SEC Proposes Rescinding Political Contribution Rule for Investment Advisers

The Securities and Exchange Commission proposed to rescind its “pay-to-play” rule, saying the regulation has effectively suppressed political speech and punished advisers for small, often impulsive donations to candidates in both parties.

The rule bars investment advisers from providing compensated advisory services to a government client for two years after making a political contribution to certain elected officials or candidates. It also imposes related recordkeeping requirements.

The Commission said the rule, adopted in 2010, has led to significant unintended consequences, including prohibitions by some advisers on political contributions at the state and local level. Advisers have said it is operationally challenging and creates a de facto strict liability standard, where small donations or “foot faults” can trigger substantial prohibitions and fines.

SEC Chairman Paul S. Atkins said the rule is overly prescriptive and handicaps advisory firms when an employee makes a donation before joining the business. He said political contribution matters are more properly governed by local ordinances, state laws and federal election regulations, not the SEC.

The proposal would rescind Advisers Act Rule 206(4)-5 and amend the Advisers Act recordkeeping rule to remove related provisions. Other requirements under the Advisers Act would remain, including prohibitions on fraud, fiduciary duty requirements, the compliance rule and the code of ethics rule.

The public comment period will remain open for 60 days after the proposing release is published in the Federal Register.