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Conformed to Federal Register Version

SECURITIES AND EXCHANGE COMMISSION
17 CFR Part 275
[Release No. IA-6994; File No. S7-2026-31]
RIN 3235-AN65
Political Contributions by Certain Investment Advisers
AGENCY: Securities and Exchange Commission.
ACTION: Proposed rule; rescission.
SUMMARY: The Securities and Exchange Commission (the “Commission” or the “SEC”) is
proposing to rescind the political contribution rule under the Investment Advisers Act of 1940
(the “Advisers Act”), which prohibits investment advisers from providing investment advisory
services for compensation to a government client for two years after an adviser or any covered
associate of the adviser makes a contribution to certain categories of elected officials or
candidates, among other prohibitions. In the more than fifteen years since the rule was adopted,
implementation challenges associated with the political contribution rule have resulted in a range
of significant unintended consequences, including compliance practices among some investment
advisers that may have had the effect of restricting all political contributions by the investment
advisers and their employees. Market participants also have stated that the political contribution
rule is burdensome, complex, and both lacks clarity and creates a de facto strict liability standard.
The Commission is of the view that other existing requirements of the Advisers Act and its
associated rules, including prohibitions on fraud, fiduciary duty requirements, the compliance
rule, and the code of ethics rule (defined below), are likely sufficient to address pay-to-play
practices while allowing an adviser the flexibility to implement an approach that is more
1

appropriately tailored to its particular risks, rendering the political contribution rule unnecessary.
The Commission also is proposing to amend the rule under the Advisers Act pertaining to books
and records consistent with the proposed rescission.
DATES: This proposal was published in the Federal Register on September 10, 2026.
Comments should be received on or before November 9, 2026.
ADDRESSES: Comments may be submitted by any of the following methods:
Electronic Comments:
•

Use the Commission’s internet comment form (https://www.sec.gov/comments/s7-202631/political-contributions-certain-investment-advisers); or

•

Send an email to rule-comments@sec.gov. Please include File Number S7-2026-31 on
the subject line.

Paper Comments:
•

Send paper comments to Vanessa A. Countryman, Secretary, Securities and Exchange
Commission, 100 F Street NE, Washington, DC 20549-1090.

All submissions should refer to File Number S7-2026-31. This file number should be
included on the subject line if email is used. To help the Commission process and review your
comments more efficiently, please use only one method of submission. The Commission will
post all comments on the Commission’s website (https://www.sec.gov/rules-regulations/publiccomments/s7-2026-31). Do not include personally identifiable information in submissions; you
should submit only information that you wish to make available publicly. The Commission may
redact in part or withhold entirely from publication submitted material that is obscene or subject
to copyright protection.

2

Studies, memoranda, or other substantive items may be added by the Commission or staff
to the comment file during this rulemaking. A notification of the inclusion in the comment file of
any such materials will be made available on the Commission’s website. To ensure direct
electronic receipt of such notifications, sign up through the “Stay Connected” option at
www.sec.gov to receive notifications by email.
A summary of the proposal of not more than 100 words is posted on the Commission’s
website (https://www.sec.gov/rules-regulations/2026/09/s7-2026-31).
FOR FURTHER INFORMATION CONTACT: Janet Jun, Lawrence Pace, and Mark
Stewart, Senior Counsels, Sirimal R. Mukerjee, Senior Special Counsel, or Robert Holowka,
Assistant Director, Investment Adviser Regulation Office, at (202) 551-6787, Division of
Investment Management, Securities and Exchange Commission, 100 F Street NE, Washington,
DC 20549-8549.
SUPPLEMENTARY INFORMATION: The Commission is proposing to rescind 17 CFR
275.206(4)-5 (“rule 206(4)-5” or the “political contribution rule”) and make related amendments
to 17 CFR 275.204-2 (“rule 204-2” or the “recordkeeping rule”) under the Advisers Act.

3

TABLE OF CONTENTS
I.

Introduction .............................................................................................................. 6
A. Background ............................................................................................................. 8
B. Existing Regulatory Framework ........................................................................... 11
C. The Political Contribution Rule Since Adoption .................................................. 15
II. Discussion................................................................................................................ 23
A. Proposed Rescission of Rule 206(4)-5 under the Advisers Act ............................ 23
1. Basis for the Rescission of the Political Contribution Rule............................ 24
2. Compliance Policies and Procedures and Codes of Ethics ............................. 34
3. Request for Comment ..................................................................................... 40
B. Proposed Amendments to Rule 204-2 under the Advisers Act ............................ 45
III. Economic Analysis ................................................................................................. 47
A. Introduction ........................................................................................................... 47
B. Economic Baseline................................................................................................ 50
1. Current Regulatory Framework and Market Practice ..................................... 50
2. Affected Parties............................................................................................... 56
C. Benefits and Costs................................................................................................. 57
1. Benefits of Rescinding the Political Contribution Rule .................................. 57
2. Costs of Rescinding the Political Contribution Rule ...................................... 63
3. Costs and Benefits of Amending Rule 204-2 ................................................. 68
4. Aggregate Monetized Benefits and Costs ....................................................... 68
D. Effects on Efficiency, Competition, and Capital Formation................................. 73
1. Efficiency ........................................................................................................ 73
2. Competition..................................................................................................... 74
3. Capital Formation ........................................................................................... 76
E. Reasonable Alternatives........................................................................................ 76
1. Policies and Procedures Requirement ............................................................. 76
2. Amending the Requirements of Rule 206(4)-5............................................... 77
3. Considering Adviser Size ............................................................................... 78
F. Request for Comment ........................................................................................... 79
IV. Paperwork Reduction Act ..................................................................................... 80
A. Introduction ........................................................................................................... 80
B. Rule 204-2............................................................................................................. 81
C. Rule 0-4................................................................................................................. 87
D. Rule 206(4)-7 ........................................................................................................ 93
E. Request for Comment ........................................................................................... 99
V. Initial Regulatory Flexibility Act Analysis ........................................................ 100
A. Reasons for and Objectives of Proposed Actions ............................................... 100
B. Legal Basis .......................................................................................................... 103
C. Small Entities Subject to the Amendments......................................................... 103
D. Projected Reporting, Recordkeeping, and Other Compliance Requirements ..... 104
E. Duplicative, Overlapping, or Conflicting Federal Rules .................................... 105
F. Significant Alternatives ...................................................................................... 105
G. General Request for Comment............................................................................ 107
VI. Congressional Review Act ................................................................................... 107
4

VII. Other Matters ....................................................................................................... 108
Statutory Authority ...................................................................................................... 109

5

I.

INTRODUCTION

Investment advisers play a vital role in helping governments responsibly manage public
funds and honor commitments to their taxpayers, public-sector employees and retirees, and
retirement benefit plan participants. In 2010, the Commission adopted the political contribution
rule with respect to investment advisers, which was intended to reduce the possibility that
campaign contributions and other support of elected officials and candidates for public office by
investment advisers and covered associates would result in fraudulent activity. 1
We propose to rescind the political contribution rule in its entirety based on our
experience administering the rule since its adoption (informed by feedback from market
participants), including our observations that the rule:
•

Has led to significant unintended consequences, including prohibitions by some
investment advisers on any and all political contributions made by the investment
adviser and its employees at the State and local level, which affects core political
speech protected by the First Amendment; 2

•

Is operationally challenging for investment advisers to implement;

•

May impose significant burdens that may not be justified by its benefits; and

1

See Political Contributions by Certain Investment Advisers, Investment Advisers Act Release No. 3043
(July 1, 2010) [75 FR 41018 (July 14, 2010)] (the “2010 Adopting Release”) (stating that the Commission
believed “rule 206(4)-5 is a necessary and appropriate measure to prevent fraudulent acts and practices in
the market for the provision of investment advisory services to government entities by prohibiting
investment advisers from engaging in pay to play practices”).

2

See 2024 Investment Management Compliance Testing Survey (2024) (the “2024 Investment Management
Compliance Testing Survey”), available at https://www.investmentadviser.org/wpcontent/uploads/2024/07/2024_IMCT-Survey.pdf (stating that 12.41 percent of investment advisers which
responded to the survey prohibit all political contributions).

6

•

Lacks clarity and creates a de facto strict liability standard, which can lead to
situations where small donations or “foot faults” potentially trigger substantial
prohibitions.

We are of the view that rescinding the current rule in its entirety and instead relying on
other existing requirements of the Advisers Act and associated rules, including prohibitions on
fraud, fiduciary duty requirements, 17 CFR 275.206(4)-7 (“rule 206(4)-7” or the “compliance
rule”), and 17 CFR 275.204A-1 (“rule 204A-1” or the “code of ethics rule”), as well as other
existing Federal, State and local requirements, could avoid many of the issues and unintended
consequences associated with the political contribution rule and lead to more appropriate
measures by investment advisers to address pay-to-play practices. In addition, our experience
with the current rule has underscored the inherent difficulty of designing specific objective
criteria for a rule expressly designed to address pay-to-play practices without unintended adverse
effects on investment adviser contributions, employee hiring, investment advisory services, and
political speech, as well as overall significant compliance burdens that may not be justified by
the benefits.
We therefore are of the view that rescinding the political contribution rule and 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. That is, other
existing requirements of the Advisers Act and its associated rules operate to require investment
advisers to address pay-to-play practices, but with the flexibility to design tailored compliance
policies and procedures and codes of ethics in accordance with their own business models and

7

risk profiles. 3 The rescission of the political contribution rule also may lead to government
entities being able to select from a larger pool of investment advisers as well as lower prices for
the provision of investment advisory services to public pension plans.
A rescission of the Commission’s political contribution rule would not curtail any other
existing criminal and civil laws against public sector corruption. Other Federal, State, and local
laws and regulations regarding the public procurement process (including the awarding of
investment advisory mandates) exist independently of the political contribution rule and would
not be limited or otherwise impacted by its rescission. 4
Similarly, the Commission’s ability to bring cases against investment advisers for
fraudulent practices and violations of fiduciary duty for engaging in pay-to-play practices would
remain unchanged. Investment advisers’ fiduciary duty obligations and the broad anti-fraud
provisions under the Federal securities laws would continue to apply following the proposed
rescission of the political contribution rule.
A.

Background

State and local government assets, including nearly $6 trillion of public pension plan
assets, 5 are administered by government employees and elected officials. 6 Some of these
government employees and elected officials are directly or indirectly responsible for selecting

3

See infra section I.A (describing what constitutes pay-to-play practices in more detail).

4

See infra footnotes 48 through 51 and accompanying text for examples of such Federal, State and local
laws and regulations designed to prevent pay-to-play practices.

5

The term “public pension plan” is used interchangeably with “government client” and “government entity”
in this proposing release. However, rule 206(4)-5 applies broadly to investment advisory activities for
government clients, regardless of whether they are pension plans.

6

See Census Bureau Releases 2024 Annual Survey of Public Pensions (May 29, 2025) (the “2024 Annual
Survey of Public Pensions”), available at https://www.census.gov/newsroom/press-releases/2025/2024annual-survey-public-pensions.html.

8

the individual investment advisers entrusted with managing these assets on a discretionary basis,
providing other investment advisory services, and allowing State and local government entities
to invest in funds managed or advised by such advisers.
Contributions made to a candidate for political office are a form of speech that is
protected by the First Amendment, and the prevention of quid pro quo corruption or its
appearance is the only permissible ground for restricting or limiting such speech. 7 In the context
of providing or seeking to provide investment advisory services to State and local governments,
in some instances, investment advisers have engaged in pay-to-play practices that embody such
quid pro quo corruption or highlight the risk of it. 8 These practices (“pay-to-play practices”) arise
when:
•

Political contributions influence the selection of an adviser to provide investment
advisory services to State and local governments, including by constituting a
prerequisite to competing for an advisory role; or

•

Investment advisers seek to influence an elected official’s award of advisory
contracts by making or soliciting contributions to that official.

