Proposed Rule2026-18424
Political Contributions by Certain Investment Advisers
Primary source
Metadata and text below are from the Federal Register, a public-domain U.S. government work. Always verify the official published version before relying on it for any legal matter.
Published
September 10, 2026
Effective
September 10, 2026
Issuing agencies
Securities and Exchange Commission
Abstract
The Securities and Exchange Commission (the "Commission" or the "SEC") is proposing to rescind the political contribution rule under the Investment Advisers Act of 1940 (the "Advisers Act"), which prohibits investment advisers from providing investment advisory services for compensation to a government client for two years after an adviser or any covered associate of the adviser makes a contribution to certain categories of elected officials or candidates, among other prohibitions. In the more than fifteen years since the rule was adopted, implementation challenges associated with the political contribution rule have resulted in a range of significant unintended consequences, including compliance practices among some investment advisers that may have had the effect of restricting all political contributions by the investment advisers and their employees. Market participants also have stated that the political contribution rule is burdensome, complex, and both lacks clarity and creates a de facto strict liability standard. The Commission is of the view that other existing requirements of the Advisers Act and its associated rules, including prohibitions on fraud, fiduciary duty requirements, the compliance rule, and the code of ethics rule (defined below), are likely sufficient to address pay-to-play practices while allowing an adviser the flexibility to implement an approach that is more appropriately tailored to its particular risks, rendering the political contribution rule unnecessary. The Commission also is proposing to amend the rule under the Advisers Act pertaining to books and records consistent with the proposed rescission.
Full Text
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<title>Federal Register, Volume 91 Issue 174 (Thursday, September 10, 2026)</title>
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[Federal Register Volume 91, Number 174 (Thursday, September 10, 2026)]
[Proposed Rules]
[Pages 57698-57726]
From the Federal Register Online via the Government Publishing Office [<a href="http://www.gpo.gov">www.gpo.gov</a>]
[FR Doc No: 2026-18424]
[[Page 57697]]
Vol. 91
Thursday,
No. 174
September 10, 2026
Part II
Securities and Exchange Commission
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17 CFR Part 275
Political Contributions by Certain Investment Advisers; Proposed Rule
Federal Register / Vol. 91, No. 174 / Thursday, September 10, 2026 /
Proposed Rules
[[Page 57698]]
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SECURITIES AND EXCHANGE COMMISSION
17 CFR Part 275
[Release No. IA-6994; File No. S7-2026-31]
RIN 3235-AN65
Political Contributions by Certain Investment Advisers
AGENCY: Securities and Exchange Commission.
ACTION: Proposed rule; rescission.
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SUMMARY: The Securities and Exchange Commission (the ``Commission'' or
the ``SEC'') is proposing to rescind the political contribution rule
under the Investment Advisers Act of 1940 (the ``Advisers Act''), which
prohibits investment advisers from providing investment advisory
services for compensation to a government client for two years after an
adviser or any covered associate of the adviser makes a contribution to
certain categories of elected officials or candidates, among other
prohibitions. In the more than fifteen years since the rule was
adopted, implementation challenges associated with the political
contribution rule have resulted in a range of significant unintended
consequences, including compliance practices among some investment
advisers that may have had the effect of restricting all political
contributions by the investment advisers and their employees. Market
participants also have stated that the political contribution rule is
burdensome, complex, and both lacks clarity and creates a de facto
strict liability standard. The Commission is of the view that other
existing requirements of the Advisers Act and its associated rules,
including prohibitions on fraud, fiduciary duty requirements, the
compliance rule, and the code of ethics rule (defined below), are
likely sufficient to address pay-to-play practices while allowing an
adviser the flexibility to implement an approach that is more
appropriately tailored to its particular risks, rendering the political
contribution rule unnecessary. The Commission also is proposing to
amend the rule under the Advisers Act pertaining to books and records
consistent with the proposed rescission.
DATES: This proposal was published in the Federal Register on September
10, 2026. Comments should be received on or before November 9, 2026.
ADDRESSES: Comments may be submitted by any of the following methods:
Electronic Comments
<bullet> Use the Commission's internet comment form (<a href="https://www.sec.gov/comments/s7-2026-31/political-contributions-certain-investment-advisers">https://www.sec.gov/comments/s7-2026-31/political-contributions-certain-investment-advisers</a>); or
<bullet> Send an email to <a href="/cdn-cgi/l/email-protection#b8cacdd4dd95dbd7d5d5ddd6cccbf8cbdddb96dfd7ce"><span class="__cf_email__" data-cfemail="5022253c357d333f3d3d353e2423102335337e373f26">[email protected]</span></a>. Please include
File Number S7-2026-31 on the subject line.
Paper Comments
<bullet> Send paper comments to Vanessa A. Countryman, Secretary,
Securities and Exchange Commission, 100 F Street NE, Washington, DC
20549-1090.
