The U.S. Securities and Exchange Commission (SEC) is moving to ease its "pay-to-play" rule, which restricts investment advisers from working for public pension funds if they have made political donations to state and local elected officials. The proposed changes were submitted to the White House for review on Wednesday, as indicated by a posting on the Office of Management and Budget's website.
The SEC stated that the reform is aimed at reducing identified compliance burdens. A spokesperson for the SEC noted that the current rule "creates unnecessary compliance burdens and overly restricts investment advisers," and that the commission is responding to years of complaints from across the political spectrum. The rule, adopted in 2010 as Rule 206(4)-5 under the Investment Advisers Act of 1940, imposes strict liability, barring an adviser for two years from collecting advisory fees if a covered associate donates to an official who can influence a government entity's choice of manager.
This initiative aligns with President Donald Trump's broader deregulation agenda and is occurring ahead of the November 3 midterm elections. However, the move is expected to face significant opposition from Democratic lawmakers, who argue that loosening these restrictions could invite corruption and jeopardize trillions of dollars in public pension funds. As of the first quarter of 2026, U.S. public pension funds held approximately $6.86 trillion, according to the National Association of State Retirement Administrators.
The current rule also prohibits covered employees from fundraising for candidates or state and local parties where their firm is seeking government advisory business. While the SEC's regulatory agenda for 2026 included potential amendments, signaling action, the current rule remains fully operative. Investment advisers are advised to maintain compliance through the 2026 election cycle until formal changes are enacted.
