On September 3, 2026, the Securities and Exchange Commission (SEC) proposed rescinding Rule 206(4)-5 under the Investment Advisers Act of 1940, commonly known as the “pay-to-play” rule. The SEC also proposed related changes to its recordkeeping requirements.
The proposing release, Release No. IA-6994, was published in the Federal Register on September 10, 2026, with comments due November 9, 2026.
If adopted, the proposal would represent a significant shift toward a principles-based regulatory approach to political contributions by investment advisers.
How the Current Rule Works
The SEC adopted Rule 206(4)-5 in 2010 in response to concerns that investment advisers were using campaign contributions to influence the award of contracts to manage public pension plan assets and other government investment accounts.
At the time, state and local government retirement funds held nearly $6 trillion in assets. Today, they hold approximately $9.6 trillion, or roughly 33% of all U.S. pension assets. Approximately 36 million people participate in state and local retirement plans.
The rule generally prohibits an investment adviser from receiving compensation for advisory services provided to a government entity for two years after the adviser or any of its “covered associates” makes a political contribution to an official who can influence the adviser’s selection.
Covered associates include an adviser’s general partners, managing members, executive officers, employees who solicit government entities for advisory business, supervisors of those employees, and political action committees controlled by the adviser or its covered associates.
The rule provides limited exceptions. A de minimis exception permits contributions of up to $350 per election to officials for whom the contributor is entitled to vote and $150 per election to officials for whom the contributor cannot vote.
Under the “new covered associate” exception, a contribution made more than six months before an individual becomes a covered associate does not trigger the compensation ban, provided the individual does not solicit government entity clients after assuming that role.
The rule also includes a “returned contribution” exception and an exemptive relief process, though the SEC has acknowledged that the relief process can be costly and time-consuming.
In addition to the compensation ban, Rule 206(4)-5:
- Prohibits advisers from paying third parties who are not registered broker-dealers or registered municipal advisors to solicit government entities for advisory business.
- Prohibits advisers and their covered associates from coordinating or soliciting contributions to officials or political parties of states or localities where the adviser is seeking business.
Proposal Would Rescind the Rule in Full
The SEC proposes rescinding the pay-to-play rule in its entirety, including:
- The two-year compensation ban.
- The de minimis exceptions.
- The covered associate provisions.
- The prohibition on payments to third-party solicitors seeking government entity business.
- The ban on coordinating or soliciting contributions.
The SEC said the rule’s objectives would be “better achieved using a principles-based approach under the existing regulatory framework.”
The proposing release identifies several concerns with the current rule:
- Restrictions on political activity. Some advisers impose blanket prohibitions on all political contributions by employees, restricting First Amendment-protected political speech. According to a 2024 industry survey cited by the SEC, approximately 12.4% of surveyed advisers use these bans.
- Disproportionate consequences. Small donations or inadvertent “foot faults” can trigger substantial two-year prohibitions on compensation.
- Outdated thresholds. The $150 and $350 de minimis thresholds have not been adjusted for inflation in the 16 years since the rule’s adoption, while the federal contribution limit has risen to $3,500 per candidate, per election.
- Difficult definitions. The definitions of “official” and “covered associate” have proven difficult to interpret and apply in practice, potentially sweeping in individuals and contributions that present no genuine pay-to-play risk.
- Employment and contracting effects. The rule may prevent advisers from hiring or promoting qualified individuals because of prior political contributions and deprive public pension plans of access to qualified or cost-effective advisory services.
Related recordkeeping requirements would also go
The proposal would also eliminate Rule 204-2(a)(18), which requires advisers to maintain records of political contributions by the adviser, its covered associates, and political action committees (PACs) controlled by the adviser or its covered associates, as well as records of payments to certain third parties and information about government entity clients.
Other recordkeeping requirements would remain in effect, including obligations to maintain copies of compliance policies and procedures, codes of ethics, and written agreements with government entity clients.
Existing rules would take on a larger role
Rather than relying on a prescriptive pay-to-play rule, the SEC proposes addressing misconduct through the existing regulatory framework, including:
- Antifraud provisions. Sections 206(1), (2), and (4) of the Advisers Act broadly prohibit fraudulent and deceptive practices by investment advisers.
- Fiduciary duty obligations. Advisers must act in their clients’ best interests and fully and fairly disclose material conflicts of interest.
- The compliance rule. Rule 206(4)-7 requires registered advisers to adopt and implement written policies and procedures reasonably designed to prevent Advisers Act violations.
- The code of ethics rule. Rule 204A-1 requires registered advisers to establish codes of ethics that set forth standards of conduct and address personal trading and conflicts of interest.
- Other legal protections. Federal bribery laws, state and local pay-to-play laws, Municipal Securities Rulemaking Board (MSRB) rules, Financial Industry Regulatory Authority (FINRA) Rule 2030, and the SEC’s Whistleblower Program continue to apply.
Atkins Cites Political Speech and Compliance Burdens
In a statement accompanying the proposal, SEC Chair Paul Atkins criticized the existing rule as burdensome, complex, and misaligned with the agency’s mission.
In articulating the policy rationale for rescission, Atkins said the SEC is “not the nation’s elections regulator” and argued that the rule has unnecessarily penalized advisers while suppressing political speech. He noted that “many firms simply impose blanket prohibitions on employee political contributions rather than navigate the rule’s complexities.”