All submissions should refer to File Number S7-2026-31. This file
number should be included on the subject line if email is used. To help
the Commission process and review your comments more efficiently,
please use only one method of submission. The Commission will post all
comments on the Commission's website (<a href="https://www.sec.gov/rules-regulations/public-comments/s7-2026-31">https://www.sec.gov/rules-regulations/public-comments/s7-2026-31</a>). Do not include personally
identifiable information in submissions; you should submit only
information that you wish to make available publicly. The Commission
may redact in part or withhold entirely from publication submitted
material that is obscene or subject to copyright protection.
Studies, memoranda, or other substantive items may be added by the
Commission or staff to the comment file during this rulemaking. A
notification of the inclusion in the comment file of any such materials
will be made available on the Commission's website. To ensure direct
electronic receipt of such notifications, sign up through the ``Stay
Connected'' option at <a href="http://www.sec.gov">www.sec.gov</a> to receive notifications by email.
A summary of the proposal of not more than 100 words is posted on
the Commission's website (<a href="https://www.sec.gov/rules-regulations/2026/09/s7-2026-31">https://www.sec.gov/rules-regulations/2026/09/s7-2026-31</a>).
FOR FURTHER INFORMATION CONTACT: Janet Jun, Lawrence Pace, and Mark
Stewart, Senior Counsels, Sirimal R. Mukerjee, Senior Special Counsel,
or Robert Holowka, Assistant Director, Investment Adviser Regulation
Office, at (202) 551-6787, Division of Investment Management,
Securities and Exchange Commission, 100 F Street NE, Washington, DC
20549-8549.
SUPPLEMENTARY INFORMATION: The Commission is proposing to rescind 17
CFR 275.206(4)-5 (``rule 206(4)-5'' or the ``political contribution
rule'') and make related amendments to 17 CFR 275.204-2 (``rule 204-2''
or the ``recordkeeping rule'') under the Advisers Act.
Table of Contents
I. Introduction
A. Background
B. Existing Regulatory Framework
C. The Political Contribution Rule Since Adoption
II. Discussion
A. Proposed Rescission of Rule 206(4)-5 Under the Advisers Act
1. Basis for the Rescission of the Political Contribution Rule
2. Compliance Policies and Procedures and Codes of Ethics
3. Request for Comment
B. Proposed Amendments to Rule 204-2 Under the Advisers Act
III. Economic Analysis
A. Introduction
B. Economic Baseline
1. Current Regulatory Framework and Market Practice
2. Affected Parties
C. Benefits and Costs
1. Benefits of Rescinding the Political Contribution Rule
2. Costs of Rescinding the Political Contribution Rule
3. Costs and Benefits of Amending Rule 204-2
4. Aggregate Monetized Benefits and Costs
D. Effects on Efficiency, Competition, and Capital Formation
1. Efficiency
2. Competition
3. Capital Formation
E. Reasonable Alternatives
1. Policies and Procedures Requirement
2. Amending the Requirements of Rule 206(4)-5
3. Considering Adviser Size
F. Request for Comment
IV. Paperwork Reduction Act
A. Introduction
B. Rule 204-2
C. Rule 0-4
D. Rule 206(4)-7
E. Request for Comment
V. Initial Regulatory Flexibility Act Analysis
A. Reasons for and Objectives of Proposed Actions
B. Legal Basis
C. Small Entities Subject to the Amendments
D. Projected Reporting, Recordkeeping, and Other Compliance
Requirements
E. Duplicative, Overlapping, or Conflicting Federal Rules
F. Significant Alternatives
G. General Request for Comment
VI. Congressional Review Act
VII. Other Matters
Statutory Authority
I. Introduction
Investment advisers play a vital role in helping governments
responsibly manage public funds and honor commitments to their
taxpayers, public-sector employees and retirees, and retirement benefit
plan participants. In 2010, the Commission adopted the political
contribution rule with respect to investment advisers, which was
intended to reduce the possibility that
[[Page 57699]]
campaign contributions and other support of elected officials and
candidates for public office by investment advisers and covered
associates would result in fraudulent activity.\1\
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\1\ See Political Contributions by Certain Investment Advisers,
Investment Advisers Act Release No. 3043 (July 1, 2010) [75 FR 41018
(July 14, 2010)] (the ``2010 Adopting Release'') (stating that the
Commission believed ``rule 206(4)-5 is a necessary and appropriate
measure to prevent fraudulent acts and practices in the market for
the provision of investment advisory services to government entities
by prohibiting investment advisers from engaging in pay to play
practices'').
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We propose to rescind the political contribution rule in its
entirety based on our experience administering the rule since its
adoption (informed by feedback from market participants), including our
observations that the rule:
<bullet> Has led to significant unintended consequences, including
prohibitions by some investment advisers on any and all political
contributions made by the investment adviser and its employees at the
State and local level, which affects core political speech protected by
the First Amendment; \2\
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\2\ See 2024 Investment Management Compliance Testing Survey
(2024) (the ``2024 Investment Management Compliance Testing
Survey''), available at <a href="https://www.investmentadviser.org/wp-content/uploads/2024/07/2024_IMCT-Survey.pdf">https://www.investmentadviser.org/wp-content/uploads/2024/07/2024_IMCT-Survey.pdf</a> (stating that 12.41
percent of investment advisers which responded to the survey
prohibit all political contributions).
