Act. Investment advisers would still be required to have policies and procedures that are reasonably designed to prevent fraudulent practices, including pay-to-play practices, but would have flexibility to tailor those policies particular to their business models in a manner that differs from the specific prescriptive requirements of the Rule. In assessing their compliance programs, investment advisers generally should also assess their codes of ethics to reinforce fiduciary principles governing the conduct of the investment adviser and its personnel in the context of pay-to-play risks.
The Proposal identifies several key considerations for investment advisers in structuring their compliance programs:
- Compliance with applicable law. An investment adviser’s policies and procedures would need to address pay-to-play practices that violate the Advisers Act and the rules thereunder.
- Risk identification. An investment adviser’s policies and procedures would need to identify and assess the risk of the investment adviser or its personnel engaging in pay-to-play practices — including by making contributions to government officials, political parties, and political action committees — that violate the Advisers Act and the rules thereunder. In making this risk assessment, an investment adviser should, for example, take into account:
- Governmental relationships. Investment advisers should consider whether they have an existing relationship with one or more government entities or government-entity officials, or whether they are seeking to provide investment advisory services to such government entities or officials. If so, investment advisers should analyze any contributions or related activities to assess the investment adviser’s risk.
- Investment advisers should consider the nature of the position of any personnel making a contribution — for example, whether the contributor is advisory or senior-level decision-making or business development personnel versus back-office, administrative, or clerical employees — and the associated risk. Contributions by personnel in positions involving client solicitation may carry heightened pay-to-play risks. Some personnel may also carry heightened pay-to-play risks due to their history of contributions.
- Pre-clearance. Investment advisers could consider incorporating into their policies and procedures a process of pre-clearance of contributions by the investment adviser and its personnel to officials of government entities, depending on the investment adviser’s risk assessment, nature of business, and its particular facts and circumstances. As part of any such process, the investment adviser could consider maintaining reports documenting contributions by personnel to help better identify pay-to-play risk, which could also aid the investment adviser in performing the required annual review of its overall compliance program.
- Risk mitigators. After identifying conflicts and other compliance factors creating pay-to-play risk, investment advisers would need to design policies and procedures to address those risks. As noted throughout the Proposal, these policies and procedures could be tailored to an investment adviser’s particular business model. For example, policies and procedures could provide that the investment adviser or its personnel may make contributions during a particular window that the investment adviser determines to have low pay-to-play risk. Policies and procedures could also set forth contribution thresholds, where contributions falling under such thresholds would not be subject to all or certain elements of the investment adviser’s pay-to-play policies and procedures (e.g., not subject to pre-clearance, if such a protocol were adopted).
- Third-party solicitors. To the extent an investment adviser uses third-party solicitors, the investment adviser would need to address in its policies and procedures the unique pay-to-play risks associated with such practices. For example, the investment adviser could consider limitations, such as requiring engagements to be approved by the adviser’s chief compliance officer or requiring any third-party soliciting government business on behalf of the investment adviser to be a registered investment adviser, registered broker-dealer, security-based swap dealer, or registered municipal adviser who has not made a political contribution to the government entity it is soliciting.
- Periodic monitoring. Policies and procedures could incorporate a process for more frequent periodic monitoring of compliance with, and the effectiveness of, any pay-to-play-related elements, as part of the investment adviser’s overall review of the effectiveness of the implementation of its policies and procedures under the compliance rule.
- Remedial steps. Investment advisers would need to include in their policies and procedures steps or a framework to address contributions that are inconsistent with the policies and procedures. For example, policies could require seeking the return of contributions within a specific timeframe or potential disciplinary or other appropriate actions against employees that violate the policies and procedures.
Next Steps
The Proposal will be open for public comment until November 9, 2026. In the meantime, the Rule remains in effect until the SEC takes further action on the Proposal. Given this timing, the Rule is expected to remain effective for at least the remainder of the 2026 election cycle.
The SEC is requesting comment on whether to rescind the Rule in its entirety or instead amend it within a more principles-based framework. Identified alternatives include raising the de minimis threshold to $3,500; shortening or eliminating the two-year time-out and lookback; simplifying the “official” and “covered associate” definitions; and expanding the bases for exemptive relief. Wholesale rescission, therefore, is not certain.
Even if the Rule is rescinded, the Proposal is clear that certain pay-to-play practices can still give rise to liability under the Advisers Act’s general antifraud provisions and fiduciary duty standards, as well as applicable federal, state, and local election laws. Therefore, registered investment advisers, exempt reporting advisers, and foreign private advisers should continue to closely evaluate their pay-to-play practices and associated risks, and maintain the political-contribution reporting and/or pre-clearance protocols established for compliance with the Rule.
ENDNOTES
[i] For purposes of the Proposal, “pay-to-play practices” arise when: (1) political contributions influence the selection of an investment adviser to provide investment advisory services to state and local governments, including by constituting a prerequisite to competing for an advisory role; or (2) investment advisers seek to influence an elected official’s award of advisory contracts by making or soliciting contributions to that official. In some instances, the SEC notes, investment advisers have engaged in pay-to-play practices that embody such quid pro quo corruption or highlight the risk of it.
[ii] See N.Y. Republican State Comm. & Tenn. Republican Party v. SEC, 799 F.3d 1126 (D.C. Cir. Aug. 25, 2015) (finding the plaintiffs’ claim to be time-barred and dismissing the lawsuit).
This post is based on a Latham & Watkins LLP memorandum, “SEC Proposes to Rescind the Political Contribution Rule for Investment Advisers,” dated September 11, 2026, and available here.