Contributions made pursuant to a pay-to-play arrangement may take a variety of forms, including
an adviser’s direct contributions to government officials, contributions to an election committee
for government officials, solicitation of third parties to make contributions or payments to

7

See FEC v. Ted Cruz for Senate, 596 U.S. 289, 305 (2022).

8

See 2010 Adopting Release, supra footnote 1, at section I (discussing pay-to-play practices that the political
contribution rule is designed to address). See also N.Y. Republican State Comm. v. Sec. & Exch. Comm’n,
927 F.3d 499, 500-02 (D.C. Cir. 2019).

9

government officials or political parties in the State or locality where an adviser seeks to provide
services, and payments to third parties to solicit government business. 9
When contributions influence the award of these advisory roles, including by constituting
a prerequisite to competing for an advisory role, the process by which government officials
select investment advisers can be transformed into one in which contributions to a government
entity official, rather than the competence and cost of investment advisers, drive the award of
contracts. 10 Because such actions may result in public pension plans not being managed by the
best available investment advisers or paying higher fees, 11 investment advisers engaging in payto-play practices have a conflict of interest with, and compromise their fiduciary duties to, the
public pension plan clients they advise and can defraud those plans, other prospective pension
plan clients, and public pension plan investors. 12 These practices can harm retirees that rely on
these public pension plans and the taxpayers of the State and municipal governments that must
honor these plan obligations. 13
Pay-to-play practices therefore are inconsistent with an adviser’s role as a fiduciary under
the Advisers Act and constitute fraud under the Federal securities laws. 14 In this regard, while

9

Id.

10

See New York Republican State Comm., 927 F.3d at 505, supra footnote 8.

11

See id.

12

See 2010 Adopting Release, supra footnote 1, at section II.A. See also infra section II.A (describing in
more detail how pay-to-play practices constitute fraud).

13

See 2024 Annual Survey of Public Pensions, supra footnote 6 (stating that “36 million people (including
inactive employees not currently contributing to pensions but eligible for future benefits) participated in
state and local retirement plans in 2024”).

14

See 2010 Adopting Release, supra footnote 1, at section II.A (stating that “‘pay to play’ arrangements are
inconsistent with an adviser’s fiduciary obligations” and “payments to state officials as a quid pro quo for
obtaining advisory business as well as other forms of ‘pay to play’ violate the antifraud provisions of
section 206 of the Advisers Act”).

10

government corruption and procurement fraud matters generally come under the jurisdiction of
Federal, State, and municipal authorities, investment advisers also are subject to the Advisers Act
and other Federal securities laws and regulations, which further restrict pay-to-play practices and
other fraudulent conduct and provide for penalties and bans relating to such conduct.
B.

Existing Regulatory Framework

In 2010, the Commission adopted the political contribution rule. 15 The rule sets forth a
detailed, prescriptive framework that generally provides for the following:
Prohibitions. The political contribution rule provides for certain express prohibitions:
•

Ban on compensation and two-year lookback. The political contribution rule
generally makes it unlawful for an adviser 16 to receive compensation for providing
investment advisory services to a government entity for a two-year period after the

15

Several enforcement actions related to pay-to-play schemes were brought under sections 206(1) or (2) of
the Advisers Act [15 U.S.C. 80b-6(1) and (2)] prior to the rule’s adoption. See, e.g., SEC v. Henry Morris,
et al., Litigation Release No. 21036 (May 12, 2009); SEC v. Paul J. Silvester, et al., Litigation Release No.
16759 (Oct. 10, 2000); Litigation Release No. 20027 (Mar. 2, 2007); Litigation Release No. 19583 (Mar. 1,
2006); Litigation Release No. 18461 (Nov. 17, 2003); Litigation Release No. 16834 (Dec. 19, 2000); SEC
v. DiBella, 587 F.3d 553 (2nd Cir. 2009) (affirming liability for aiding and abetting violations of section
206(2)); In the Matter of Thayer Capital Partners, TC Equity Partners IV, L.L.C., TC Management
Partners IV, L.L.C., and Frederick V. Malek, Investment Advisers Act Release No. 2276 (Aug. 12, 2004)
(settled matter); In the Matter of Frederick W. McCarthy, Investment Advisers Act Release No. 2218 (Mar.
5, 2004) (settled matter). Certain of these enforcement actions were also brought under section 10(b) of the
Securities Exchange Act of 1934 (the “Exchange Act”) and section 17(a) of the Securities Act of 1933
[15 U.S.C. 78j(b) and 77q(a)].

16

Rule 206(4)-5 applies to any investment adviser that is registered (or required to be registered) with the
Commission, or that is (1) an adviser unregistered in reliance on the exemption available under section
203(b)(3) of the Advisers Act [15 U.S.C. 80b-3(b)(3)] (“foreign private advisers”) or (2) an exempt
reporting adviser as defined in rule 204-4(a) under the Advisers Act. Rule 206(4)-5(a)(1). Section 203(b)(3)
of the Advisers Act was amended in 2010 to remove the exemption for an adviser that does not hold itself
out to the public as an investment adviser and that has fewer than 15 clients during the last 12 months, and
in its place to insert the current exemption for foreign private advisers. See 15 USC 80b-3(b)(3).

11

adviser or any of its covered associates 17 (including a person who becomes a covered
associate within two years after making a contribution) makes a contribution to an
official 18 of a government entity or candidate for such office, whose office is in a
position to influence the award of advisory business. The two-year time out was
intended to discourage investment advisers from engaging in pay-to-play practices by
requiring a “cooling-off period” during which the effects of a political contribution on
the selection process can be expected to dissipate. 19
•

Ban on solicitation. The political contribution rule generally prohibits advisers from
paying persons to solicit government entities for advisory business, unless such
persons are (1) regulated persons or (2) an executive officer, general partner,
managing member (or, in each case, a person with a similar status or function),
or employee of the adviser. 20 The restriction on solicitors or “placement agents” was
intended to prevent advisers from circumventing the political contribution rule. 21 The

17

A “covered associate” of an investment adviser is defined as: (1) any general partner, managing member or
executive officer, or other individual with a similar status or function; (2) any employee who solicits a
government entity for the investment adviser and any person who supervises, directly or indirectly, such
employee; and (3) any political action committee controlled by the investment adviser or by any of its
covered associates. Rule 206(4)-5(f)(2). Under the rule, an “executive officer” of an adviser includes the
president, any vice president in charge of a principal business unit, division or function, other officers with
policy-making functions, and other persons who perform similar policy-making functions for the adviser.
Rule 206(4)-5(f)(4).

18

An “official” is any person (including any election committee for the person) who was, at the time of the
contribution, an incumbent, candidate, or successful candidate for elective office of a government entity if
the office is directly or indirectly responsible for, or can influence the outcome of, the hiring of an
investment adviser by a government entity or has the authority to appoint any person who is directly or
indirectly responsible for, or can influence the outcome of, the hiring of an investment adviser by a
government entity. See rule 206(4)-5(f)(6).

19

See 2010 Adopting Release, supra footnote 1, at section II.B.2(a).

20

See rule 206(4)-5(a)(2).

21

See 2010 Adopting Release, supra footnote 1, at section II.B.2(b).

12

rule also prohibits indirect payments, because the rule includes a provision that makes
it unlawful for an adviser or any of its covered associates to do anything indirectly
which, if done directly, would result in a violation of the rule. 22 A regulated person
under the rule is a registered investment adviser, a registered broker-dealer, or a
registered municipal advisor, in each case itself subject to pay-to-play restrictions. 23
•

Covered investment pools. An investment adviser to a covered investment pool in
which a government entity invests or is solicited to invest is treated as though the
adviser is providing or seeking to provide investment advisory services directly to the
government entity. 24

•

Ban on coordination. The political contribution rule makes it unlawful for an adviser
or any of its covered associates to coordinate, or to solicit any person or political
action committee to make, any (1) contributions to an official of a government entity
to which the investment adviser is providing or seeking to provide investment
advisory services; or (2) payments to a political party of a State or locality where the
investment adviser is providing or seeking to provide investment advisory services to
a government entity. 25

Exceptions. The political contribution rule includes exceptions for de minimis
contributions, new covered associates, and certain returned contributions: 26

22

See rule 206(4)-5(d).

23

See rule 206(4)-5(f)(9) (describing the meaning of “regulated person” under the rule).

24

See rule 206(4)-5(c); rule 206(4)-5(f)(3) (defining “covered investment pool”).

25

See rule 206(4)-5(a)(2)(ii).

26

See rule 206(4)-5(b).

13

•

De minimis. Under the de minimis exception, individuals are permitted to make
aggregate contributions without triggering the two-year time out of up to $350, per
election, to an elected official or candidate for whom the individual is entitled to vote,
and up to $150, per election, to an elected official or candidate for whom the
individual is not entitled to vote. 27 The de minimis exception is available only for
contributions by individual covered associates, not the investment adviser itself.

•

New covered associates. Under the exception for a new covered associate, the twoyear time out is not triggered by a contribution made by a natural person more than
six months prior to becoming a covered associate, unless he or she solicits clients
after becoming a covered associate. 28 As a result, the two-year look back only applies
to covered associates who solicit for the investment adviser.

•

Returned contributions. The exception for certain returned contributions provides an
adviser with a limited ability to cure the consequences of an inadvertent contribution
to an official for whom the covered associate was not entitled to vote. 29 This
exception is for contributions that in the aggregate do not exceed $350 to any one
official per election, and the adviser must have discovered the contribution within
four months of the date of such contribution. 30 Additionally, within 60 days of
learning of the triggering contribution, the contributor must obtain the return of the
contribution.

27

See rule 206(4)-5(b)(1).

28

See rule 206(4)-5(b)(2).

29

See rule 206(4)-5(b)(3). This exception also includes limitations on the number of times an adviser can rely
on the exception. See rule 206(4)-5(b)(3)(ii) and (iii).

30

See 2010 Adopting Release, supra footnote 1, at section II.B.2(a)(7).

14

Exemptions. An investment adviser may apply to the Commission for an order exempting
it from the two-year compensation ban. 31 The rule sets forth certain factors the Commission will
consider in determining whether to grant such an exemption. The Commission takes into account
the relevant facts and circumstances of each application in determining whether to grant an
exemption. 32
In addition to the political contribution rule, the recordkeeping rule includes several
provisions that require registered investment advisers to make and keep certain books and
records relating to compliance with the political contribution rule in order to aid the Commission
in examining for compliance with it. 33
C.

The Political Contribution Rule Since Adoption

Since the Commission adopted the political contribution rule in 2010, we have observed
numerous challenges associated with the rule’s complexity and how broadly investment advisers
have applied the rule. Market participants 34 also have stated, among other issues, that the rule is

31

See rule 206(4)-5(e).

32

See 2010 Adopting Release, supra footnote 1, at section II.B.2(f); see, e.g., True Venture Mgmt., L.L.C.,
Investment Advisers Act Release Nos. 6932 (Dec. 11, 2025) (notice) and 6937 (Jan. 8, 2026) (order) and
related application; J.P. Morgan Investment Mgmt. Inc., Investment Advisers Act Release Nos. 6244
(Feb. 16, 2023) (notice) and 6261 (Mar. 14, 2023) (order) and related application; AEW Capital
Mgmt., L.P., Investment Advisers Act Release Nos. 6224 (Jan. 24, 2023) (notice) and 6245 (Feb. 22, 2023)
(order) and related application; Davidson Kempner Capital Mgmt. LLC, Investment Advisers Act Release
Nos. 3693 (Oct. 17, 2013) (notice) and 3715 (Nov. 13, 2013) (order) and related application.

33

See rule 204-2(a)(18) (describing the books and records that advisers must retain).

34

For purposes of this Release, unless otherwise noted, we refer to market participants, industry interest
groups, and others who have discussed with us or submitted comments to us as “market participants.”

