SEC Poised To Rescind Investment Adviser Pay-to-Play Rule But Compliance Risks Still Loom

On September 3, 2026, the Securities and Exchange Commission (SEC or Commission) announced its plan to rescind Rule 206(4)-5 under the Investment Advisers Act of 1940, as amended, also known as the “Pay-to-Play Rule” (the Rule), which has been in effect since 2010. If the SEC rescinds the Rule, maintaining diligent compliance procedures will remain critical for advisers and their employees who engage in political activities, even if they will not face the same strict liability penalties. Please be aware that the current Rule remains in effect for the upcoming November elections so investment advisers should continue to follow their established compliance procedures.

Overview of SEC Rule 206(4)-5

Currently, the Rule prohibits registered investment advisers and certain other investment advisers from providing investment advisory services for compensation to a state or local government entity if the adviser, or a “covered associate” of the adviser, has made a political contribution in excess of permitted de minimis limits to certain state or local government officials in the prior two years. “Covered associates” include general partners, managing members, executive officers of an investment adviser, employees who solicit a government entity for the investment adviser and any persons who supervise such employees. It also includes political action committees controlled by any covered associate. The rule prohibits political contributions to candidates for, and incumbents holding, any elective office which has the authority to directly or indirectly influence the hiring of an investment adviser or to appoint a person with such authority. The Rule’s “look back” requirement applies to an employee’s contributions made prior to becoming a covered associate for six months before employment, which is extended to two years for covered associates that are retained to solicit investors or clients.

As the Commission noted in its recent press release, the Rule’s strict liability standard “has led to significant unintended consequences... which can lead to situations where small donations or ‘foot faults’ potentially trigger substantial prohibitions and fines.” Violations of the Rule can not only disqualify investment advisers from future business but can jeopardize existing business managing public funds and result in disgorgement of fees earned for that work. The Rule permits certain de minimis contributions to covered officials without triggering the restriction—up to $350 per election to an elected official or candidate for whom an individual is entitled to vote and up to $150 per election to an official or candidate for whom they are not.

Other SEC Obligations Remain and Other Pay-to-Play Rules Are Unaffected

The SEC’s announcement and NPRM do not displace other legal requirements and restrictions that may apply to regulated entities. The SEC highlighted that an investment adviser that makes contributions to a government official to steer assets to a pooled investment vehicle it manages would be liable for implementing the government official’s scheme either directly or through aiding and abetting liability. It also noted that a contribution in connection with the solicitation of an advisory relationship would create a conflict of interest that must be disclosed and consented to by a neutral party. Accordingly, the SEC recommended that investment advisors proactively amend their codes of ethics and compliance policies to address the risk of quid pro quo, including by implementing policies on the following issues: 

• Requiring Compliance with Law: Investment advisers should consider and require compliance with obligations under state law, such as lobbyist registration and anti-corruption laws in states and under other federal rules addressing political activity.
• Tailored Risk-Based Policies Addressing Risks: Consider the risks posed by the number of current and potential government entities or covered officials with which the investment adviser interacts, the nature and position of personnel making a contribution and whether personnel would create heightened risks upon being hired.
• Pre-Clearance: Depending on the risks referenced above, pre-clearance of all political contributions and retention of detailed records may be advisable.
• Risk Mitigation Policies: Use mitigation factors, such as de minimis thresholds and contribution windows and other factors and guidelines to reduce risk.
• Third-Party Solicitors: Investment advisers retaining a third-party solicitor should consider compliance approval to confirm that the solicitor has not made a recent political contribution.
• Periodic Monitoring: Investment advisers should monitor compliance with the policies and the audit pre-clearance requests.
• Remedial Actions: Investment advisers should also require remediation for those violating the policies, such as requesting the return of contributions and other potential consequences for those that violated policies.

Please note that regardless of action by the SEC on the Rule, other pay-to-play rules at the federal level would remain in effect. The MSRB’s Rule G-37—after which the SEC’s rule was modeled—continues to limit certain contributions to state and local candidates and officeholders by municipal securities broker-dealers. Similarly, CFTC Regulation 23.451 and FINRA Rule 2030 will continue to restrict contributions by registered commodity-based swap-dealers and placement agents, solicitors, and distributors, respectively. There are currently no proposed actions that would amend or rescind these pay-to-play rules. A separate SEC pay-to-play restriction, Rule 15Fh-6, limits contributions by swap-dealers engaged in securities-based swaps. The NPRM does not currently propose rescinding that rule; however, it is conceivable it may do so in the future as the rule is analogous to Rule 206(4)-5.

State and local pay-to-play rules remain in effect. Many states and localities have pay-to-play restrictions limiting contributions by a company, its employees, and even their family members when the company is seeking or doing business with government entities. Additionally, public pensions and other funds often have system-specific rules restricting or requiring disclosures of political contributions. These rules can be more restrictive than the existing SEC Rule. Companies should continue to maintain strict compliance procedures to ensure that their political activities do not inadvertently trigger these federal, state, local, and system-specific rules. Also, additional jurisdictions may adopt pay-to-play rules to address a perceived gap in compliance.

Public Comment Period

The SEC’s NPRM provides for a period of public comment before it finalizes the Rule’s rescission. Comments must be received on or before 60 days after the NPRM’s date of publication in the Federal Register. As of September 8, the proposal has not yet been published in the Federal Register but we will continue to monitor its publication and the ensuing deadline for comment submission. For clients who are interested in submitting comments regarding the potential Rule change, we are available to assist with those submissions.

Beyond assisting with preparing and submitting comments, the Akin Political Law and Investment Funds practices are available to provide legal counsel and advise clients on necessary compliance protocols. Please do not hesitate to contact us with any questions.