SEC Proposes To Rescind Rule 206(4)-5, The Investment Adviser Pay-to-Play Rule

The U.S. Securities and Exchange Commission (SEC or Commission) on September 3, 2026, announced a proposal to rescind SEC Rule 206(4)-5, the federal pay-to-play rule for investment advisers. This announcement kicks off a rulemaking process that could ultimately result in the complete repeal of Rule 206(4)-5, which was first adopted by the SEC in 2010, potentially giving investment advisers and their employees greater flexibility to make political contributions to state and local candidates and officeholders without limiting their ability to do business with state and local pension funds and other government entity clients.

Currently, Rule 206(4)-5 bars covered investment advisers from providing investment advisory services for compensation to any state or local government entity for a period of two years after the adviser or one of the adviser's "covered associates" makes a contribution covered by the rule. The rule also includes limits on political fundraising by investment advisers and their covered associates, restrictions on the use of certain placement agents to solicit government entity clients, and a broad anti-circumvention provision that potentially implicates contributions made to political action committees (PACs), political party committees and other politically active entities.

Though the SEC seeks comment on a number of more limited options, the core of the announcement is the proposal to completely rescind Rule 206(4)-5, including each of the elements of the rule described above. Under this approach, advisers would remain subject under the Investment Advisers Act of 1940 to general antifraud requirements, fiduciary duty obligations, and rules requiring them to maintain compliance policies and codes of ethics – all of which would potentially impose obligations relating to pay-to-play practices – but Rule 206(4)-5's prophylactic, strict liability approach would be completely abandoned.

What's Next: Comments, Rulemaking and Potential Pushback

The SEC's announcement does not make any immediate changes to current law. Rule 206(4)-5 remains in effect, and will be in effect for the 2026 midterm elections. Instead, the SEC's proposal begins an administrative process pursuant to which the agency first seeks public comments on the proposed rescission of the rule. The proposal was published in the Federal Register on September 10, 2026, and comments are due by November 9, 2026. Following the comment period, the SEC will issue a final rule either rescinding Rule 206(4)-5 or (if the rule is not rescinded) setting forth any modifications to the rule's requirements. Such a final rule likely will be issued relatively soon after the close of the comment period.

From a press release and accompanying materials, it is clear that complete rescission of Rule 206(4)-5 is the SEC's preferred approach. As SEC Chairman Paul Atkins noted in a statement, "the SEC is not the nation's elections regulator." In his view, Rule 206(4)-5 is overly broad and imposes undue burdens on investment advisers, and those burdens are not outweighed by the benefits to investors from preventing pay-to-play practices.

In the event that the SEC decides to completely eliminate the rule, one key question is whether that action would be challenged in court and, if so, by whom. The agency's preference for complete rescission is somewhat complicated by the fact that Rule 206(4)-5 itself emerged from an extensive rulemaking process that involved both a detailed assessment of the costs of pay-to-play practices and an extensive record containing references to a number of specific pay-to-play scandals involving public pension funds and investment advisers. To safeguard against potential legal challenges, the SEC will be looking for the regulated community – particularly investment advisers subject to Rule 206(4)-5 – to provide comments that support the agency's view that the current rule imposes undue costs on advisers and their covered associates without commensurate benefits to public sector investors and their stakeholders.

We anticipate that good government advocacy groups will weigh in during the comment process, arguing that the SEC should retain the current rule or modify it rather than eliminating the rule in its entirety. Holland & Knight will be watching closely to see if these advocacy groups are joined by major public sector investors, many of whom supported adoption of the rule in 2010. Holland & Knight will also monitor the extent to which the SEC's proposal attracts broader public attention beyond the asset management community. Given the current political focus on issues related to corruption and government transparency, it is possible that the proposal could attract attention from the media or elected officials, which could introduce an unpredictable dynamic to the regulatory process.

A World Without Rule 206(4)-5: Practical Considerations for Investment Advisers

Rescinding Rule 206(4)-5 would have major implications for investment advisers and their covered associates, who would have greater freedom to make political contributions without foreclosing business opportunities. Rescinding the rule could also reduce compliance burdens for advisers, including those associated with the rule's broad anti-circumvention provision, which requires scrutiny of contributions made to a range of political actors, such as political parties, PACs and Super PACs, among others.

However, rescinding the rule would not eliminate advisers' pay-to-play risks, nor would it entirely do away with the need to review the personal political contributions of an investment adviser's senior executives and marketing staff. Advisers seeking to do business with public sector investors would still have to contend with a complex patchwork of state and local pay-to-play rules, all of which would remain in place.

Doing away with Rule 206(4)-5 could also prompt public sector investors and state elected officials to adopt new restrictions on investment adviser contributions. Significantly, many public pension funds have incorporated Rule 206(4)-5 into their internal anti-corruption procedures, often requiring investment adviser counterparties to certify as to their compliance with the rule and requiring related disclosures related to covered associate contributions. If the SEC rescinds Rule 206(4)-5, these public pension funds – many of whom have expressed their commitment to the principles underlying the rule – could impose broadly similar requirements through side letter agreements or other contracts with investment advisers. Similarly, state comptrollers, state legislatures and city councils could react to the rescission of Rule 206(4)-5 by adopting new pay-to-play rules on a state-by-state or municipality-by-municipality basis.

In the proposed rule, the SEC has also suggested replacing Rule 206(4)-5 with a principles-based compliance approach. In particular, the proposed rule outlined a compliance approach under which investment advisers that provide investment advisory services to government entity clients would update their compliance policies and procedures to address pay-to-play concerns, using a principles-based approach that reflects each adviser's specific pay-to-play profile (including such factors as the adviser's "particular business needs, organizational structure, and the exact nature of its business," including the specific "risk of the adviser or its personnel engaging in pay-to-play practices").

The SEC estimates that the one-time cost of conducting such an assessment would be $51 million in the first year following the recission of Rule 206(4)-5. In addition, there is a risk that the move to a principles-based, risk-tailored approach will, over the long run and as interpreted by the Commission over multiple administrations, result in unanticipated compliance and legal risk burdens for advisers.

The implications of the SEC's proposal for the other federal financial services pay-to-play rules are also unclear. In the proposal, the SEC relies on the existence of these other rules (particularly Municipal Securities Rulemaking Board Rule G-37 and Financial Industry Regulatory Authority Rule 2030) as mitigating in part the potential adverse consequences of rescinding Rule 206(4)-5. In any event, there is no current rulemaking process in place to rescind these other rules, and we would not anticipate such a process at least until the status of Rule 206(4)-5 is clearly resolved.