Overview
As expected, late last week, the Securities and Exchange Commission (SEC) shook up the political law landscape when it proposed to rescind its monumental pay-to-play rule governing investment advisers. For well over a decade, advisers have been subject to SEC Rule 206(4)-5,[1] a complex pay-to-play rule that seeks to prevent political contributions being used to secure investment advisory business from public entities ("Pay-to-Play Rule" or the "Rule"). The broad-ranging rule applies to wide swaths of employees making contributions in their personal capacity, using personal funds. In its release,[2] the SEC poses 15 general categories of questions to the public as part of a comment process, which will run 60 days after publication in the Federal Register.
The coming weeks will determine the final fate of this rule and how its rescission will impact compliance programs throughout the financial services industry. This summer, we covered a variety of pay-to-play risks that companies should keep in mind with respect to the 2026 elections.[3] As we discuss below, the SEC’s Pay-to-Play Rule is one of many that compliance professionals and in-house counsel in the financial services sector must keep in mind as the 2026 midterm election approaches.
What does the current rule do?
In response to allegations of corruption in the procurement process, the Pay-to-Play Rule was modeled after the Municipal Securities Rulemaking Board (MSRB) Rule G-37,[4] which dealt with political contributions by municipal securities dealers. The Pay-to-Play Rule imposes a two-year timeout for compensated investment advisory services if the investment adviser or one of its covered associates made a contribution to an official of a government entity. Violations of the Rule occur when that two-year timeout was violated, or when contributions were solicited for those officials, or payments were made to state or local parties of the jurisdiction where business was sought. The Rule includes a very low de minimis threshold for contributions that would not trigger the ban: $350 per candidate per election if the covered associate could vote for the official in question, and $150 if the covered associate was not eligible.
The Rule contains a "de facto strict liability standard,"[5] meaning the intent behind a contribution is irrelevant when determining whether the prohibition on fees applied. While the Rule allows for exemptive relief in limited circumstances, the impact of the potential loss of business for firms created significant concern over potential inadvertent violations. As a result, compliance programs for registered investment advisers were overhauled to account for the Rule’s mandates. For instance, such programs would typically identify which of their employees (including prospective new hires) fit the definition of covered associates, implement a preclearance process for political contributions, and determine which officials would be considered covered based on the authority of the officials’ office and appointment power.
In practice, this federal Rule covered mainly state and local elections due to the definition of official. However, if a state or local officeholder ran for federal office, the law would still apply to the federal campaign.[6]
The SEC’s Pay-to-Play Rule is often layered on top of state and local pay-to-play rules, which apply to government contractors and varied widely depending on the jurisdiction.[7] As we discuss later, even with a rescission, state and local pay-to-play rules would still be in effect and not touched by SEC action.
What does the proposed rule to rescind say?
The Proposal seeks to fully rescind the Rule, and to amend the recordkeeping rules of the Advisers Act to eliminate the corresponding references and requirements. Citing "operational implementation challenges" and "suppression of political speech," SEC Chairman Paul Atkins stated that these matters are best left governed by state and local law, or by federal election regulations.[8] Commissioner Hester Peirce, who has long been critical of the Rule, echoed those sentiments, stating that "[t]he rule is broad, and its exceptions are narrow."[9]
In the Release, the SEC discusses what it says are difficulties with the Rule’s operations, leading to "significant unintended consequences."[10] Upon rescission, the SEC believes that advisers will be "better enable[d] . . . to tailor their compliance policies and procedures."[11]
The questions posed in the Proposal also ask whether something short of rescission is appropriate, including whether certain provisions should be modified, such as increasing the de minimis exception to $3,500 or reducing the two-year timeout to a shorter period.
Additional questions posed in the Proposal contemplate amending the Rule to require advisers to adopt robust compliance programs that are tailored to address pay-to-play risks, such as establishing firmwide guidelines to identify covered personnel and prohibited conduct, including pre-clearance, periodic monitoring, and documenting contributions made.
What’s next?
The SEC seeks public comment on various questions focusing on high level considerations and practical experiences with the Rule’s operations. Taken together, the questions provide an opportunity to weigh in on the Rule’s impact, suggest alternatives to full rescission, and advocate for compliance requirements that best suit the industry.
