FROM: Elias Law Group LLP
Last Thursday, the Securities and Exchange Commission (“SEC”) proposed repealing Rule 206(4)-5 – the so-called “pay-to-play” rule – in its entirety. Since 2010, the rule has barred an investment adviser from receiving compensation for advisory services provided to a government client for two years after the adviser or a “covered associate” contributed to an official or candidate in a position to influence the award of advisory business. It also imposes restrictions on covered associates soliciting funds for such officials, candidates, or political parties. And, in practice, the rule has severely restricted political giving to other organizations, such as PACs and certain nonprofits. The comment period runs for 60 days after publication in the Federal Register.
What the Rule Restricts Today
A contribution by a covered associate – generally, an adviser’s executive officers, employees who solicit government entities, their supervisors, and adviser-controlled PACs – to a state or local official, or a candidate whose office can influence the hiring of an adviser, triggers a two-year ban on compensation from that government entity. The ban attaches automatically, without regard to intent. The de minimis exception permits an individual covered associate to give up to $350 per election to a candidate for whom the individual may vote, and $150 per election to one for whom the individual may not. Those figures have not been adjusted since 2010 and are far below the contribution limits in nearly every jurisdiction. The rule also bars an adviser and its covered associates from soliciting or coordinating contributions to covered officials, or payments to state or local political parties where the adviser does or seeks business.
The rule’s chilling effect has extended well past the contributions that the rule proscribes. In practice, many covered personnel have stopped giving to PACs altogether or will give only on the condition that the recipient committee agrees to significant restrictions on how the funds are spent – commonly, a commitment not to use the contribution to support any candidate or officeholder who might qualify as an “official” under the rule. Some have begun applying the same conditions to contributions to 501(c)(4) organizations. These restrictions are plainly not required by the rule but are nonetheless features of many companies’ donation policies.
What Would Still Restrict Giving
Parallel rules are untouched by the proposal. MSRB Rule G-37, FINRA Rule 2030, and Exchange Act Rule 15Fh-6 would continue to apply on their own terms. So would state and local restrictions – the release cites Connecticut’s and New Jersey’s contractor contribution limits, Rhode Island’s vendor affidavit requirement, South Carolina’s post-award contribution ban, and Philadelphia’s disclosure ordinance, among others.
Next Steps
The proposal is not final, and the existing rule remains fully in effect through any rulemaking. Comments are due 60 days after Federal Register publication (File No. S7-2026-31). In addition to weighing on rescission, the proposal also asks whether the SEC should amend the rule rather than rescind it outright and offers potential suggestions on how to do so.
Elias Law Group lawyers are available to advise on the impact of the rule and other so-called “pay-to-play” rules on prospective contributions to state and local candidates and officials, political parties, and other organizations.