15

burdensome, complex, and both lacks clarity and creates a de facto strict liability standard. 35
Based on these observations and feedback from market participants, the Commission
understands that the political contribution rule has resulted in the following outcomes, which, in
certain instances, were not intended or anticipated: 36
•

The monetary losses associated with the two-year ban on receiving compensation for
providing investment advisory services to a government client seem excessive,
particularly given that the ban can be triggered by contributions of as little as $150. 37

•

The two-year ban on compensation (which is automatically triggered by the
underlying contribution) creates a de facto strict liability standard that does not permit
consideration of the complexities of the case outside of the exemptive process or the

35

See, e.g., Benjamin Neaderland & Thomas Bredar, It’s Time To Fix The SEC’s Pay-To-Play Rule, Law360
(Mar. 17, 2025), available at https://www.law360.com/articles/2310410; Benjamin Neaderland & Thomas
Bredar, Recent Exemptions From Rule 206(4)-5 Demonstrate the Importance of Strong Compliance
Policies and Quick Corrective Action, WilmerHale (Mar. 16, 2025), available at
https://www.wilmerhale.com/en/insights/client-alerts/20230316-recent-exemptions-from-rule-20645demonstrate-the-importance-of-strong-compliance-policies-and-quick-corrective-action; Investment
Adviser Association Letter to Chairman Atkins Re: Regulation of Registered Investment Advisers (May 1,
2025), available at https://www.investmentadviser.org/resources/iaa-letter-to-sec-chairman-atkins/;
Investment Adviser Association Letter to Chairman Clayton Re: Regulation of Registered Investment
Advisers (May 10, 2017), available at
https://higherlogicdownload.s3.amazonaws.com/INVESTMENTADVISER/aa03843e-7981-46b2-aa49c572f2ddb7e8/UploadedImages/publications/170510cmnt.pdf; Investment Adviser Association Letter to
Secretary Countryman Re: List of Rules to be Reviewed Pursuant to the Regulatory Flexibility Act (Aug. 9,
2019), available at https://www.sec.gov/comments/s7-10-19/s71019-5947271-189129.pdf; Managed Funds
Association Letter to Chairman Clayton Re: Managed Funds Association Regulatory Priorities (May 18,
2017), available at https://www.mfaalts.org/wp-content/uploads/2017/05/MFA-Regulatory-PrioritiesLetter-to-SEC-Chairman-Clayton.pdf; Private Fund Sponsor Pay-to-Play Restrictions for Upcoming U.S.
Election Cycle, Kirkland & Ellis, Kirkland AIM (Aug. 7, 2024), available at
https://www.kirkland.com/publications/kirkland-aim/2024/08/private-fund-sponsor-pay-to-playrestrictions-for-upcoming-us-election-cycle.

36

See also infra section III.B.1 for a discussion of practices that investment advisers have adopted to address
pay-to-play risks.

37

See rule 206(4)-5(b)(1).

16

rule’s limited remedial provisions. This can lead to situations where small donations
or “foot faults” potentially trigger substantial prohibitions under the rule.
•

Advisers may be prevented from hiring or promoting qualified individuals into roles
where they would be considered a “covered associate” for either six months or two
years following an individual’s contribution, despite the contribution potentially
having an attenuated relationship or no relationship to pay-to-play practices. Whether
the time period is two years or six months depends on whether the person who
becomes a covered associate solicits clients on behalf of the investment adviser; if the
employee does not solicit clients, the shorter six-month time period applies. 38 This
means that if an existing employee is promoted or transferred into a covered associate
role, under the rule the firm must review the employee’s political contributions from
the previous six months or two years, as applicable. A contribution during that time
exceeding the de minimis threshold made to an official of a government entity could
lead to a two-year ban on receiving compensation from that government entity, even
though the individual was not a covered associate at the time of the contribution. A
similar result can occur in situations where a person makes a contribution while
employed by a different adviser or company but subsequently applies to a covered
associate role at an adviser within six months or two years (as applicable) following
the contribution. This could prevent an adviser from hiring a top candidate if the
person’s past political contributions could trigger the rule’s two-year time out period
on receiving compensation from an existing government client of the adviser even if

38

See rule 206(4)-5(a)(1); rule 206(4)-5(b)(2).

17

such past contributions do not present a material risk of engaging in a pay-to-play
practice.
•

Public pension plans may be unable to hire the most qualified or cost-effective
advisers or may ultimately lose the services of an existing adviser with institutional
knowledge of the public pension plan’s investment strategy and composition because
of contributions by the adviser’s covered associates during the two-year lookback
period that do not present a material risk of engaging in a pay-to-play practice.

•

It can be difficult for an adviser to identify which persons fall within the definition of
an “official” who is “indirectly responsible for, or can influence the outcome of, the
hiring of an investment adviser by a government entity.” 39 Making the determination
could require analysis of government entity oversight structures, an official’s
appointment authority, or the scope of duties of a State government employee, for
which in each case there may be little publicly available information. The “indirect”
element of the definition may also encompass a chain of influence among government
officials that might be attenuated from pay-to-play practices, potentially capturing
contributions to officials who may have no practical involvement in or knowledge of
specific investment contracts. As a result, advisers may be unable to determine
conclusively who is an official under the rule or an adviser’s employees may be
deterred from making contributions that pose little or no pay-to-play risks. If an
adviser is unable to make a conclusive determination, the rule may encourage the
adviser to implement blanket contribution bans. In that situation, the rule may

39

See rule 206(4)-5(f)(6).

18

unintentionally result in a greater restriction on political speech by advisers than is
necessary to serve the objectives of the rule.
•

The definition of “covered associate” can be difficult to interpret and may have been
applied more broadly than intended, with employees whose contributions are unlikely
to be related to pay-to-play practices being subjected to restrictive policies. For
example, the definition of covered associate can equate to a significant number of
employees and be difficult to apply because the definition’s supervisory prong picks
up adviser personnel that “supervises, directly or indirectly,” an employee who
solicits a government entity for an investment adviser and it can be difficult to
determine whether an individual “indirectly” supervises an employee who solicits
government entities. 40 Additionally, employees that are not covered associates but are
supervised by one could also trigger a prohibition due to rule 206(4)-5(d). Any
contributions by such employees could be attributed to the covered associate
supervisor as an indirect contribution and would make such employees subject to the
rule’s prohibitions. The definition also could be considered overly expansive when
applied because the definition of “executive officer” of the investment adviser 41
includes, among other persons, any vice president in charge of a principal business
unit, division or function, 42 irrespective of whether such person’s role involves
soliciting government entities for the investment adviser or if the employee has a
direct economic stake in the firm’s business relationship with a government client

40

See rule 206(4)-5(f)(2)(ii).

41

See rule 206(4)-5(f)(2)(i).

42

See rule 206(4)-5(f)(4).

19

which could implicate pay-to-play concerns. The “covered associate” definition also
could be construed to inappropriately capture independent contractors with whom the
adviser has only an attenuated connection because the definition of employee in the
rule could include consultants and advisors. 43
•

The dollar amounts in the de minimis exceptions have not been updated for inflation
since the adoption of the rule 16 years ago. Some contributions above the $150 (for
officials for whom the covered associate is not entitled to vote at the time of the
contribution) and $350 (for officials for whom the covered associate was entitled to
vote at the time of the contribution) contribution ceilings are likely small enough that
they would not meaningfully influence the adviser selection process but still trigger
the prohibitions of the rule. 44 Indeed, these limits are significantly lower than the
contribution limits imposed under federal campaign finance laws. 45

•

The exception for returned contributions requires that the contributor obtain the return
of a contribution within 60 calendar days of the date of discovery of such contribution
by the investment adviser, which means that advisers must rely on the third party that
received the contribution to satisfy the exception; this may not be feasible if the funds

43

The term “employee” is not defined in the Advisers Act.

44

See rule 206(4)-5(b)(1).

45

See, e.g., 2 U.S.C. 441a(a) (establishing contribution limits under the Federal Election Campaign Act,
which increase based on price index); Contribution limits for 2025-2026 federal elections, Federal
Elections Commission of the United States (Aug. 31, 2026), available at https://www.fec.gov/helpcandidates-and-committees/candidate-taking-receipts/contribution-limits/ (setting an individual
contribution limit of $3,500 per election to candidates).

20

have been spent. 46 Consequently, an adviser may not be able to satisfy the exception
despite robust efforts to obtain the contribution’s return.
•

The exemptive process through which the Commission may, upon application,
conditionally or unconditionally exempt an investment adviser from the prohibitions
of the rule may be costly and time-consuming to pursue.

Due to such interpretive difficulties and related operational and implementation
challenges, the political contribution rule has resulted in significant unintended consequences.
For example, the rule’s substantial consequence for a contribution (a two-year ban on
compensation) and its potential to scope in activities that carry a relatively low risk of leading to
pay-to-play practices may result—and often has resulted—in an adviser prohibiting contributions
outright, which may chill political speech protected by the First Amendment that does not lead
even to the appearance of corruption. As another example, and as discussed above, we have
observed that advisers have been prevented from hiring or promoting qualified managers because
of past contributions by such individuals that may in fact pose little if any risk of constituting
pay-to-play practices.
Additionally, because the specific objective criteria of the rule apply to an adviser
regardless of its pay-to-play risk profile—including conditions whose application may prove
onerous or inappropriate for a low risk adviser—and pay-to-play considerations can be unique to
each adviser, an adviser with a lower pay-to-play risk profile may nonetheless be required to
design and implement compliance policies and procedures which result in unintended adverse
effects that may not be justified by its risk of engaging in pay-to-play practices.

46

See rule 206(4)-5(b)(3).

21

More than fifteen years of complying with the political contribution rule have provided
existing investment advisers with experience in understanding a complicated political
contribution landscape, assessing whether and how contributions have the potential to influence
the award of advisory contracts, formulating tailored policies, and developing tracking and
attestation systems. Separately, investment advisers have developed experience complying with a
variety of State and local laws, as well as other Federal laws, that may subject them to
restrictions designed to prevent pay-to-play practices. 47
For example, a Rhode Island law requires a State vendor that has entered into a contract
costing $5,000 or more with a State agency to execute and file an affidavit if it has also
contributed over $250 in a calendar year to any general officer, candidate for general office,
general assembly member, general assembly candidate, or political party within the 24 months
preceding the date of the contract. 48 As another example, South Carolina law prevents any
person who has been awarded a contract with the State or local government through noncompetitive bidding practices from making a contribution after the awarding of the contract or
investing in a financial venture in which a public official has an interest if that official was in a
position to act on the contract’s award. 49 At the local level, the city of Philadelphia requires that
the contractor for every non-competitively bid contract disclose (during the term of such contract
and for one year thereafter) any contribution of money or in-kind assistance the contractor has
made during such time period to certain city officeholders and candidates for city office, as well

47

See also infra section III.C.2 for discussion of how improvements in data dissemination and new
requirements in some jurisdictions for increased transparency regarding, among other things, advisory fees
and plan investments, have made it easier to identify anomalous investment patterns that may reflect
improper influence.

48

See R.I. Gen. Laws § 17-27-2 (2026).

49

See S.C. Code § 8-13-1342 (2026).

22

as associations organized in support of such persons. 50 Though the burdens of accommodating
these various and diverse State and local restrictions may result in some advisers implementing
blanket contribution bans, other advisers may utilize a fact-and-circumstances based analysis to
determine when and how such statutes apply.
Furthermore, investment advisers and their employees in certain cases also must comply
with other Federal laws that establish criminal or civil penalties for bribery or fraudulent quid
pro quo schemes. 51 As with State and local laws, though the variability of other Federal laws
may result in some advisers implementing an outright ban on contributions, it may result in
advisers utilizing a fact-and-circumstances-based analysis to determine when and how such
statutes apply. To the extent that State, local, and other Federal laws apply, such statutes, in
addition to the regulatory framework under the Advisers Act discussed below, likely address
some pay-to-play practices notwithstanding a rescission of the political contribution rule. 52
II.

