Rescinding SEC ‘Pay to Play’ Rule Could Reduce Advisers’ Compliance Burden

The Securities and Exchange Commission has proposed eliminating its long-standing “pay to play” rule for investment advisers, which could reduce compliance burdens for some firms while leaving many existing restrictions intact through federal, state and local regulations.

The SEC announced on September 3 that it is seeking to rescind Investment Advisers Act Rule 206(4)-5, a regulation adopted in 2010 which generally bars investment advisers from providing compensated advisory services to a government client for two years after making certain political contributions. The proposal would also remove related recordkeeping requirements. The agency stated that the rest of the Investment Advisers Act, including anti-fraud provisions, fiduciary obligations, compliance requirements and codes of ethics, would remain in place.

Rule 206(4)-5’s intended purpose was to protect beneficiaries of invested state and municipal assets, such as pension plans and their participants, by preventing advisers from using political contributions to influence the officials responsible for the hiring of investment advisers.

In a separate statement, SEC Chair Paul Atkins said the rule was “needlessly penalizing, burdensome and complex,” discouraging political participation, and imposing significant penalties for relatively small political contributions. Atkins, who echoed prior critics of the rule, argued that political contributions were more appropriately regulated by other agencies.

“Matters involving political contributions are more properly governed by local ordinances, state laws, and federal election regulations—not by the SEC,” Atkins said in the statement. “Rescinding the rule would not open the door to fraud because sufficient protections exist and have always existed.”

Michael Koffler, a partner in law firm Eversheds Sutherland and a former SEC staff member, says many financial firms have adopted highly restrictive practices because of the potential consequences of violating the rule.

“In case they’re wrong, it’s a civil fraud claim against them. So that meant firms built a natural buffer against the rule,” Koffler says. “Many advisers prohibited political contributions across the board from anyone with the firm.”

Firms often had to monitor contributions made not only by current personnel, but, in some instances, made by newly hired employees before they had joined the firm, according to Koffler.

While Koffler did not expect the SEC to propose repealing the rule instead of revising it, he agrees that even if it is repealed, advisers will not be operating without oversight.

“The SEC noted there still are the anti-fraud provisions, the fiduciary duty obligations, the compliance rule and the code of ethics rule,” Koffler says. “It’s not like it didn’t bring pay-to-play cases before this rule went into effect, and it’s not like it can’t continue to bring these types of cases after the rule goes away.”

The September 3 proposal drew support from some industry groups. Tom Quaadman, chief government affairs and public policy officer at the Investment Company Institute, said the existing rule became outdated, given the presence of other safeguards at the federal, state and local levels.

Others cautioned that the practical impact may be limited. Erin Koeppel, managing director of government relations and public policy counsel at Certified Financial Planner Board of Standards Inc., notes that many advisers remain subject to other regulatory frameworks, including pay-to-play restrictions enforced by FINRA and the Municipal Securities Rulemaking Board. She also noted that states and municipalities may continue enforcing their own requirements or could adopt new ones if the SEC rule is withdrawn.

“Firms may determine that the proposal does not warrant changes to their existing policies and procedures, which would reduce the proposal’s practical impact across portions of the industry,” Koeppel said in a statement to PLANADVISER.

In general, Atkins has pushed a deregulatory agenda. A report by the Harvard Law School Forum of Corporate Governance noted a 27% drop in new SEC enforcement actions in 2025, and former SEC Division of Enforcement Director Margaret Ryan resigned in May. At the time of Ryan’s resignation, Atkins said the agency was targeting “types of misconduct that inflict the greatest harm” and not “touting volume over impact.”

The SEC’s proposal is subject to a 60-day public comment period, which would likely end after November’s midterm elections.