On September 3, 2026, the U.S. Securities and Exchange Commission (“SEC”) released a proposal (link: https://www.sec.gov/files/rules/proposed/2026/ia-6994.pdf) yesterday to rescind Rule 206(4)-5 – the Political Contributions Rule, better known as the "Pay-to-Play" Rule – under the Investment Advisers Act of 1940 (“the Advisers Act”), along with related amendments to the Recordkeeping Rule (Rule 204-2).

Adopted in 2010, the Rule 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 (so-called “pay-to-play” practices).” It does so by, among other things, barring advisers from receiving compensation for advisory services from a government client for two years if the adviser or a "covered associate" makes a political contribution to certain officials/candidates with influence over that client's business.

For many fund managers, the Rule’s significant unintended consequences pose a considerable regulatory burden and have been argued to infringe upon an individual’s Constitutional rights, as complying with it may necessitate restricting all staff and firm political contributions to ensure a fund manager does not fall afoul of the Rule. The Rule also has a strict liability standard, punishing advisers even without intent to influence government business. Modest campaign contributions have triggered enforcement actions with prohibitions and penalties that were far disproportionate to the activity in question. Firms that are aware of potentially triggering contributions among their staff may decline to manage in-scope government clients for fear of a potential violation. Likewise, the Rule’s mandatory two-year ban on compensation from a government client where a violation has occurred – even without intent – forces that government client to change advisers irrespective of their preference or superior returns or investment terms. These are among the numerous troublesome aspects of this Rule.

The SEC stated in the proposing release that it chose to propose rescinding the Rule rather than modifying it because it believes other Advisers Act provisions already address pay-to-play risks adequately and that the Rule’s goals in deterring fraud would be better achieved by using a principles-based approach. It also considered the numerous political contribution-related restrictions that exist at the state and local level throughout the U.S. – which fund managers must be more acutely aware of going forward in absence of a Federal-level rule.

Please note that this is a proposal and that the Rule, for now, continues in force and must be complied with unless further guidance is issued.  Comments are due by November 9, 2026.  AIMA will arrange member calls to seek their input for a comment letter. In the interim, please reach out to Suzan Rose, [email protected], with any questions regarding this proposal.

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  Suzan Rose

  AIMA