DISCUSSION
A.

Proposed Rescission of Rule 206(4)-5 under the Advisers Act

We propose to rescind rule 206(4)-5 in its entirety. The political contribution rule takes a
prescriptive approach to deterring pay-to-play practices that, based on our experience
administering the rule and feedback from market participants:

50

See Phila., Pa., Code § 17-1402 (2026).

51

See, e.g., 18 U.S.C. 201 and 18 U.S.C. 666; see also Adam Wright, Corruption as Contract: Taking Quid
Pro Quo Seriously, 77 BAYLOR L. REV. 1 (2025), available at
https://law.baylor.edu/sites/g/files/ecbvkj1546/files/2025-04/07%20Wright.pdf; Lauren Garcia, Curbing
Corruption or Campaign Contributions? The Ambiguous Prosecution Of “Implicit” Quid Pro Quos Under
the Federal Funds Bribery Statute, 65 RUTGERS L. REV. 1 (2012), available at
https://www.rutgerslawreview.com/wp-content/uploads/archive/vol65/issue1/Garcia.pdf.

52

See infra section II.A.3 for request for comment on whether State and local pay-to-play requirements as
well as any antibribery and other applicable Federal laws and regulations address pay-to-play practices.

23

•

Creates operational challenges for investment advisers to implement due to the rule’s
complexity and the breadth of its application;

•

Captures activity that may not warrant a two-year compensation ban;

•

Imposes significant burdens that may not be justified in connection with what the rule
is designed to prevent (including preventing advisers from hiring or promoting
qualified personnel due to past contributions that do not present a material risk of
engaging in a pay-to-play practice); and

•

Results in advisers prohibiting contributions outright, which affects core political
speech protected by the First Amendment. 53

In view of the challenges we have observed that have resulted from the political
contribution rule, we are of the view that its goals may be better achieved through a principlesbased approach to prevent fraud and that other existing laws and regulations (including the
compliance rule and the code of ethics rule) provide a sufficient framework to support such an
approach. Accordingly, we propose to rescind the political contribution rule in its entirety.
1.

Basis for the Rescission of the Political Contribution Rule

As a fundamental matter (and separate and apart from the political contribution rule),
investment advisers engaging in pay-to-play practices violate the U.S. securities laws, including
the antifraud provisions of the Advisers Act. In upholding this long-established principle, the
Commission has brought numerous enforcement actions under the antifraud provisions of the
Advisers Act, as well as other Federal securities laws, involving pay-to-play practices. 54

53

For a more detailed discussion of the operational and scoping challenges of the political contribution rule,
see supra section I.C.

54

See supra footnote 15.

24

Specifically, section 206 of the Advisers Act establishes Federal fiduciary standards that
govern the conduct of investment advisers. 55 Sections 206(1), (2), and (4) of the Advisers Act
make it unlawful for any investment adviser to employ any “device, scheme, or artifice to
defraud any client or prospective client,” “to engage in any transaction, practice, or course of
business which operates as a fraud or deceit upon any client or prospective client,” or “to engage
in any act, practice, or course of business which is fraudulent, deceptive, or manipulative,”
respectively.
Pay-to-play practices are prohibited by the Advisers Act and may violate other Federal
securities laws (for example, certain enforcement actions have also been brought under section
10(b) of the Exchange Act and section 17(a) of the Securities Act of 1933). 56 The Commission
has specifically stated that payments to State officials as a quid pro quo for obtaining advisory
business, as well as other forms of “pay-to-play,” violate the antifraud provisions of section 206
of the Advisers Act. 57 As an example, with respect to pooled investment vehicles, the
Commission has previously stated that an adviser that makes contributions to an official of a
government entity to steer assets to a pooled investment vehicle it manages facilitates fraud by
implementing a government official’s quid pro quo scheme. 58 Furthermore, under section 203 of
the Advisers Act [15 U.S.C. 80b–3], if advisory personnel engage in pay-to-play practices, the

55

See Commission Interpretation Regarding Standard of Conduct for Investment Advisers, Investment
Advisers Act Release No. 5248 (June 5, 2019), [84 FR 33669 (July 12, 2019)]; Transamerica Mortgage
Advisors, Inc. v. Lewis, 444 U.S. 11, 17 (1979).

56

See supra footnotes 8 through 9 and accompanying text describing what we refer to as “pay-to-play
practices” in this release. See also supra footnote 15 for reference to certain enforcement actions of the
Commission for pay-to-play practices.

57

See 2010 Adopting Release, supra footnote 1, at section II.A.

58

See 2010 Adopting Release, supra footnote 1, at section II.B.2(e); SEC v. DiBella, 587 F.3d 553, 568 (2d
Cir. 2009).

25

Commission may charge the adviser and its individual supervisors for failure to reasonably
supervise. 59
Pay-to-play practices also involve conflicts of interest. Public pension plan beneficiaries
are harmed when a government official violates the public trust, for example, by failing to
disclose that the government official has directed the investment of the plan’s assets into a
pooled investment vehicle not because of the adviser’s qualifications or competency or the
vehicle’s financial merits but rather because the official has received a contribution. By engaging
in such conduct with the government official, the adviser creates a conflict of interest with the
plan and engages in a scheme to defraud the government plan or program. Additionally, an
adviser to a pooled investment vehicle that is an investment option in a government plan or
program may prepare information about the pooled investment vehicle that may be used by plan
officials to evaluate the vehicle and by pension plan beneficiaries to decide whether to allocate
assets to the vehicle. Such an adviser engages in or facilitates an act, practice, or course of
business which is fraudulent, deceptive, or manipulative when the adviser does not disclose that
it made a contribution that induces government officials to make an investment and that the
government officials sponsoring the plan chose the vehicle as an investment option for
beneficiaries not solely on the basis of its merits, but rather as the consequence of improper quid
pro quo payments. Further, as discussed above, when government officials select investment
advisers based on their contributions rather than the competence of and fees charged by the
adviser, public pension plans are more likely to be managed by less qualified investment advisers

59

See section 203(e)(6) of the Advisers Act; section 203(f) of the Advisers Act.

26

and to pay higher fees, to the detriment of the plan, and potentially, the plan’s beneficiaries and
taxpayers. 60
In addition to substantive securities law provisions that prohibit pay-to-play practices, a
registered investment adviser already is subject to other existing Advisers Act requirements that,
in our view and given the experiences described above with the political contribution rule,
establish a sufficient principles-based framework through which advisers commonly
prophylactically address its risk of engaging in pay-to-play practices. For example, the
compliance rule requires investment advisers to adopt and implement written policies and
procedures reasonably designed to prevent violation, by the adviser and its supervised persons,
of the Advisers Act and the rules thereunder, and to review, no less frequently than annually, the
adequacy of those policies and procedures and the effectiveness of their implementation. 61
Further, the compliance rule requires an adviser to consider its fiduciary and regulatory
obligations under the Advisers Act and to formalize policies and procedures to address them. 62
The compliance rule is designed to permit the Commission to address the failure of an adviser to
have in place adequate compliance controls, before that failure has a chance to harm clients or
investors. 63 Accordingly, upon any rescission of the political contribution rule, a registered
investment adviser would still be required to have policies and procedures reasonably designed
to prevent fraudulent practices, including pay-to-play practices, though the adviser would have

60

See supra section I.A; New York Republican State Committee, 927 F.3d at 505.

61

See rule 206(4)-7. See also Compliance Programs of Investment Companies and Investment Advisers,
Investment Advisers Act Release No. 2204 (Dec. 17, 2003) [68 FR 74714 (Dec. 24, 2003)] (the
“Compliance Rule Adopting Release”).

62

See Compliance Rule Adopting Release, supra footnote 61, at section II.A.1.

63

Id.

27

the flexibility to either tailor those policies in a manner that differs from the specific prescriptive
requirements of the political contribution rule or maintain those polices consistent with the
compliance rule.
Advisers have for over twenty years implemented systems of controls to comply with
rule 206(4)-7 that help protect the interests of clients while being tailored to advisers’ particular
businesses. The compliance rule relates to a variety of investment adviser compliance activities
because it requires written policies and procedures reasonably designed to prevent violation of
the Advisers Act and the rules thereunder. For example, the Commission has stated that it
expects that an adviser’s compliance rule policies and procedures, at a minimum, should address
certain areas to the extent that they are relevant to that adviser. 64 Based on our experience with
the political contribution rule, an adviser’s risk of engaging in pay-to-play practices would be
mitigated by the adviser assessing its particular pay-to-play risks, taking into account its
particular business, and developing policies and procedures addressing those risks under the
more principles-based and time-tested framework of the compliance rule.
In addition to the Advisers Act prohibitions on fraud, fiduciary duty requirements, and
the compliance rule, a registered investment adviser is also required to adopt a code of ethics
under the code of ethics rule. The rule requires that the code of ethics, in part, set forth the
standard of business conduct that the adviser requires of all of its supervised persons, and the
standard chosen must reflect the adviser’s fiduciary obligations and those of its supervised
persons, and must require compliance with Federal securities laws. 65 Thus, an adviser, in

64

See id (for example, trading practices, personal trading activities of supervised persons, custody, and
marketing and solicitation activities).

65

See rule 204A-1(a)(1) through (2); Investment Adviser Codes of Ethics, Investment Advisers Act Release
No. 2256 (July 2, 2004) [69 FR 41696 (July 9, 2004)] (the “Code of Ethics Adopting Release”).

28

addition to assessing whether its compliance policies and procedures address its particular payto-play risks, generally should assess its code of ethics to “reinforc[e] fiduciary principles that
must govern the conduct of [the adviser and its] personnel” in the context of its pay-to-play
risks. 66 Advisers, for example, could scope out of their code of ethics low risk behaviors in
accordance with their own business models and structure.
Providing an adviser additional flexibility to adapt its policies and procedures and code of
ethics to its specific business and risks instead of basing them on the specific prescriptive
requirements of the political contribution rule would permit the adviser to address its pay-to-play
risks more holistically consistent with its obligations under the Advisers Act. It would, at the
same time, allow the adviser to better balance its individual pay-to-play risk and the burden
associated with mitigating such risk relative to what we have observed under the political
contribution rule. Furthermore, to the extent that the compliance costs of mitigating risk under
the political contribution rule exceed the compliance costs an adviser would bear if it determines
to adjust its code of ethics and compliance policies and procedures to address its particular payto-play risks, these cost savings may ultimately benefit the adviser’s public pension plan clients
and potentially other clients as well (e.g., by allowing the adviser to allocate more money to
portfolio research or more resources to provide investment advice). In addition, the proposal
could help an adviser fulfill its fiduciary duty. For example, when an adviser to a closed-end
fund is subject to a two-year fee timeout for a political contribution violation involving a pension
plan investor in the fund, all investors in the fund may be negatively impacted if the resulting

66

See Investment Adviser Codes of Ethics, Investment Advisers Act Release No. 2209 (Jan. 20, 2004) [69 FR
4040 (Jan. 27, 2004)].

29

loss of fee revenue reduces the adviser’s operational resources and impairs its ability to execute
the fund’s strategy and fulfill its fiduciary duties. Rescinding the political contribution rule, as
proposed, could conversely increase the resources available to the adviser and help the adviser
better exercise its fiduciary duty to the benefit of the fund’s investors.
Finally, the rescission of the political contribution rule will allow advisers and their
personnel greater freedom to make political contributions and to exercise their constitutional
right to political speech. The First Amendment’s protection of free speech has its “‘fullest and
most urgent application precisely to the conduct of campaigns for political office.’” 67 “[T]he
First Amendment safeguards an individual’s right to participate in the public debate through
political expression and political association,” and when an “individual contributes money to a
candidate, he exercises both of those rights.” 68 While “Congress may regulate campaign
contributions to protect against corruption or the appearance of corruption,” 69 some advisers
have chosen to go beyond the rule and preclude all employees from contribution to all
candidates, including those with no authority to award advisory contracts. Rescission of the rule
would reopen these avenues for political speech and fulfillment of First Amendment rights
without additional limitation (beyond those that already exist under federal and state law).
The proposal to rescind the political contribution rule could also lead to increased
competition for public pension plan investment mandates. 70 For example, investment advisers

67

See Nat’l Republican Senatorial Comm. v. FEC, 146 S. Ct. 2404, 2415 (2026), quoting Cruz, 596 U.S. at
302.

