On September 3, 2026, the US Securities and Exchange Commission (“SEC” or the “Commission”) proposed the rescission of Rule 206(4)-5 under the Investment Advisers Act of 1940 (the “Advisers Act”), widely known as the “pay-to-play” rule. The SEC will solicit comments on the proposal for 60 days following publication in the Federal Register.
Rule 206(4)-5, adopted in 2010, generally makes it unlawful for an investment adviser to receive compensation for providing investment advisory services to a state or local government entity for two years after the adviser or any of its “covered associates” makes a political contribution to an official with direct or indirect authority to select investment advisers for that entity. The rule also reaches advisers to pooled investment vehicles in which a government entity invests, and applies to contributions to candidates for office as well as to sitting officeholders. The rule provides de minimis exceptions and an adviser may apply to the SEC for an order exempting it from the two-year ban, but the SEC contends in the proposal that the de minimis exceptions are too low, and that the exemptive process has proven too costly and time-consuming for market participants.
In the release proposing the rescission, the SEC takes the view that the rule’s burdens may not be justified by its benefits, and that existing antifraud provisions and other regulatory frameworks are sufficient to address pay-to-play practices. The SEC suggests that permitting investment advisers to address their pay-to-play risks in a principles-based manner consistent with other existing obligations under the Advisers Act would be appropriate. In other words, the SEC believes that other existing requirements of the Advisers Act and its associated rules operate to require investment advisers to address pay-to-play practices, but retain the flexibility to design tailored compliance policies and procedures and codes of ethics in accordance with their own business models and risk profiles, taking a more holistic approach.
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