SEC proposes to rescind adviser pay-to-play rule for government clients

The Securities and Exchange Commission is seeking to rescind Investment Advisers Act Rule 206(4)-5, the pay-to-play regulation adopted in 2010 that generally bars an investment adviser from providing compensated advisory services to a government client for two years after making certain political contributions, PLANADVISER reported. The September 3 proposal would also remove the recordkeeping requirements tied to the rule, while the rest of the Advisers Act, including anti-fraud provisions, fiduciary obligations, compliance requirements and codes of ethics, would remain in place, according to the agency.

The rule was written to protect the beneficiaries of invested state and municipal assets, pension plans and their participants among them, by keeping political contributions from being used to influence the officials who hire investment advisers. Its mechanism was blunt: a contribution started a two-year clock, and compensated advisory work for a government client stopped while it ran.

SEC Chairman Paul Atkins framed the rescission as relief from a rule that was, in his words, "needlessly penalizing, burdensome and complex," one that discouraged political participation and imposed significant penalties for relatively small political contributions. In a separate statement, he argued that contributions are better handled elsewhere. "Matters involving political contributions are more properly governed by local ordinances, state laws, and federal election regulations—not by the SEC," Atkins said. "Rescinding the rule would not open the door to fraud because sufficient protections exist and have always existed."

The proposal leans on that second claim: the agency says the remaining provisions of the Advisers Act do the work, and the coverage noted that many existing restrictions would survive through other federal, state and local regulations. On the SEC's account, advisers to government clients are not being left unsupervised so much as supervised by someone else.

Michael Koffler, a partner at Eversheds Sutherland and a former SEC staff member, described how far past the rule's terms many firms built their defenses. Because of what a violation would cost, many advisers barred political contributions across the board by anyone at the firm, and some monitored contributions that newly hired employees had made before they joined. "In case they're wrong, it's a civil fraud claim against them," Koffler said, "so that meant firms built a natural buffer against the rule."

That account matters for sizing the relief. The two-year bar attaches to certain contributions and to compensated advisory services for a government client, but what many firms operated was broader — a prohibition extended across staff and, in some cases, backward in time to contributions made before employment began. The compliance cost the proposal lifts is therefore only partly the cost of Rule 206(4)-5; the rest is the cost of the buffer firms chose to hold against being wrong, and that buffer was sized by the severity of the sanction, which Koffler describes as a civil fraud exposure rather than a technical one. Removing the trigger does not by itself remove the reason a firm with a deep public-plan book might keep the ban, and the operation with the most state and municipal mandates to protect likely has the least appetite to be first to relax anything.

Where the relief actually lands depends on the layer Atkins pointed to, because state and local restrictions arrive as a map rather than a line. An adviser whose public-plan clients sit in one state may find the residue thin. A firm with mandates spread across many jurisdictions may find that the single federal rule it is losing was the cheaper regime to run, since one rule is one policy to write and a patchwork is not. The SEC does not claim a net reduction for every firm, and the coverage does not quantify the savings; how much cost falls depends on where the book sits.

The change is also one of mechanism. The rule acted on a fact — a contribution — and closed the door for two years. The protections the agency says will remain act on conduct, and the exposure Koffler describes is a civil fraud claim, which is what a firm carries when its judgment about a contribution turns out to be wrong. That distinction decides how much the rescission is worth: if "sufficient protections exist and have always existed" holds everywhere a public plan sits, this is cleanup; if it holds unevenly, the protection available to a public pension participant turns on where the plan is domiciled, a variance the federal rule did not create.

What the rule produced, on Koffler's account, was a compliance apparatus broader than its own terms, maintained by firms that could not afford to be wrong about a judgment call. Whether they keep that apparatus once the two-year trigger is gone is now each firm's decision, made against the cost of the state and local rules that outlast this proposal. The coverage does not say when the SEC will act or how long the process will run.