68

See McCutcheon v. FEC, 572 U.S. 185, 203 (2014); see also Buckley v. Valeo, 424 U.S. 1, 15-22 (1976).

69

See McCutcheon, 572 U.S. at 191.

70

See infra section III.D.2 for further discussion of how the rescission of the political contribution rule could
affect competition in the investment adviser market for State and local government clients.

30

who would have been prohibited from receiving compensation for investment advisory services
under the political contribution rule may be able to compete for public pension plan clients after
the proposed rescission without being subject to any additional requirements beyond complying
with the various applicable principles-based rules discussed below. This increased competition
may lead to more favorable investment terms. Further, this increased competition also could
ultimately benefit the retirees that rely on these plans and the taxpayers of the State and
municipal governments that must honor these plans’ obligations. 71 Additionally, public pension
plans with a greater number of advisers to choose from may be able to select advisers that can
provide advice better tailored to the needs of the particular public pension plan and potentially at
a lower cost to the plan.
While the compliance rule and the code of ethics rule apply only to investment advisers
registered or required to be registered under section 203 of the Advisers Act (unlike the political
contribution rule, which applies to exempt reporting advisers and foreign private advisers as well
as registered investment advisers), we understand that registered investment advisers manage a
significant amount of public pension plan assets or other public funds and, therefore, represent
the highest risk of engaging in pay-to-play practices. 72 We also note that all investment advisers
(including exempt reporting advisers and foreign private advisers) are subject to section 206 of
the Advisers Act, and all investment advisers subject to section 204 of the Advisers Act

71

See 2024 Annual Survey of Public Pensions, supra footnote 6 (stating that “36 million people (including
inactive employees not currently contributing to pensions but eligible for future benefits) participated in
state and local retirement plans in 2024”).

72

See rule 206(4)-5(a)(1) and rule 206(4)-5(a)(2); supra footnote 16.

31

(including exempt reporting advisers) are subject to section 204A of the Advisers Act. 73 Further,
an adviser registered or required to be registered must provide each of its supervised persons
with a copy of its code of ethics and any amendments, and its supervised persons must provide
the adviser with a written acknowledgement of their receipt of the code and any amendments. 74
We acknowledge that, before adopting the political contribution rule, the Commission
previously discussed policies and procedures as being insufficient for preventing pay-to-play
practices. In adopting the political contribution rule, the Commission stated that (1) codes of
ethics or compliance procedures alone may not be adequate to stop pay-to-play practices; 75 (2)
“policies and procedures alone, without critical objective criteria, such as obtaining a return of
the contribution, are insufficient in our view to justify an exception to our prophylactic rule”; and
(3) “voluntary actions are insufficient to deter pay to play, which may yield lucrative
management contracts.” 76 The Commission in 2010, however, apparently did not anticipate the
unintended consequences of the political contribution rule. Our experience administering the
political contribution rule for over a decade and the difficulty in designing specific objective
criteria for such a rule without unintended adverse effects on adviser contributions, employee

73

An investment adviser to a pooled investment vehicle is also subject to rule 206(4)-8, which prohibits the
making of false or misleading statements of material fact to current or prospective investors in the pooled
investment vehicle, or otherwise engaging in any fraudulent, deceptive, or manipulative conduct with
respect to those investors.

74

See rule 204A-1(a)(5).

75

See also 2010 Adopting Release, supra footnote 1, at section II.B.2(a) (noting that violations of codes of
ethics or compliance procedures do not themselves establish violations of the Federal securities laws, and
senior officers of an adviser that have the greatest incentives to engage in pay-to-play and therefore are
most likely to make contributions, would themselves ultimately be responsible for enforcing their own
compliance with the adviser’s code of ethics or compliance procedures).

76

See, e.g., 2010 Adopting Release, supra footnote 1, at section II.B.2(b). Further, the Commission also
articulated in the 2010 Adopting Release that disclosure of political contributions would be insufficient to
address the concerns the political contribution rule is designed to address.

32

hiring, and investment advisory services as well as significant compliance burdens that may not
be justified by the benefits (as discussed above), has caused us to reconsider those previouslystated views. 77 Given that experience, we now believe that rescinding the political contribution
rule and taking a more principles-based approach, permitting advisers to tailor their compliance
policies and procedures and codes of ethics in accordance with their own business models and
risk profiles to address their pay-to-play risks, would be appropriate. As indicated above, we are
of the view that the existing Advisers Act framework, including prohibitions on fraud and
fiduciary duty requirements along with the compliance rule and code of ethics rule, is likely
sufficient to avoid many of the issues discussed above regarding the political contribution rule
and would lead to appropriate measures to address pay-to-play practices. 78 Additionally, the
Commission brought enforcement actions involving pay-to-play practices prior to the adoption
of the political contribution rule; any withdrawal of the rule would accordingly not prevent the
Commission from continuing to pursue fraudulent cases involving pay-to-play practices. 79

77

In addition, our experience has emphasized the challenge in designing a rule that is not also operationally
complex, which in turn could result in significant compliance burdens that may not be justified by the
benefits. For example, a rule that cross references State and local contribution limits or is premised on
constituting a de minimis portion of total campaign spending could be challenging to develop and
implement given widely varying State and local laws and continuously evolving campaign spending.

78

In addition, technological advancements and increased data dissemination could facilitate the detection of
pay-to-play practices. See infra section III.C.2 (discussing improvements in data dissemination and
increased transparency in certain jurisdictions related to advisory fees, plan investments, and information
related to other relevant concerns that may have made it easier to identify anomalous investment patterns
that may reflect improper influence).

79

See supra footnote 15 for Commission enforcement actions addressing pay-to-play schemes. In addition,
since the political contribution rule was adopted in 2010, the Commission has established the SEC
Whistleblower Program, including a system and form regarding tips, complaints, and referrals. See SEC
Whistleblower Program, available at https://www.sec.gov/enforcement-litigation/whistleblower-program;
Form TCR, available at https://www.sec.gov/files/formtcr.pdf. The SEC Whistleblower Program was
established to incentivize whistleblowers to report specific, timely, and credible information about possible
federal securities laws violations and, accordingly, may provide the Commission with information
regarding fraud, including pay-to-play practices.

33

The rescission of the political contribution rule in its entirety would also result in the
rescission of the prohibition under the current rule on an adviser from paying a third party that is
not a “regulated person” (i.e., a registered investment adviser, registered broker-dealer, or
registered municipal advisor) to solicit government entities for investment advisory services. 80
For the reasons discussed in this proposal with respect to the political contribution rule more
broadly, we believe that it would be more appropriate to address the risk of fraud arising from
the use of persons for solicitation activities through a principles-based approach that would allow
an adviser to tailor its policies and procedures to the specific pay-to-play risks faced by the
adviser. 81 However, advisers may still face restrictions on using certain persons for purposes of
soliciting government entities to the extent that other rules and regulations that govern the use of
solicitors, including the MSRB Political Contribution Rule, FINRA Rule 2030, and Exchange
Act rule 15Fh-6 (because, for example, those advisers are dually registered as investment
advisers and broker-dealers, or as investment advisers and municipal advisors), or State and local
laws regulating the use of placement agents, apply to advisers. 82
2.

Compliance Policies and Procedures and Codes of Ethics

By rescinding the political contribution rule, we would better enable advisers who
provide or seek to provide investment advisory services to State or local governments to tailor

80

See current rule 206(4)-5(a)(2)(i). See also supra section I.B.

81

Rule 204-2 under the Advisers Act would also continue to require an investment adviser to maintain all
written agreements entered into by the investment adviser with government entity clients, third-party
solicitors and placement agents, which would be available for the Commission to review upon examination.
See current rule 204-2(a)(10); infra section II.B for discussion of the proposed amendments to rule 204-2.

82

See, e.g., Section 424-A of the New York Retirement & Social Security Law (prohibiting the New York
State Common Retirement Fund (“CRF”) from investing with an outside investment manager that is using
the services of a placement agent or other intermediary to assist the investment manager in obtaining
investments by the CRF).

34

their compliance policies and procedures and the standard of business conduct contained in their
code of ethics to address their particular pay-to-play risks. The compliance rule does not
enumerate specific elements that an adviser must include in its policies and procedures. 83 Rather,
it provides an adviser with flexibility to apply the rule in a manner best suited to its organization.
The Commission has stated, however, that “in designing its policies and procedures, [an adviser]
should first identify conflicts and other compliance factors creating risk exposure for the firm
and its clients in light of the firm’s particular operations, and then design policies and procedures
that address those risks.” 84
If the political contribution rule is ultimately rescinded, some investment advisers who
provide or seek to provide investment advisory services to State or local governments may
determine, after assessing their pay-to-play risks, to update their compliance policies and
procedures to replace policies and procedures that were established pursuant to the prescriptive
nature of the political contribution rule with policies and procedures that are tailored to address
the risks of pay-to-play practices to their organization. Other investment advisers, however, may
determine, after assessing their pay-to-play risks, to maintain policies and procedures established
pursuant to the political contribution rule as a component of their compliance policies and
procedures addressing the risks of pay-to-play practices to their organization.
Following any rescission of the political contribution rule, to the extent an adviser
provides or seeks to provide investment advisory services to State or local governments and
determines to update its compliance policies and procedures, identifying factors creating pay-to-

83

But see Compliance Rule Adopting Release, supra footnote 61, at section II.A.1 (stating that the
Commission expects that an adviser’s policies and procedures, at a minimum, should address certain issues
to the extent that they are relevant to that adviser).

84

See id.

35

play risk exposure particular to the adviser and its clients in light of its particular business needs,
organizational structure, and the exact nature of its business, would be relevant to making this
update. Leveraging the compliance framework that it already has in place, such adviser would
then design and implement policies and procedures that address those risks and tailor them as
appropriate to reflect the adviser’s unique characteristics that are relevant to preventing pay-toplay practices.
Below are several factors to consider in completing this assessment, and the extent to
which any of these considerations apply would depend on the individual facts and circumstances
and pay-to-play risks of each adviser:
•

Compliance with applicable law. The adviser’s policies and procedures would need to
address pay-to-play practices that violate the Advisers Act and the rules thereunder. For
purposes of efficiency and cohesiveness of internal policies, the adviser could leverage
these policies and procedures to also consider addressing its compliance with political
donation and other relevant anti-corruption laws and regulations (including any State or
local laws and regulations or other applicable Federal laws and regulations) governing the
adviser’s existing and/or prospective public pension plan clients.

•

Risk identification. The adviser’s policies and procedures would need to identify and
assess the risk of the adviser or its personnel engaging in pay-to-play practices (including
by making contributions to government officials, political parties and political action
committees) that violate the Advisers Act and the rules thereunder, and may consider
identifying and assessing those risks that violate other applicable laws in connection with
an award or retention of investment advisory services (including through an investment in
the adviser’s advised funds). Pay-to-play risks may vary substantially across different

36

types of advisers and across the industry generally and the adviser’s policies and
procedures would need to take into account these risks (e.g., organization specific factors
such as the size of the adviser’s investment and business development teams; indirect
conduct such as structuring transactions in a manner intended to hide the true purpose of
a contribution or payment using third-parties, such as consultants, attorneys, family
members, friends or companies affiliated with the adviser, to hide the true source of the
donation). Factors that might affect the adviser’s risk assessment include:
•

Governmental relationships. Whether the adviser has an existing relationship with
one or more government entities or government entity officials or whether the
adviser is seeking to, or has begun the process of, providing investment advisory
services to such government entities or officials and, if so, whether any
contributions or related activities should be analyzed to assess the adviser’s risk.

