SEC Proposes to Rescind Pay-to-Play Rule

Who may be interested: Investment Advisers; Compliance Officers; Registered Investment Companies; Directors of Registered Investment Companies; Broker-Dealers.

Quick Take: The SEC has proposed rescinding Rule 206(4)-5 of the Advisers Act, commonly known as the “pay-to-play” rule, and amending Rule 204-2 to eliminate the related recordkeeping requirements, while leaving advisers’ anti-fraud, fiduciary, compliance, and ethics obligations intact.

On September 3, 2026, the SEC proposed rescinding Rule 206(4)-5 of the Advisers Act, commonly known as the “pay-to-play” rule, and amending Rule 204-2 to eliminate the related recordkeeping requirements. Rule 206(4)-5 generally prohibits an investment adviser from receiving compensation for advisory services provided to a government client for two years after the adviser or certain covered associates make political contributions to certain elected officials or candidates. Advisers would remain subject to existing anti-fraud, fiduciary, compliance, and code of ethics requirements, as well as other applicable laws and regulations, if Rule 206(4)-5 is rescinded and Rule 204-2 is amended.

Proposed Changes

The proposal would:

• Rescind Rule 206(4)-5 in its entirety;
• Amend Rule 204-2 to eliminate the requirements related to Rule 206(4)-5; and
• Remove the current two-year compensation ban associated with certain political contributions.

Continued Regulatory Obligations

The proposal would not affect an investment adviser’s broader obligations under the Advisers Act. Advisers would remain subject to existing anti-fraud, fiduciary, compliance, and code of ethics requirements, as well as other applicable laws and regulations.

The Release states that, in the view of the SEC, these existing requirements provide a sufficient basis for addressing pay-to-play concerns.

Takeaways

The proposal is based on concerns that Rule 206(4)-5 has created compliance and operational burdens, including consequences for minor contributions and inadvertent violations, constraints on hiring and promotion decisions, limitations on the ability of government clients to hire or retain advisers, and interpretive challenges in applying Rule 206(4)-5. The SEC also expressed concerns that Rule 206(4)-5 has led some advisers to prohibit political contributions outright, which might chill political speech protected by the First Amendment.

If adopted, the proposal would represent a shift in the SEC’s regulation of political contributions by investment advisers and could reduce compliance, monitoring, and recordkeeping obligations associated with the current pay-to-play framework. Significantly, Advisers would still remain subject to existing fiduciary, anti-fraud, and compliance obligations under the Advisers Act and other applicable laws and regulations.

Comments are due November 9, 2026, which is 60 days after publication of the proposal in the Federal Register.

The proposal is available here.