What does it mean for financial services companies subject to the Rule?
While the Rule is unlikely to be rescinded before the November 2026 elections, it is unlikely that the current SEC would enforce it against investment advisers for contributions made in the coming months. That said, the SEC has been known to use other tools in its arsenal to bring cases involving pay-to-play conduct. In one case, a State Treasurer demanded that the financial institution raise $25,000 in five days before the Treasurer would approve certain financial contracts. An employee coordinated making payments through the company’s external lobbyist, and the SEC found this violated its anti-fraud provisions.[12]
In addition, the myriad of overlapping state, local, and agency specific pay-to-play rules remain intact. So, for investment advisers seeking investment form public pension funds, various restrictions on political contributions and political fundraising are still in place and compliance programs will need to be able to mitigate those risks. This is even more the case for financial institutions subject to other federal pay-to-play rules, such as the MSRB, which applies to Municipal Securities Dealers, CFTC rule, which applies to swap dealers, and FINRA rule applicable to broker dealers. While one might expect at least the FINRA Rule 2030 to be rescinded in short order as well, the Proposal states that companies may not change their existing pay-to-play policies if they remain subject to these other rules, including FINRA’s 2030.[13]
Lastly, many public pension systems include provisions in side letters and contracts related to their investments that the investment adviser agrees to act in compliance with Rule 206(4)-5, and the consequence for failing to do so may include cancellation of the contract and suspension from seeking new investment for a period of years. Even if the Rule is rescinded, public pension funds may continue to impose similar obligations contractually. We may also see states and localities beef up their own pay-to-play rules in response to the SEC’s anticipated rescission of its rule.
In short, while 206(4)-5 may not be long for this world, pay-to-play risks are not going anywhere, and compliance programs will have to consider how to adapt to the changing landscape.
[1] Advisers Act Rule 206(4)-5, 17 C.F.R. § 275.206(4)-5; Investment Advisers Act of 1940, 15 U.S.C. § 80b-20, et seq.; Political Contributions by Certain Investment Advisers, Release No. IA-3043 (July 1, 2010), https://www.sec.gov/files/rules/final/2010/ia-3043.pdf.
[2] Political Contributions by Certain Investment Advisers, Release No. IA-6994 (proposed Sept. 3, 2026) (hereinafter "Release"), https://www.sec.gov/files/rules/proposed/2026/ia-6994.pdf.
[3] Jason Abel, Adie J. Olson, Claire Rajan & Elizabeth Goodwin, Considering Evolving Pay-to-Play Risks in the 2026 Elections, Steptoe (July 29, 2026), https://www.steptoe.com/en/news-publications/political-law-blog/considering-evolving-pay-to-play-risks-in-the-2026-elections.html.
[4] Municipal Securities Rulemaking Board, Rule G-37.
[5] Release at 7.
[6] Jason Abel & Scott A. Sinder, Pay-to-Play Rules and the Presidential Campaign, Steptoe (July 15, 2016), https://www.steptoe.com/en/news-publications/pay-to-play-rules-and-the-presidential-campaign.html.
[7] Id.
[8] Statement on Proposal to Rescind "Pay-to-Play" Rule, Paul S. Atkins, Chairman, Securities & Exchange Commission (Sept. 3, 2026), https://www.sec.gov/newsroom/speeches-statements/atkins-statement-proposal-rescind-pay-play-rule-090326.
[9] Statement on First Amendment Sense and Sensibilities: Statement on Proposed Recission of Pay-to-Play Rule, Commissioner Hester M. Pierce, Commissioner, Securities & Exchange Commission (Sept. 3, 2026), https://www.sec.gov/newsroom/speeches-statements/peirce-statement-pay-play-090326 (internal citations omitted).
[10] Release at 21.
[11] Id. at 33–34.
[12] State Street Bank & Trust Co., Exchange Act Release No. 76905 (Jan. 14, 2016), https://www.sec.gov/files/litigation/admin/2016/34-76905.pdf.
[13] Release at 58.
