SEC Proposes to Rescind the Pay-to-Play Rule and Delays Compliance Date for 2024 Form PF Amendments to July 1, 2027

Proposed Recission of the Pay-to-Play Rule

Summary

On September 3, 2026, the Securities and Exchange Commission (SEC) issued a proposal (the “Proposal”) to rescind:

• the Political Contribution Rule (Rule 206(4)-5 under the Investment Advisers Act of 1940 (the “Advisers Act”)) commonly known as the Pay-to-Play Rule (the “Rule”), and
• related recordkeeping requirements (Advisers Act Rule 204-2(a)(18))

(SEC.gov | SEC Proposes Rescission of Political Contribution Rule for Investment Advisers (the “Proposal”)).

The Rule applies to SEC registered investment advisers and exempt reporting advisers.

Since its adoption in 2010, the Rule arguably has been one of the most burdensome and worrisome rules for investment advisers due to:

• the difficulty of applying the Rule (e.g., the definitions of “covered associate” and “official” are often challenging to apply), and
• the impact of its “de facto strict liability” standard even for minor “foot fault” violations (i.e., outsized potential consequences attend even small political contributions with no indications of pay-to-play purposes).

The Proposal is likely to be a welcome relief for the industry.

SEC’s Change of Philosophy Regarding the Rule

The Proposal notes that rather than the prescriptive, strict liability approach of the current Rule, the SEC’s preference now is for a more “principles-based” approach permitting advisers to tailor their compliance approach regarding political contributions in accordance with their own business models and risk profiles. Citing several cases, the Proposal further highlights that:

• enforcement actions related to political contributions were brought prior to the Rule’s adoption, and
• the Rule’s withdrawal would not prevent the SEC’s future pursuit of cases involving fraudulent pay-to-play practices.

In a statement accompanying the Proposal, SEC Chairman Paul Atkins highlights the SEC’s 15 years of experience with the Rule, noting that “the SEC is not the nation’s elections regulator” and indicating that the Rule “has proven only to be needlessly penalizing, burdensome and complex to implement, and misaligned with the SEC’s mandate.” He acknowledges that application of the Rule has resulted in many unintended consequences, including a chill on core political speech protected by the First Amendment, as, e.g., many advisers do not adopt the Rule’s de minimis contribution limits but instead opt to “impose blanket prohibitions on employee political contributions rather than navigate the Rule’s complexities.”

Further, the Chairman states that:

• “matters involving political contributions are more properly governed by local ordinances, state laws, and federal election regulations — not by the SEC”;
• the Advisers Act anti-fraud provisions and fiduciary duty obligations would cover political contributions that could impact the selection of an investment adviser, and certain Advisers Act rules bolster the anti-fraud provisions, including the Compliance Program Rule (Rule 206(4)-7) and Code of Ethics Rule (Rule 204A-1); and
• recission of the Rule “would not open the door to fraud because sufficient protections exist (and have always existed)” (SEC.gov | Statement on Proposal to Rescind “Pay-to-Play” Rule).

Similarly, the Proposal points out that, in addition to the anti-fraud provisions and rules specified above, there are numerous other federal, state, and local pay-to-play rules that likely would continue to address some pay-to-play practices despite recission of the Rule. Further, the Proposal notes that an adviser may choose to retain its existing pay-to-play policy because, e.g., the adviser:

• is subject to more stringent state regulations,
• is a dual-registered entity subject to rule 15Fh-6 under the Securities Exchange Act of 1934,
• has an affiliated broker or dealer required to comply with the MSRB rules or FINRA Rule 2030, which include prohibitions like those in the Rule, and it is not cost-effective to use separate policies, or
• otherwise determines the existing policy is the most appropriate to address its pay-to-play risks.

In any case, recission of the Rule would allow advisers to tailor their pay-to-play policies to address their own business model and risk profile as they see fit.

Well-Known Issues with the Current Rule — “Foot Faults” and Look-Backs

Addressing a Rule violation, including “foot faults,” presents an adviser with several unsavory choices:

• apply the narrow exception for returned contributions in the unlikely event its highly restrictive requirements can be satisfied;
• forego compensation for two years from the state or local pension plan investor(s) potentially impacted by the influence of the official in receipt of the contribution, which likely would have a devastating impact on the advisory business;
• undertake an expensive and lengthy application process for exemptive relief;
• take the risks of:
  • being subject to an enforcement action,
  • absorbing a large fine, and
  • disclosing publicly a violation on its Form ADV for 10 years, which could discourage further investment from pension plans and significantly impact the adviser’s business.

Other potential negative effects of a Rule violation, including “foot faults,” are public pension plans unable to:

• hire the most qualified and/or cost-effective adviser, or
• continue accepting services from a valued adviser.

Compliance with the Rule can also have negative effects because advisers may be unable to:

• hire certain qualified applicants, or
• promote certain qualified employees.

due to either the six-month or two-year look-back period regarding such persons’ political contributions, which in turn may discourage political contributions and the exercise of First Amendment rights across the industry, even among individuals not currently subject to the Rule.

Request for Comment

Importantly, the SEC includes 20 questions in the Proposal and seeks comment on all aspects of the Proposal, including alternatives to full rescission, e.g., whether to:

• increase the Rule’s de minimis contribution thresholds,
• shorten or eliminate the look-back periods and/or the two-year time out,
• narrow certain aspects of the definitions of “official” and “covered associate,” or
• expand the availability of exemptive relief.

Comments are due 60 days after publication of the Proposal in the Federal Register.

Extension of the Deadline for the 2024 Form PF Amendments

On August 31, 2026, the SEC voted to extend the compliance date regarding the 2024 Form PF amendments from October 1, 2026, to July 1, 2027, while the SEC and its staff work to conclude their additional consideration of these amendments (SEC.gov | Statement on Extension of 2024 Form PF Amendments).