SEC Proposes to Scrap Pay-to-Play Rule for Advisers

The rule bars advisory firms from managing money for government clients for two years after political contributions, the SEC said. Rescinding it would also strip related recordkeeping requirements from the Advisers Act. Firms would no longer need to track employee political giving to determine when the two-year ban applies.

Adopted more than 15 years ago, Rule 206(4)-5 falls under the Investment Advisers Act of 1940. The SEC designed it to deter fraud by blocking advisory firms from winning pension or municipal deals tied to political giving. The agency detailed the rule's origins in a Sept. 3 statement.

For advisers competing for state and local government mandates, the proposal could ease hiring friction and legal costs. That friction has pushed many firms toward blanket bans on employee political giving rather than case-by-case compliance, the SEC said.

Atkins said the rule has proven overly prescriptive since its adoption. It has imposed penalties on small or impulsive donations to candidates in both parties. He added that it routinely punishes advisory firms over donations that an employee made before ever joining the business.

Blanket restrictions have also curbed political speech among advisers, according to the SEC. The current rule exempts small donations below a set threshold. Most firms simply prohibit employee contributions altogether rather than navigate the rule's complexities.

What the Change Means for Advisers

Fraud protections would remain in place even without the rule, Atkins said. Advisers are still bound by the Advisers Act's antifraud provisions and fiduciary duty requirements. They also must maintain written compliance policies and codes of ethics.

Atkins said the rule's blanket effect amounts to a free-speech issue, not just a compliance one. Blanket bans discourage full participation in elections through candidate donations. People should not have to choose between exercising political speech rights and working in the industry.

Oversight of political contributions would instead fall to state and local ordinances and federal election law, according to Atkins. He argued that policing campaign donations sits outside the SEC's core mandate to regulate securities markets.

The proposal marks another step in Atkins' push to narrow the SEC's focus, according to the agency. It remains open for public comment before any final vote, meaning current pay-to-play restrictions stay in effect for now.

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