The SEC proposes to delete its pay-to-play rule

A regulator repairing a rule tells you the rule was imprecise. A regulator deleting one tells you it thinks the rule should not have existed in its current form, and that is a much less common thing to read.

On September 10 the Securities and Exchange Commission proposed rescinding the political contribution rule under the Investment Advisers Act of 1940. The proposal, published at document 2026-18424 under Release No. IA-6994 and RIN 3235-AN65, is styled in the Federal Register as a proposed rule and rescission.

The rule being removed is the two-year time-out. It prohibits an adviser from providing advisory services for compensation to a government client for two years after the adviser, or any covered associate, makes a contribution to certain categories of elected officials or candidates.

The design is deliberately blunt. There is no need to prove that a contribution bought anything, because proving that is nearly impossible; the rule assumes the risk and removes the business opportunity instead. That bluntness is the source of both its effectiveness and the Commission's complaint.

In the more than fifteen years since adoption, the Commission says, implementation difficulties have produced significant unintended consequences — including compliance practices at some advisers that may have had the effect of restricting all political contributions by the firm and its employees.

That is a striking admission to put in a proposing release. A securities rule aimed at the relationship between advisers and public pension money appears, in practice, to have led some firms to discourage employees from participating in politics at all, because a single contribution by the wrong person could cost the firm a mandate.

Market participants told the Commission the rule is burdensome, complex, lacking in clarity and effectively a strict liability standard. Strict liability is the operative phrase: intent does not matter, the identity of the contributor may not be known to compliance in advance, and the penalty is the loss of fee revenue.

The Commission's stated basis for removal is that other tools already cover the conduct. It points to the antifraud provisions, the fiduciary duty, the compliance rule and the code of ethics rule as likely sufficient to address pay-to-play practices, while letting each adviser tailor its approach to its own risks.

Whether that holds depends on what those tools actually reach. Antifraud requires a misstatement or a scheme. Fiduciary duty requires a conflict that harms a client. A contribution that precedes a mandate may involve neither, which is the gap the bright-line rule was written to cover.

The Commission is also proposing to amend the books and records rule in line with the rescission, which is the tell that this is intended as a full removal rather than a softening. Recordkeeping obligations exist to evidence compliance with a rule; delete the rule and the records have nothing to evidence.

The comment period closes on November 9, 2026. The firms best placed to explain what the rule cost them are the ones that spent fifteen years building compliance around it, and they are unlikely to be the ones arguing loudest for keeping it.