The Current Pay-to-Play Framework

The current political contribution rule, adopted in 2010 following scandals in which firms lavished politicians with money, travel, and gifts or paid sham placement agent fees to government officials in exchange for lucrative advisory contracts, prohibits investment advisers from receiving compensation for advisory services provided to a government client for two years after the adviser or any “covered associate” (i.e., any general partner, managing member, executive officer, or employee who solicits government entities) makes a political contribution to certain elected officials or candidates in a position to influence the hiring of advisers by such governmental client. The rule also bans advisers from paying unregulated third parties to solicit government business and prohibits coordination of contributions to officials of government entities the adviser serves or seeks to serve.

What the SEC is Proposing

The SEC is proposing to rescind the Pay to Play Rule in its entirety and to amend Rule 204-2, the recordkeeping rule, to eliminate the provisions requiring advisers to maintain records specifically tied to the Pay to Play Rule. The SEC cited significant unintended consequences since the Rule’s adoption, including that some advisers have imposed blanket prohibitions on all political contributions by their employees, creating operational challenges and a de facto strict liability standard. The SEC also noted that the Rule has made it difficult for advisers to hire or promote qualified individuals and may have limited the pool of advisers available to public pension plans.

The public comment period will remain open for 60 days following publication of the proposing release in the Federal Register. The proposal was dated September 3, 2026, though the exact Federal Register publication date had not yet been set at the time of the release.

Remaining Obligations for Advisers if the Proposal is Adopted

Even if the Pay to Play Rule is rescinded, the SEC emphasized that other existing requirements under the Advisers Act and associated rules would continue to apply, including prohibitions on fraud, fiduciary duty requirements, the compliance rule (Rule 206(4)-7), and the code of ethics rule (Rule 204A-1). For example, the SEC’s proposal highlights that were an investment adviser to engage in a pay-to-play arrangement with a government official, the adviser would create a conflict of interest and engage in a scheme to defraud the government plan or program.

Advisers would still be required to adopt written compliance policies and procedures reasonably designed to prevent violations of the Advisers Act, including pay-to-play practices, and to review those policies at least annually. Record-keeping requirements related to compliance with the adviser’s policies and procedures would also remain unchanged as would the SEC’s ability to bring enforcement actions against advisers for fraudulent pay-to-play practices.

Importantly, federal, state, and local anti-corruption and procurement laws continue to operate independently of the SEC’s rule. Advisers that are dually registered as broker-dealers or municipal advisors should also note that the MSRB Political Contribution Rule (Rule G-37), FINRA Rule 2030, and Exchange Act Rule 15Fh-6 remain in effect and impose their own pay-to-play restrictions. State-level requirements vary significantly and may impose additional or more stringent obligations depending on the jurisdiction.

Key Takeaways for Clients

• The Pay to Play Rule is not yet rescinded. As of now, this is a proposed rulemaking. The SEC must receive and consider public comments before any final action. The SEC has invited comment on all aspects of the proposal, including whether alternative approaches (e.g., amending rather than rescinding the rule) would be preferable.
• Evaluation of compliance framework. Until the proposal is finalized and effective, the Pay to Play Rule remains in force, and advisers must continue to comply with existing requirements. Advisers should evaluate their political contribution policies and procedures to ensure they remain reasonably designed to address pay-to-play risks under the Rule and to determine what changes, if any, are appropriate to ensure ongoing compliance with the Advisers Act’s antifraud rules, applicable fiduciary duties, and federal, state, and local laws if the Rule is ultimately rescinded.
• Review side letters and other agreements. Advisers will need to evaluate side letters and other agreements that contain pay-to-play provisions on a case-by-case basis. Any provisions that restate the Rule 206(4)-5 requirements in lieu of a reference to compliance with the rule may remain unchanged regardless of whether the rule is rescinded.
• State and local rules still apply. Advisers should confirm their obligations under applicable state and municipal pay-to-play and procurement laws, which are not affected by a federal rescission.

If you have questions about the proposed rescission and its potential impact on your compliance programs, political contribution policies, or government advisory business, please contact any of the authors listed below or your regular King & Spalding advisor.