•

Personnel. The nature of the position of any personnel making a contribution
(e.g., advisory, senior level decision makers, or business development personnel,
on the one hand, or back-office, administrative, or clerical employees, on the
other hand) and the associated risk (e.g., contributions by personnel in positions
involving client solicitation may carry heightened pay-to-play risks) and whether
any personnel carry heightened pay-to-play risks for other reasons (e.g., some
personnel may carry heightened pay-to-play risks due to their history of
contributions).

•

Pre-clearance. The adviser could consider incorporating into its policies and procedures
a process of pre-clearance of contributions by the adviser or its personnel to officials of
government entities depending on its risk assessment, the nature of its business, and its

37

particular facts and circumstances. As part of any such process, the adviser could
consider whether to maintain reports documenting contributions by personnel to help
better identify pay-to-play risk depending on its risk assessment, the nature of its
business, and its particular facts and circumstances, which could also aid the adviser in
performing the required annual review of its overall compliance program (including any
policies and procedures specific to pay to play). An adviser with a small number of
employees could determine that it does not need a formalized pre-clearance program.
Alternatively, a large adviser with multiple advisory contracts with several public pension
plans could determine that it is appropriate to have an electronic pre-clearance system for
contributions similar to what typically is used for pre-clearing personal securities
transactions.
•

Risk mitigators. After identifying conflicts and other compliance factors creating pay-toplay risk, the adviser would need to design policies and procedures to address those risks.
Those policies and procedures would vary by adviser depending on the nature of the
adviser’s business and its particular facts and circumstances. For example, an adviser’s
policies and procedures could provide that the adviser or its personnel be able to make
contributions during a particular window that the adviser determines to have low pay-toplay risk. As another example, the policies and procedures could set forth contribution
thresholds, including where contributions falling under such a threshold would not be
subject to all or certain elements of the adviser’s policies and procedures pertaining to
pay-to-play (e.g., not subject to pre-clearance, if such a protocol were to be adopted).

•

Third-party solicitors. To the extent an adviser uses third-party solicitors, the adviser
would need to address in its policies and procedures the unique pay-to-play risks

38

associated with such practices. For example, the adviser could consider limitations such
as requiring engagements to be approved by the adviser’s Chief Compliance Officer or
requiring any third-party solicitating government business on behalf of the adviser to be a
registered investment adviser, registered broker-dealer, security-based swap dealer, or
registered municipal adviser who has not made a political contribution to the government
entity it is soliciting.
•

Periodic monitoring. The adviser’s policies and procedures could incorporate a process
for more frequent periodic monitoring of compliance with and the effectiveness of any
elements it has included with respect to pay-to-play conduct, as part of its overall review
of the effectiveness of the implementation of its policies and procedures under the
compliance rule. 85 Periodic monitoring could include periodic audits of pre-clearance
requests against a report documenting contributions by personnel to ensure compliance
with its pre-clearance process, and/or other required protocols the adviser has adopted as
part of its policies and procedures.

•

Remedial steps. The adviser would need to include in its policies and procedures steps or
a framework to address contributions that are inconsistent with the policies and
procedures. For example, the policies could require seeking the return of contributions
within a specific timeframe or potential disciplinary or other appropriate actions against
employees that violate the policies and procedures.
Likewise, the code of ethics rule does not require an adviser to adopt a particular standard

of business conduct. Instead, it requires that the standard an adviser chooses reflect its fiduciary

85

See rule 206(4)-7(b) (requiring a registered investment adviser to review, no less frequently than annually,
the adequacy of the policies and procedures and the effectiveness of their implementation).

39

obligations and those of its supervised persons and require compliance with the Federal
securities laws. 86 Accordingly, in choosing a standard of business conduct, an adviser who
provides or seeks to provide investment advisory services to State or local governments would
need to review and, if necessary, adjust its code of ethics to include a standard of business
conduct that aligns with any policies and procedures the adviser adopts under the compliance
rule in the context of its pay-to-play risks. For example, if the adviser restricts certain types of
contributions as part of its policies and procedures, the adviser should consider amending its
code of ethics to reference that restriction. Further, an adviser is required in its Form ADV Part
2A (Item 11) to briefly describe its code of ethics and to explain that it will provide a copy of the
code of ethics to any client or prospective client upon request. 87
3.

Request for Comment

We request comment on all aspects of the proposal to rescind the political contribution
rule, including the following:
1. Should the Commission rescind rule 206(4)-5 in its entirety, as proposed? Why or
why not?
2. Do commenters agree with our observation that the political contribution rule has
generally resulted in unintended consequences and a broader application of the rule
than intended such as some advisers’ policies and procedures outright prohibiting
political contributions altogether? Do commenters believe that the proposed
rescission of the political contribution rule would encourage more political speech

86

See Code of Ethics Adopting Release, supra footnote 65.

87

See Part 2A of Form ADV: Firm Brochure, Item 11.

40

by way of increased political contributions in circumstances that do not generate
pay-to-play risk?
3. Does the political contribution rule raise significant questions under the First
Amendment?
4. Would an adviser’s policies and procedures adopted under the compliance rule be a
more appropriate means of addressing the risks associated with pay-to-play
practices? Would such an approach reduce burdens for the adviser relative to the
burdens incurred with compliance with rule 206(4)-5 or otherwise avoid the
challenges associated with the current rule? Would an adviser’s adoption of a
standard of business conduct under the code of ethics rule that addresses an adviser’s
particular pay-to-play risks help prevent fraudulent pay-to-play conduct?
5. If the political contribution rule is rescinded, would other existing requirements
under the Advisers Act and the rules thereunder sufficiently address pay-to-play
practices? Would rescinding the political contribution rule increase the likelihood of
pay-to-play practices? Why or why not? If so, would keeping the rule or adopting
some other alternative be preferable?
6. Should the Commission amend the political contribution rule to provide for some
specific standards within a more principles-based framework? If so, describe what
framework should be provided. For example, would an amended, more principlesbased rule under the Advisers Act specific to pay-to-play practices help an adviser
develop policies and procedures and codes of ethics sufficiently robust to prevent
pay-to-play practices (e.g., addressing pay-to-play practices that may arise from the
use of political action committees (“PACs”) or third-party solicitors)?

41

7. Should the Commission amend the rule to require an adviser to adopt and implement
policies and procedures tailored to its pay-to-play risks taking into account its
particular business, but also prescribe certain elements in the policies and
procedures? If so, what elements and why? For instance, should any such policies
and procedures be required to expressly include (1) a risk identification and
assessment element that would require an adviser to identify and assess the adviser’s
or its covered personnel’s risk of making contributions to officials of government
entities that could result in the award or retention of investment advisory services or
the decision to invest or maintain an investment in an investment pool advised by the
investment adviser; (2) a political contributions guidelines element that would
require an adviser to establish firm-wide guidelines that would identify covered
personnel and certain prohibited conduct and establish contribution limits and
protocols with respect to contributions (e.g., pre-clearance, periodic monitoring, and
a report documenting contributions made); or (3) an annual review and report
element that would require an adviser to review at least annually the adequacy of the
policies and procedures and the effectiveness of their implementation and prepare a
written report describing the review, its results, and any material changes made to
the policies and procedures resulting from any deficiencies identified and any
actions taken in response to any violations of the policies and procedures or
guidelines? Would such a rule lead to different results than what an adviser would
institute under the compliance rule and the code of ethics rule, and if so how?
8. As an alternative to the proposed rescission, should the Commission instead modify
specific provisions of the political contribution rule? If so, which provisions and

42

why? For example, should the Commission modify (1) the de minimis exception to
increase the dollar amounts to $3,500 or another amount; (2) the two-year timeout
and the lookback provisions to eliminate, or reduce the time periods (e.g., one
calendar year, one fiscal quarter) contained in, the provisions; (3) certain definitions
to simplify compliance by eliminating the “indirect” concept in the definitions of
“official” and “covered associate”; and/or (4) the exemptive process set forth in rule
206(4)-5(e) to expand the bases for relief? If a partial rescission of the rule or
targeted modifications is a preferable approach, how specifically should the
Commission amend the rule to address market participants’ concerns about
complexity, breadth, and burden?
9. Should the Commission further clarify application of the compliance rule with
respect to pay-to-pay practices, or otherwise provide additional guidance to assist
advisers in updating and tailoring their policies and procedures and codes of ethics if
the political contribution rule is rescinded as proposed? If so, what clarification or
guidance would be helpful?
10. Should the Commission adopt enhanced disclosure obligations (e.g., Form ADV
disclosures to provide an alternative means of transparency) if the rule is rescinded
as proposed? If so, what should the disclosures be and why? For example, should the
Commission require advisers to briefly disclose how their policies and procedures
address pay-to-play risk? Would such a requirement result in different disclosure
than advisers would provide under Item 11 of Form ADV Part 2 in describing their
code of ethics if the political contribution rule were rescinded? Would enhanced

43

disclosure regarding an adviser’s policies and procedures addressing pay-to-play risk
help to reduce instances of pay-to-play practices? Why or why not?
11. Do State and local pay-to-play requirements as well as any anti-bribery and other
applicable laws and regulations including Federal laws and regulations regarding the
procurement process (while not all targeted at investment advisers specifically and
not consistent across or present in all jurisdictions) diminish the need for rule
206(4)-5? Why or why not? Alternatively, is having a Federal rule addressing payto-play practices necessary given the variability among State and local pay-to-play
laws and the complex analyses required to determine whether these regulations are
applicable? Why or why not?
12. Would the proposed rescission of the political contribution rule affect the application
of other rules or regulations (including, but not limited to, the MSRB Political
Contribution Rule, FINRA Rule 2030, and Exchange Act rule 15Fh-6) applicable to
pay-to-play conduct by registered broker-dealers, registered municipal advisers,
security-based swap dealers, or any other registered firms? Why or why not? If so,
which rules and how? For example, if the political contribution rule were rescinded
as proposed, would limitations on the use of solicitors under other rules and
regulations continue to apply to advisers? Why or why not? Additionally, what
impact (e.g., compliance burdens or otherwise) would the proposed rescission have
on dually registered investment advisers and broker-dealers? Is our understanding
accurate that most advisers that provide investment advisory services to government
clients (or seek to do so) and, therefore, that present the greatest pay-to-play risk, are
investment advisers registered with the Commission?

44

13. Do commenters believe that the proposed rescission of the political contribution rule
would increase pay-to-play risk for exempt reporting advisers and foreign private
advisers given that these advisers are not subject to the code of ethics rule or the
compliance rule? Why or why not?
B.

Proposed Amendments to Rule 204-2 under the Advisers Act

The proposal would amend the recordkeeping rule to eliminate the provisions requiring a
registered investment adviser to make and keep certain records in connection with the political
contribution rule. 88 Paragraph (a)(18) of rule 204-2 requires an adviser to make and keep records
containing a list or record of its covered associates, government entity clients, contributions to
officials, State political parties and PACs, and payments to regulated persons soliciting
government business on the adviser’s behalf. Because the proposal would rescind rule 206(4)-5
in its entirety, we propose to eliminate paragraph (a)(18) of rule 204-2.
As discussed above, however, an adviser must manage the risk of engaging in pay-toplay practices, including by adopting policies and procedures under the compliance rule and a
code of ethics under rule 204A-1 as appropriate. 89 Rule 204-2 requires an adviser to maintain a
copy of its policies and procedures and records documenting the adviser’s annual review of those
policies and procedures. 90 Further, the rule requires an adviser to maintain a copy of its code of
ethics and a record of any violation of that code along with actions taken as a result of the

88

Staff in the Division of Investment Management is reviewing certain of our staff’s no action letters
addressing the application of the recordkeeping rule to determine whether any such letters would need to be
withdrawn in connection with a rescission of the political contribution rule. One letter being reviewed is the
letter from the Investment Company Institute. See Investment Company Institute, SEC Staff No-Action
Letter (Sept. 12, 2011).

