This publication is provided for educational and informational purposes only and is not intended to constitute legal advice. The information contained herein is generalized, does not apply to any particular facts or circumstances, and should not be relied upon without consulting qualified legal counsel. Receipt of this publication does not create an attorney-client relationship.
Proposal
On September 3, 2026, the Securities and Exchange Commission (SEC) proposed rescinding Rule 206(4)-5 under the Investment Advisers Act of 1940 (“Advisers Act”), commonly known as the “Pay-to-Play Rule,” (the “Pay-to-Play Rule”). Although the rescission is not yet in place and advisers must continue to comply with the Rule while the rulemaking is pending, we expect many years of unintended consequences to be alleviated, which will help divert impactful resources to other areas of an adviser’s compliance program.
In support of rescission, SEC Chair Paul S. Atkins characterized the Rule as needlessly punitive, burdensome and complex to administer, and misaligned with the SEC’s mandate. The proposal focuses on consequences that, in the Commission’s view, can be disproportionate to the conduct involved, particularly where a contribution is small, inadvertent, or unrelated to any effort to obtain government business. The Commission reminds advisers that even after the rescission, advisers would remain subject to the Advisers Act’s antifraud provisions, fiduciary duty, Rule 206(4)-7 compliance obligations, code-of-ethics requirements, and applicable federal, state, and local campaign-finance and ethics laws.
The Compliance Trap
The SEC adopted the Pay-to-Play Rule in 2010 to address the risk that political contributions could be used to obtain or retain public pension and other government advisory mandates. Its central mechanism is a two-year “time out” from compensation, rather than a requirement that the SEC prove an actual quid pro quo. The Rule therefore can apply even when the contributor lacked corrupt intent and the contribution did not influence an investment decision.
The Rule includes limited de minimis exceptions: up to $350 per election when the contributor is entitled to vote for the candidate, and up to $150 per election when the contributor is not entitled to vote for the candidate. It also contains look-back provisions that may attribute a new employee’s earlier contributions to the hiring adviser. Depending on the employee’s role, the look-back period may be six months or two years. Although an adviser may seek an SEC exemption, the process can be costly, time-consuming, and uncertain.
This structure has generated compliance burdens that extend beyond preventing quid pro quo corruption. Advisers may restrict lawful political participation, alter hiring and promotion decisions, decline or relinquish government mandates, and devote significant resources to preclearance, employee certifications, monitoring, and recordkeeping. Further, advisers in many cases have expanded the requirements to cover all or most personnel rather than just those who would be classified as “covered associates” under the rule in an effort to streamline compliance.
Examples of Cured Unintended Consequences
A $1,000 Contribution to a Gubernatorial Candidate
An RIA manages assets for a state employees’ retirement system. An employee contributes $1,000 to a gubernatorial candidate who, if elected, would have authority to appoint members of the pension board. Because the contribution exceeds the Rule’s de minimis thresholds, it could trigger a two-year prohibition on the adviser receiving compensation from the retirement system, even if the contribution was motivated solely by the candidate’s position on an unrelated issue and no quid pro quo existed. If the Rule is rescinded, the contribution would no longer automatically trigger Rule 206(4)-5’s compensation ban, although other laws and the adviser’s general compliance obligations would continue to apply.
A New Hire’s Pre-Employment Contribution
An adviser to a state’s short-term investment fund identifies a highly qualified candidate for a role. During onboarding, the candidate reports contributing $300 six months earlier to the successful campaign of the state treasurer, an official with influence over adviser selection. If the candidate was not entitled to vote for the treasurer, the contribution exceeds the $150 de minimis threshold and may fall within the Rule’s look-back provisions. The adviser may face a difficult choice: delay or forgo the hire, restructure the employee’s duties, seek an exemption, or risk losing compensation from the government mandate. Rescission of the Rule would remove this automatic federal consequence, while leaving the adviser responsible for assessing actual conflicts and applicable state or local restrictions.
An Employee Who Wants to Run for School Board
An employee of an RIA wishes to run for the local school board. The RIA, or an affiliated adviser, manages funds for the school district. Contributions by the employee to the employee’s own campaign, as well as contributions solicited from others, can raise complicated questions under the Rule if the office has influence over adviser selection. Firms may respond conservatively by restricting candidacy, campaign activity, or job responsibilities. Rescission would eliminate Rule 206(4)-5 as an automatic obstacle, though conflicts, fiduciary obligations, and local election rules would still require review.
A Mayoral Contribution Unrelated to a Pension Proposal
An adviser plans to compete for a city firefighters’ pension mandate. Before the proposal is submitted, a covered associate contributes to the mayor’s reelection campaign. If the mayor has authority to appoint pension trustees or otherwise influence the selection process, the contribution could trigger the two-year time out even though the pension fund was not yet a client and the contribution was unrelated to the prospective mandate. Rescission would remove the Rule’s automatic compensation bar, but any contribution intended to influence the award of business would remain subject to antifraud and other applicable laws.
An Inadvertent Contribution Above the Applicable Limit
A covered associate encounters a local candidate at a community event and makes a $275 contribution based on the candidate’s position on social issues. The associate does not know that the office can influence government investment mandates. If the associate is entitled to vote for the candidate, the contribution ordinarily would fall within the $350 de minimis exception. If the associate is not entitled to vote for the candidate, however, the contribution exceeds the $150 limit and could trigger the compensation ban. This example illustrates how geography and voting eligibility, rather than corrupt intent, can determine the federal consequence.
Firmwide Blanket Bans on Political Giving
Because identifying every official who may influence a government entity can be difficult, and because even a small mistake can threaten compensation from a significant mandate, some advisers impose political-contribution restrictions that are broader than the Rule itself. Those policies may prohibit contributions by large groups of employees, including personnel with no role in soliciting government business. The proposal contends that rescission could reduce the incentive for blanket bans and permit advisers to adopt more tailored, risk-based controls.
Takeaways for Advisers
- Continue to monitor the proposal.
- Continue enforcing existing political-contribution policies and preclearance procedures while the proposal is pending.
- Do not assume that rescission, if adopted, would eliminate all political-contribution compliance obligations – a program will still be required.
- Inventory local, state, and federal restrictions applicable to each government client and prospective mandate. This may include individual entity by-laws and conflicts of interest rules. Be sure to regularly review the law for updates and specificity as it applies to the specific client and service provided.
- If a final rescission is adopted, reassess whether existing blanket bans can be replaced with controls tailored to the adviser’s actual government-business risk. Ensure those controls continue to address other restrictions that may exist.
- Check back in for more Bressler updates as the rulemaking progress.