SEC Proposes Rescission of Investment Adviser Pay-to-Play Rule

On September 3, 2026, the SEC proposed to rescind Rule 206(4)-5 under the Investment Advisers Act of 1940, as amended (the “Advisers Act”), commonly known as the pay-to-play rule (the “Pay-to-Play Rule”), in its entirety (the “Rescission Proposal”). The SEC also proposed conforming amendments to Rule 204-2 under the Advisers Act that would eliminate the records that registered investment advisers are required to maintain specifically in connection with the Pay-to-Play Rule.^[1] In proposing the rescission of the Pay-to-Play Rule, the SEC stated its view that existing Advisers Act antifraud provisions, fiduciary duty obligations, compliance program requirements and code of ethics requirements, together with other applicable federal, state and local requirements, are sufficient to address the risks that pay-to-play practices pose. The Rescission Proposal is one of a number of items previewed by the SEC’s Office of Information and Regulatory Affairs in its 2026 Regulatory Agenda.

The comment period for the Rescission Proposal will remain open until November 9, 2026.

The Rescission Proposal

The Pay-to-Play Rule currently establishes a detailed framework governing political contributions and the provision of advisory services to government entities. Among other things, the rule:

• generally prohibits an adviser from providing advisory services for compensation to a government entity for two years following certain political contributions by the adviser or its covered associates; and
• restricts the use of certain third parties to solicit government entities for advisory business and prohibits certain solicitation or coordination of political contributions and payments to political parties.

The Rescission Proposal would eliminate this framework in its entirety.

SEC Rationale

The SEC stated that its experience administering the Pay-to-Play Rule over the past fifteen years, together with feedback from market participants, has led it to conclude that the rule has produced significant unintended consequences and may impose burdens that are not justified by its benefits. Concerns identified in the Rescission Proposal include that:

• the rule operates as a de facto strict liability regime, where small donations or “foot faults” can trigger significant consequences;
• advisers may face challenges in determining whether particular individuals qualify as covered associates or whether particular government officials fall within the scope of the rule;
• the rule’s look-back provisions may affect hiring and promotion decisions involving employees who have made political contributions;
• government entities may be unable to hire the most qualified or cost-effective advisers, or may lose the services of existing advisers, because of contributions made by adviser personnel; and
• some advisers have adopted broad restrictions on political contributions in response to the rule, potentially limiting political participation beyond conduct presenting a meaningful pay-to-play risk.

The SEC stated that rescission of the Pay-to-Play Rule would return the pay-to-play regulatory framework to a principles-based approach based on existing Advisers Act obligations, providing advisers with flexibility to address pay-to-play risks in a manner tailored to their particular businesses and risk profiles.

Key Takeaways

The Pay-to-Play Rule remains in effect until the Rescission Proposal is adopted, so advisers must continue to comply with the rule’s requirements. While the Rescission Proposal would eliminate Rule 206(4)-5 and the related Rule 204-2 recordkeeping requirements, advisers should not assume that political contribution compliance will cease to be a regulatory focus. The Rescission Proposal is premised on the SEC’s view that existing Advisers Act antifraud, fiduciary duty, compliance and code of ethics requirements, together with other applicable federal, state and local requirements, are sufficient to address pay-to-play risks.^[2] State and local pay-to-play laws, public pension system rules, federal anti-bribery statutes and rules governing the use of solicitors for government entities (e.g., MSRB Political Contributions Rule, FINRA Rule 2030 and Exchange Act Rule 15Fh-6) will all continue to apply. All advisers will need to assess the extent to which existing political contribution compliance controls remain appropriate in light of other applicable legal, regulatory and contractual requirements.

Seward & Kissel will continue to monitor developments relating to the Rescission Proposal and is available to assist clients in evaluating the proposal, preparing comments and assessing potential implementation considerations.