The Securities and Exchange Commission proposed on September 3 to repeal Rule 206(4)-5, commonly known as the "pay-to-play" rule, which prohibits investment advisers from accepting compensation from government clients for two years if the adviser or covered employees have made political contributions to officials or candidates capable of influencing adviser selection.
Under the current rule, investment advisers and their staff cannot manage government money for fees while adhering to a two-year political contribution restriction. If the proposal succeeds, these restrictions would be eliminated, though other protections would remain in place, including anti-fraud provisions, fiduciary obligations, and anti-corruption laws at federal, state, and local levels.
Who Would Benefit
Approximately 16,434 registered investment advisers and their 1.11 million employees could benefit from the rule's removal. The primary beneficiaries would be firms competing for public sector business, including managers seeking contracts with public pension funds, state retirement systems, and university endowments that manage large investment mandates.
The SEC noted that the rule's complexity has led some companies to ban all political contributions internally rather than risk violations. Employees would face fewer restrictions on political speech if the rule is repealed.
The Rule's Original Purpose
Research covering approximately 22,000 SEC-registered advisory firms from 2001 to 2016 showed that political donations to state authorities and political action committees correlated with increased business for public pension managers. After the rule took effect, the study noted a significant decline in political donations from advisers managing substantial government assets, suggesting the rule succeeded in reducing contributions tied to business development.
The SEC characterized the rule as complex and burdensome, describing it as a "trap for the unwary" due to provisions that can apply to contributions made before an employee becomes a covered associate or donations made to federal campaigns where the candidate later holds a covered state or local position.
The Comment Period
SEC Chairman Paul Atkins stated in a September 3 statement that individuals should not have to choose between political speech rights and employment in a particular industry. The Investment Adviser Association has called for reform but stopped short of demanding full repeal, instead proposing a more tailored approach with reduced compliance requirements.
The SEC will accept public comment for 60 days following publication of the proposal in the Federal Register before determining whether to adopt the measure.