89

See supra section II.A.

90

See rule 204-2(a)(17)(i) through (ii).

45

violation, and copies of its supervised persons’ written acknowledgment of receipt of the code. 91
An adviser must also maintain records of all written agreements with any client or otherwise
relating to the business of the adviser, which would include written agreements with its
government entity clients. 92 Thus, notwithstanding any rescission of the political contribution
rule as proposed, rule 204-2 would continue to require an adviser to maintain these records,
including any portion relating to preventing pay-to-play practices. These records would be
available for the Commission to review upon examination.
We request comment on all aspects of the proposed amendments relating to the
recordkeeping rule, including the following:
14. Should the recordkeeping rule be amended to eliminate all the current political
contribution recordkeeping requirements, as proposed?
15. Alternatively, should we retain certain recordkeeping requirements within rule 2042(a)(18)? If so, which requirements and why? Are there any additional
recordkeeping requirements related to pay-to-play practices that we should require?
If so, what requirements and why? For example, are there specific records that we
should require an adviser to maintain that would assist the Commission in
identifying fraudulent pay-to-play practices?

91

See rule 204-2(a)(12)(i) through (iii).

92

See rule 204-2(a)(10).

46

III.

ECONOMIC ANALYSIS
A.

Introduction

We are mindful of the costs imposed by, and the benefits obtained from, our rules.
Section 202(c) of the Advisers Act 93 provides that when the Commission is engaging in
rulemaking under the Advisers Act and is required to consider or determine whether an action is
necessary or appropriate in the public interest, the Commission shall also consider whether the
action will promote efficiency, competition, and capital formation, in addition to the protection
of investors. The following analysis considers, in detail, the likely significant economic effects
that may result from the rescission of rule 206(4)-5, including the benefits and costs to investors
and other market participants as well as the broader implications of the proposed rule
amendments for efficiency, competition, and capital formation.
Pay-to-play practices in investment adviser markets, when they occur, can impose
significant losses on public investment systems and, historically, have not been fully corrected
by market forces. 94 Government officials have legal obligations to government fund
beneficiaries. However, such officials can receive private benefits that incentivize them to
diverge from their obligations to government fund beneficiaries. This behavior can be checked
by law enforcement or by public scrutiny. However, pay-to-play practices are rarely explicit; it
may be difficult to prove that an adviser (or one of its executives or employees) made political
contributions for the purpose of obtaining the government business, or that it engaged a solicitor

93

See 15 U.S.C. 80b-2(c).

94

See supra the history of enforcement actions taken by the Commission at footnote 15 and accompanying
text.

47

for his or her political influence rather than substantive expertise. 95 Further, the public often
lacks insight into the adviser selection process.
These problems can persist as a type of collective action problem. 96 Investment advisers
may be locked out from the market for government contracts if they do not make contributions,
and the expected financial return on contributions can make participation individually rational
despite its collective cost. Meanwhile, government officials benefit from the arrangement so long
as they retain authority to decide which investment advisers are granted government contracts,
and candidates that wish to campaign against pay-to-pay practices could see their campaigns
financially handicapped by the loss of contributions from advisers and officials who benefit from
pay-to-play.
Pay-to-play practices transfer wealth from taxpayers and fund beneficiaries to investment
advisers and government officials responsible for selecting them. For example, they undermine
the fair competition for government contracts and can result in higher fees and lower
performance for pension funds and other government investments. They could also force
investment advisers to dedicate resources to unproductive activity (i.e., spending time and money
maintaining political connections) and away from productive activity. Finally, they could also
result in the erosion of public trust in government officials and the distortion of capital markets.
The political contribution rule, rule 206(4)-5, was designed as a prophylactic measure to
address pay-to-play practices before they occur. In practice, however, this rule has imposed
unintended costs on investment advisers, their employees, their State and local government

95

See 2010 Adopting Release, part II.

96

See Blount v. SEC, 61 F.3d 938 (D.C. Cir. 1995), cert. denied, 517 U.S. 1119 (1996).

48

clients, and indirectly on other market participants. 97 Although the rule was not intended to
discourage lawful political donations, some investment advisers have, possibly in response to the
rule, enacted policies prohibiting their employees from making any political donations. Nor was
the rule intended to affect investment adviser labor markets or disincentivize investment advisers
from competing for government contracts. However, discussions with market participants lead us
to believe that the rule may have distorted both markets.
The proposal would rescind the political contribution rule and thereby eliminate the
compliance costs and unintended consequences associated with the rule. While rescinding the
rule could increase the risk of pay-to-play practices in investment adviser markets, we believe
that this risk would be mitigated by several regulatory frameworks. Pay-to-play practices were
unlawful under various anti-bribery laws and the Advisers Act before the political contribution
rule was promulgated and would continue to be unlawful if the rule is rescinded. The compliance
rule would continue to require registered investment advisers to adopt and implement policies
and procedures that are reasonably designed to prevent violation of the Advisers Act and the
rules thereunder, including by tailoring their compliance policies and procedures in accordance
with their own business models and risk profiles to address their pay-to-play risks. Advisers’
fiduciary duties will continue to require them to assess and mitigate pay-to-play risks. The code
of ethics rule will continue to require registered investment advisers to adopt a code of ethics that
sets forth a standard of business conduct reflecting this fiduciary obligation.

97

The rule creates a de facto strict liability standard that can lead to situations where small donations or “foot
faults” potentially trigger substantial prohibitions under the rule. See supra section I.C.

49

B.

Economic Baseline

The baseline against which the costs, benefits, and the effects on efficiency, competition,
and capital formation of the proposed rule are measured consists of the current state of the
investment adviser market, current practice as it relates to pay-to-play policies and procedures,
and the current regulatory framework. 98
1.

Current Regulatory Framework and Market Practice
a.

Regulatory Baseline

The antifraud provisions of the Advisers Act make it unlawful for an adviser to employ
any device, scheme, or artifice to defraud any client or prospective client, to engage in any
transaction, practice, or course of business which operates as a fraud or deceit upon any client or
prospective client, or to engage in any act, practice, or course of business which is fraudulent,
deceptive, or manipulative. 99 Therefore, pay-to-play practices are prohibited by the Advisers Act
and also may violate other provisions of the Federal securities laws. 100 In certain circumstances,
pay-to-play schemes may also violate laws expressly prohibiting quid pro quo bribery schemes.

98

See, e.g., Nasdaq v. SEC, 34 F.4th 1105, 1111–14 (D.C. Cir. 2022). This baseline approach also follows
Commission staff guidance on economic analysis for rulemaking. See Current Guidance on Economic
Analysis in SEC Rulemaking (Mar. 16, 2012), available at
https://www.sec.gov/divisions/riskfin/rsfi_guidance_econ_analy_secrulemaking.pdf (“The economic
consequences of proposed rules (potential costs and benefits including effects on efficiency, competition,
and capital formation) should be measured against a baseline, which is the best assessment of how the
world would look in the absence of the proposed action”); Id. at 7 (“The baseline includes both the
economic attributes of the relevant market and the existing regulatory structure.”). Any staff statements
cited herein represent the views of the staff. They are not a rule, regulation, or statement of the
Commission. Furthermore, the Commission has neither approved nor disapproved their content. Any staff
statements cited herein, like all staff statements, have no legal force or effect; they do not alter or amend
applicable law; and they create no new or additional obligations for any person.

99

See Advisers Act sections 206(1), (2), and (4).

100

See supra section II.A.

50

Further, the compliance rule under the Advisers Act requires an adviser that is registered,
or required to be registered, to adopt and implement written policies and procedures reasonably
designed to prevent violations, by the adviser and its supervised persons, of the Advisers Act and
the rules that the Commission has adopted under the Advisers Act, which include requirements
to prevent certain pay-to-play practices. The adviser must review these policies’ adequacy and
effectiveness on at least an annual basis. 101
The political contribution rule acts as a prophylactic rule to prevent pay-to-play activity.
The rule generally prohibits an investment adviser from providing investment advisory services
for compensation to a government client for two years after the adviser or any of its covered
associates makes a contribution to an elected official of a government entity, or candidate for
such office, whose office is in a position to influence the selection of the adviser. 102 The rule
provides for situations in which the Commission can provide exemptions from this prohibition.
The rule also prohibits advisers from paying or agreeing to pay persons to solicit government
entities on their behalf unless the persons are the advisers’ own executive officers, general
partners, managing members, or employees, or are certain regulated persons who are themselves
subject to pay-to-play restrictions. 103 Under the rule, an adviser and its covered associates are
further restricted from soliciting or coordinating contributions or payments to certain government
officials or political parties related to the adviser’s business and may also not do indirectly

101

See rule 206(4)-7.

102

See rule 206(4)-5(a)(1) and 206(4)-5(f)(6) (defining “official”); see also supra section I.B. The investment
advisers covered by the political contribution rule include advisers who are registered or required to be
registered; advisers who are unregistered in reliance on the exemption available under section 203(b)(3) of
the Advisers Act (for foreign private advisers); and exempt reporting advisers as defined in rule 204-4(a)
(i.e., certain venture capital fund advisers and private fund advisers). See rule 206(4)-5(a) and (d).

103

See rule 206(4)-5(a)(2)(i).

51

anything which, if done directly, would violate the rule. 104 Covered investment pools in which a
government entity invests or is solicited to invest are treated as if they were the government
entity for the purposes of the rule. 105 The political contribution rule includes de minimis
exceptions (i.e., contribution dollar thresholds below which the ban on contributions does not
apply), an exception for new covered associates, and an exception for certain returned
contributions. 106 The recordkeeping rule requires a registered investment adviser to make and
keep certain records in connection with the political contribution rule. 107
Exchange Act rule 15Fh-6 imposes political contribution restrictions on security-based
swap dealers and their covered associates that are parallel to the political contribution rule’s
restrictions on investment advisers and their covered associates. 108 Rule 15Fh-6 might apply to
investment advisers to the extent that they are dually registered as investment advisers and
security-based swap dealers. Under the MSRB Political Contribution Rule (rule G-37), brokers,
dealers, municipal securities dealers, and municipal advisors are subject to a two-year prohibition
on engaging in municipal securities business or municipal advisory business, as applicable, if
they made certain contributions to officials of municipal entities within the preceding two-year
period, with a shorter six-month lookback period for certain personnel, and an exception for de
minimis contributions. MSRB rule G-38 prohibits brokers, dealers, and municipal securities
dealers from paying persons who are not affiliated persons for solicitation of municipal securities

104

See rules 206(4)-5(a)(2)(ii), 206(4)-5(d).

105

See rule 206(4)-5(c).

106

See rule 206(4)-5(b).

107

See rule 204-2(a)(18).

108

See rules 15Fh-6(b)(1) (ban on compensation and two-year lookback); 15Fh-6(b)(3)(i) (ban on solicitation
by other than regulated persons); 15Fh-6(b)(3)(ii) (ban on coordination); 15Fh-6(b)(2), (d), (e) (exceptions
and exemptions).