“People should not have to choose between their political speech rights and a job in a particular industry,” Atkins said.
He also said that political contributions are “more properly governed by local ordinances, state laws, and federal election regulations—not by the SEC.” According to Atkins, rescinding the rule “would not open the door to fraud” because the Advisers Act and other applicable laws already provide protection against misconduct.
What Investment Advisers Should Consider Now
The proposed rescission would eliminate Rule 206(4)-5’s prescriptive requirements, but it would not eliminate the need for investment advisers to address pay-to-play risks. Advisers should therefore carefully consider the following in evaluating the proposal’s implications.
Reassessing compliance policies
The SEC expects registered advisers to adopt and implement written policies and procedures reasonably designed to prevent pay-to-play violations, consistent with Rule 206(4)-7. Under the proposed principles-based approach, however, each adviser could tailor its compliance program to its own risk profile. The proposing release identifies several considerations:
- Applicable laws. Policies should account for all applicable federal, state, and local pay-to-play laws and regulations.
- Risk identification. Advisers should assess the potential for direct and indirect pay-to-play activity, including risks arising from the use of third-party solicitors.
- Government relationships. Policies should be calibrated to reflect the nature and extent of an adviser’s current and prospective relationships with government entities.
- Personnel. Advisers should consider the employees’ responsibilities, including whether they hold senior, business development, or administrative positions, when assessing contribution-related risks.
- Preclearance. Advisers may wish to implement preclearance requirements for certain political contributions.
- Risk mitigators. Advisers should consider contribution thresholds, contribution windows, or other quantitative or temporal limits.
- Third-party oversight. Advisers using third-party solicitors to pursue government business should implement appropriate oversight and due diligence procedures.
- Monitoring. Policies should include mechanisms for ongoing monitoring and review of political contribution activity.
- Remediation. Advisers should establish procedures for addressing violations, including seeking the return of contributions and taking appropriate disciplinary actions.
Other pay-to-play restrictions would remain
Rescinding Rule 206(4)-5 would not eliminate all political contribution restrictions affecting investment advisers.
Federal bribery laws, state and local pay-to-play statutes (such as those in Rhode Island, South Carolina, and Philadelphia), MSRB rules, FINRA Rule 2030, and, for dually registered entities, Exchange Act Rule 15Fh-6 would continue to impose independent obligations.
Advisers should ensure their compliance programs account for this broader regulatory landscape.
Different considerations for ERAs and foreign private advisers
The compliance rule (Rule 206(4)-7) and the code of ethics rule (Rule 204A-1) apply only to SEC-registered advisers.
Exempt reporting advisers (ERAs) and foreign private advisers (FPAs) remain subject to the antifraud provisions of Section 206 but are not required to adopt formal compliance programs under Rule 206(4)-7.
The SEC acknowledged that the reduction in deterrence resulting from rescission could be greater for ERAs and FPAs than for registered advisers. ERAs and FPAs should therefore evaluate whether their risk profiles warrant maintaining or adopting voluntary pay-to-play policies.
SEC Projects Significant Compliance Savings
The SEC estimates that approximately 2,091 advisers are currently affected by Rule 206(4)-5. Its economic analysis projects substantial cost savings from rescission, offset by one-time transition costs.
The SEC estimates:
- Approximately $416 million in aggregate annual compliance cost savings, including about $3,750 per smaller adviser, $161,500 per medium-sized adviser, and $323,000 per larger adviser.
- Approximately $51 million in one-time aggregate transition costs as advisers revise their compliance programs.
- Approximately $646,000 in recordkeeping savings and $68,917 in exemption filing savings.
- Approximately $416.3 million in total aggregate annual monetized benefits, with a 10-year present value of $3.6 billion using a 3% discount rate or $3.0 billion using a 7% discount rate.
The SEC acknowledged that rescission may increase the risk of pay-to-play activity. It nevertheless concluded that existing antifraud provisions, fiduciary obligations, federal bribery laws, and state and local pay-to-play laws would provide sufficient safeguards.
Preparing for a Potential Shift
With comments due November 9, advisers and other interested parties may want to consider whether to submit comments addressing the proposed shift to a principles-based approach and the role of the existing regulatory framework in deterring pay-to-play practices.
The proposal would significantly change the regulatory framework governing political contributions by investment advisers. If adopted, it would replace the current prescriptive regime with a principles-based approach that relies on existing antifraud provisions, fiduciary duties, Advisers Act compliance obligations, and other federal, state, and local laws.
Rescission could reduce advisers’ operational burdens, but it would also place greater responsibility on individual advisers to design and maintain compliance programs appropriately tailored to their risk profiles.
Advisers should not view the proposed rescission as an invitation to abandon compliance efforts in this area. Rather, they should begin evaluating how a principles-based framework would affect their existing policies and procedures, while remaining mindful of the full range of legal obligations that would continue to apply.
Alston & Bird will continue to monitor the rulemaking and is prepared to help clients assess its potential impact.
If you have any questions, or would like additional information, please contact one of the attorneys on our Investment Funds team.
You can subscribe to future advisories and other Alston & Bird publications by completing our publications subscription form.