52

business on their behalf. The comparable requirements of rule 206(4)-5 were closely modeled on
MSRB rules G-37 and G-38. 109 A registered municipal advisor subject to MSRB rule G-37 is a
“regulated person” under rule 206(4)-5(f)(9) and as such, an investment adviser may pay the
registered municipal advisor to solicit a government entity for investment advisory services. 110
FINRA adopted rule 2030 and a related recordkeeping rule, rule 4580, to enable its
member firms to continue to engage in distribution and solicitation activities for compensation
with government entities on behalf of investment advisers following the adoption of rule 206(4)5. The elements and terms used in rule 2030 are “substantially equivalent” to those in rule
206(4)-5, because one of the objectives of FINRA’s proposal is to satisfy the “regulated person”
definition in rule 206(4)-5(f)(9) so that an investment adviser may pay a FINRA member firm to
solicit a government entity for investment advisory services. 111
Some States and municipalities place similar restrictions on investment advisers subject
to their jurisdiction or government entities that can contract with investment advisers, though
there is significant variation in the individuals, firms, or entities to which these rules apply and
how they are restricted. State and local restrictions vary considerably in their scope and

109

See 2010 Adopting Release, supra footnote 1, at sections I, II.B.2(a), IV.A.

110

See rule 206(4)-5(a)(2)(i)(A); see also Rules Implementing Amendments to the Investment Advisers Act of
1940, Investment Advisers Act Release No. 3221 (June 22, 2011) [76 FR 42950 (July 19, 2011)], at section
II.D.1; Political Contributions by Certain Investment Advisers: Ban on Third- Party Solicitation; Order
With Respect to MSRB Rule G–37, Investment Advisers Act Release No. 4531 (Sept. 20, 2016) [(81 FR
66526 (Sept. 28, 2016)].

111

See Self-Regulatory Organizations; Financial Industry Regulatory Authority, Inc.; Order Approving a
Proposed Rule Change to Adopt FINRA Rule 2030 and FINRA Rule 4580 to Establish “Pay-To-Play” and
Related Rules, Securities Exchange Act Release No. 78683 (Aug. 25, 2016) [81 FR 60051 (Aug. 31,
2016)]. The Commission subsequently determined that that FINRA Rule 2030 imposes substantially
equivalent or more stringent restrictions on broker-dealers than the Commission’s political contribution
rule imposes on investment advisers and is consistent with the objectives of the political contribution rule.
See Political Contributions by Certain Investment Advisers: Ban on Third-Party Solicitation; Order with
Respect to FINRA Rule 2030, Investment Advisers Act Release No. 4532 (Sept. 20, 2016) [(81 FR 66526
(Sept. 28, 2016)].

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approach. Some jurisdictions prohibit principals of investment advisory firms from contributing
to campaigns or other organizations related to offices with discretion in the selection or
compensation of an investment adviser. 112 Some jurisdictions require public disclosures of
contributions for firms with procurement contracts with the State or its subdivisions. 113 Some
jurisdictions disallow government entities in the State from contracting with investment advisers
who have made contributions to campaigns for—or holders of—certain government offices, and
restrict government contractors from making, soliciting, or pledging political campaign
contributions. 114 Some jurisdictions prohibit the use of placement agents. 115 Some jurisdictions
have no restrictions resembling those in the political contribution rule.
Pay-to-play practices are inconsistent with an adviser’s role as a fiduciary under the
Advisers Act and constitute fraud under the Federal securities laws. 116 In addition, the code of
ethics rule requires an adviser that is registered, or required to be registered, to have a code of
ethics that sets forth standards of business conduct for its supervised persons, which reflect the
adviser’s fiduciary obligations and those of its supervised persons, and, among other things,
provisions requiring the adviser’s supervised persons to comply with applicable Federal
securities laws. 117 The Commission may also penalize an adviser for failing to reasonably

112

See, e.g., Conn. Gen. Stat. § 9-612 (2026).

113

See, e.g., Md. Code Regs. 21.07.01.20 (2026).

114

See, e.g., N.J. Stat. Ann. § 19:44A-20.13 et seq. (2026).

115

See, e.g., Press Release, New York City Pension Funds Enact Placement Agent Ban (June 9, 2014),
https://comptroller.nyc.gov/newsroom/new-york-city-pension-funds-enact-placement-agent-ban/
(announcing joint resolution by the New York City Employees’ Retirement System, Teachers’ Retirement
System, New York City Police Pension Fund, New York City Fire Department Pension Fund, and Board of
Education Retirement System).

116

See supra section I.A.

117

See rule 204A-1.

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supervise persons under its supervision who commit Federal securities law violations, including
pay-to-play practices. 118 Rule 204-3 and Form ADV require a registered adviser to deliver a firm
brochure to each client or prospective client describing, among other things, its code of ethics
and explaining that the adviser will provide a copy of the code of ethics to any client or
prospective client upon request. 119 The provisions collectively constitute a regulatory framework
that governs pay-to-play risk in investment advisory markets independent from the political
contribution rule.
b.

Current Market Practice

To comply with rule 206(4)-5 and to otherwise ensure that an adviser is complying with
the Advisers Act, we understand that advisers have enacted compliance frameworks to identify
sources of pay-to-play risk, manage their covered associates, and document the activities of the
advisers and their covered associates. Activities within this framework include: establishing preclearance procedures and/or annual certifications for political contributions; developing training
programs to educate employees about the rule and its implications; maintaining records of
employee contributions and other relevant activities; reviewing public contribution databases;
and creating disciplinary protocols for associates who violate the adviser’s policies.
According to an industry survey of investment advisers, 120 approximately 40 percent of
advisers conduct periodic training of relevant personnel on pay-to-play issues, 31 percent require
periodic reporting of all political contributions by covered associates, 31 percent require new
personnel to be vetted for political contributions before being hired as a covered associate, 12

118

See Advisers Act section 203(e)(6).

119

See rule 204-3(a) and (b); Part 2A of Form ADV: Firm Brochure, Item 11.

120

See 2024 Investment Management Compliance Testing Survey, supra footnote2.

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percent prohibit all political contributions, 9 percent review expense reports of relevant
personnel for pay-to-play red flags, and 4 percent require periodic reporting of political
contributions over $150. Some advisers also require associates to pre-clear contributions, with 27
percent reporting to require this for contributions over $150 and 13 percent reporting to require
this for contributions over $350. 121
According to the same survey, approximately 16 percent of investment advisers increased
the type, scope, and/or frequency of pay-to-play-related compliance testing compared to the
previous year. Additionally, 11 percent of surveyed advisers cited pay-to-play as an area of focus
during their most recent SEC examination.
2.

Affected Parties

As of December 2025, and incorporating filings received through April 30, 2026, there
were 16,434 registered investment advisers, with roughly $166.0 trillion in total regulatory assets
under management and approximately 1,110,000 employees. There were also 6,463 exempt
reporting advisers with additional assets of approximately $7.5 trillion. 122 We do not currently
have data on the extent to which advisers use third parties to solicit government entities.
The rule also affects government entities that may use investment advisory services. In
particular, State and local government retirement funds currently have $9.6 trillion in assets,

121

Advisers completing the survey were allowed to select multiple possible answers for the question “Which
of the following policies have you adopted with regard to political contributions by ‘Covered Associates’ as
defined within the Pay-to-Play Rule? (Check all that apply).” While an adviser that has a policy requiring
pre-clearance for contributions over $150 necessarily also has a policy requiring pre-clearance for
contributions over $350, it is unclear how many of the 13 percent of advisers that selected that they require
pre-clearance for contributions above $350 did so because they have this policy and not one for a $150 (or
lower) threshold or because they have this policy by virtue of having a policy with a threshold of $150 (or
lower).

122

Exempt reporting advisers are not required to report their regulatory assets under management on Form
ADV. Here we cite the total gross assets of these advisers’ private funds.

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representing 33 percent of all U.S. pension assets, and State-run qualified tuition plans currently
manage $603 billion in assets. 123
C.

Benefits and Costs
1.

Benefits of Rescinding the Political Contribution Rule

Rescinding the political contribution rule would likely lower the ongoing direct
compliance costs for advisers to comply with the Advisers Act. The extent of the cost savings
would vary with many factors. Notably, cost savings would vary with the extent to which an
adviser would choose to modify its policies and procedures related to identifying pay-to-play
risks and eliminating pay-to-play practices.
In particular, removing the prescriptive requirements of rule 206(4)-5 would allow
investment advisers to tailor their policies and procedures to their specific pay-to-play risks,
resulting in lower compliance costs for most advisers. For example, some advisers that currently
vet the past political contributions of prospective employees or employees being considered for a
transfer or a promotion may no longer do so or do so in fewer situations. These savings could
free adviser employees for other tasks or reduce the need for dedicated compliance staff, or both.
Advisers may pass these cost savings on to their government clients through lower fees or
improved service quality.

123

Pension plan data are as the end of the second quarter of 2025 and come from tables in Financial Accounts
of the United States - Z.1, Bd. Of Governors of the Fed. Rsrv. Sys.,
https://www.federalreserve.gov/releases/z1/20250911/html/default.htm (last updated Sept. 11, 2025). State
and local government employee retirement funds have $9.6 trillion in total financial assets (Table L.120),
while Federal government employee retirement funds have $4.9 trillion (Table L.119) and private pension
funds have $14.2 trillion (Table L.118). 9.6/(9.6 + 4.9 + 14.2) = 33%. State-run qualified tuition plan data
are as of December 31, 2025, as reported by the College Savings Plan Network. See Coll. Sav. Plan
Network, 529 Plan Data (2025), available at https://www.529network.org/wpcontent/uploads/2026/06/CSPN-data-for-12.31.25.pdf.

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Some advisers might change their policies and procedures to remove specific
requirements designed to comply with rule 206(4)-5, while retaining the same or similar
obligations as a matter of practice. An adviser might choose to retain a particular policy either
because its State’s regulations are already more stringent than an analogous policy imposed by
the political contribution rule, 124 because the adviser is a dual-registered entity subject to rule
15Fh-6, or because the adviser has an affiliated broker or dealer that is required to comply with
the MSRB Political Contribution Rule (rule G-37), MSRB Rule G-38, or FINRA Rule 2030.
These rules have substantially similar prohibitions to those in the political contribution rule, and
to the extent that compliance resources are shared between affiliated entities, it may not be cost
effective for an adviser to tailor its specific advisory practices in response to a rescission of the
political contribution rule. Likewise, an adviser might choose to retain some elements because
after conducting its risk assessment, it may decide that such elements are appropriate to address
its particular pay-to-play risks. 125
Some advisers may choose not to change a policy, other than by removing specific
requirements for complying with rule 206(4)-5 and related recordkeeping requirements, because
the initial cost of changing policies is larger than the ongoing savings that would accrue from
switching to a different policy. 126 Still other advisers would not be affected because they neither
currently have nor intend to seek government entity clients.

124

For example, N.J. Admin. Code § 17:16-4.3 prohibits the engagement of, and requires the termination of,
an investment management firm, if an investment management professional associated with the firm makes
certain political contributions greater than $250 within the two-year period prior to and during the
engagement.

125

Some advisers already have policies in place (such as complete prohibitions on political donations) that are
more stringent than those required by the political contribution rule, and may choose to retain these policies
for the same reasons that they originally implemented these policies.

126

We do not anticipate any substantive or material change in an adviser’s code of ethics. See infra note 166.

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The 2010 Adopting Release estimated the ongoing compliance costs related to the
political contribution rule. These costs include ongoing monitoring of employee contributions,
compliance training, recordkeeping, and related expenses. 127 Rescinding the rule would
eliminate these costs. In aggregate, we expect that rescinding the political contribution rule
would save annual, ongoing compliance expenses of approximately $3,750 per smaller firm, 128
$161,500 per medium firm, 129 and $323,000 per larger firm, 130 resulting in annual aggregate cost
savings of approximately $416 million. 131
Advisers that currently apply or consider applying for an exemption under the political
contribution rule would also see reduced costs because they would no longer spend time and

127

See 2010 Adopting Release, supra footnote 1, at section IV.B.1.

128

The 2010 Adopting Release estimated ongoing costs of 10 hours of compliance manager time (this title was
r

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Source: Frix Law Library, https://www.frixlaw.com/law-library/documents/agency%3Asec%3A5ad85ef382bc680b. Public record. Not legal advice.