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<bullet> Is operationally challenging for investment advisers to
implement;
<bullet> May impose significant burdens that may not be justified
by its benefits; and
<bullet> Lacks clarity and creates a de facto strict liability
standard, which can lead to situations where small donations or ``foot
faults'' potentially trigger substantial prohibitions.
We are of the view that rescinding the current rule in its entirety
and instead relying on other existing requirements of the Advisers Act
and associated rules, including prohibitions on fraud, fiduciary duty
requirements, 17 CFR 275.206(4)-7 (``rule 206(4)-7'' or the
``compliance rule''), and 17 CFR 275.204A-1 (``rule 204A-1'' or the
``code of ethics rule''), as well as other existing Federal, State and
local requirements, could avoid many of the issues and unintended
consequences associated with the political contribution rule and lead
to more appropriate measures by investment advisers to address pay-to-
play practices. In addition, our experience with the current rule has
underscored the inherent difficulty of designing specific objective
criteria for a rule expressly designed to address pay-to-play practices
without unintended adverse effects on investment adviser contributions,
employee hiring, investment advisory services, and political speech, as
well as overall significant compliance burdens that may not be
justified by the benefits.
We therefore are of the view that rescinding the political
contribution rule and permitting investment advisers to address their
pay-to-play risks in a principles-based manner consistent with other
existing obligations under the Advisers Act would be appropriate. That
is, other existing requirements of the Advisers Act and its associated
rules operate to require investment advisers to address pay-to-play
practices, but with the flexibility to design tailored compliance
policies and procedures and codes of ethics in accordance with their
own business models and risk profiles.\3\ The rescission of the
political contribution rule also may lead to government entities being
able to select from a larger pool of investment advisers as well as
lower prices for the provision of investment advisory services to
public pension plans.
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\3\ See infra section I.A (describing what constitutes pay-to-
play practices in more detail).
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A rescission of the Commission's political contribution rule would
not curtail any other existing criminal and civil laws against public
sector corruption. Other Federal, State, and local laws and regulations
regarding the public procurement process (including the awarding of
investment advisory mandates) exist independently of the political
contribution rule and would not be limited or otherwise impacted by its
rescission.\4\
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\4\ See infra footnotes 48 through 51 and accompanying text for
examples of such Federal, State and local laws and regulations
designed to prevent pay-to-play practices.
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Similarly, the Commission's ability to bring cases against
investment advisers for fraudulent practices and violations of
fiduciary duty for engaging in pay-to-play practices would remain
unchanged. Investment advisers' fiduciary duty obligations and the
broad anti-fraud provisions under the Federal securities laws would
continue to apply following the proposed rescission of the political
contribution rule.
A. Background
State and local government assets, including nearly $6 trillion of
public pension plan assets,\5\ are administered by government employees
and elected officials.\6\ Some of these government employees and
elected officials are directly or indirectly responsible for selecting
the individual investment advisers entrusted with managing these assets
on a discretionary basis, providing other investment advisory services,
and allowing State and local government entities to invest in funds
managed or advised by such advisers.
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\5\ The term ``public pension plan'' is used interchangeably
with ``government client'' and ``government entity'' in this
proposing release. However, rule 206(4)-5 applies broadly to
investment advisory activities for government clients, regardless of
whether they are pension plans.
\6\ See Census Bureau Releases 2024 Annual Survey of Public
Pensions (May 29, 2025) (the ``2024 Annual Survey of Public
Pensions''), available at <a href="https://www.census.gov/newsroom/press-releases/2025/2024-annual-survey-public-pensions.html">https://www.census.gov/newsroom/press-releases/2025/2024-annual-survey-public-pensions.html</a>.
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Contributions made to a candidate for political office are a form
of speech that is protected by the First Amendment, and the prevention
of quid pro quo corruption or its appearance is the only permissible
ground for restricting or limiting such speech.\7\ In the context of
providing or seeking to provide investment advisory services to State
and local governments, in some instances, investment advisers have
engaged in pay-to-play practices that embody such quid pro quo
corruption or highlight the risk of it.\8\ These practices (``pay-to-
play practices'') arise when:
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\7\ See FEC v. Ted Cruz for Senate, 596 U.S. 289, 305 (2022).
\8\ See 2010 Adopting Release, supra footnote 1, at section I
(discussing pay-to-play practices that the political contribution
rule is designed to address). See also N.Y. Republican State Comm.
v. Sec. & Exch. Comm'n, 927 F.3d 499, 500-02 (D.C. Cir. 2019).
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<bullet> Political contributions influence the selection of an
adviser to provide investment advisory services to State and local
governments, including by constituting a prerequisite to competing for
an advisory role; or
<bullet> Investment advisers seek to influence an elected
official's award of advisory contracts by making or soliciting
contributions to that official.
Contributions made pursuant to a pay-to-play arrangement may take a
variety of forms, including an adviser's direct contributions to
government officials, contributions to an election committee for
government officials, solicitation of third parties to make
contributions or payments to government officials or political parties
in the State or locality where an adviser seeks to provide services,
and payments to third parties to solicit government business.\9\
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\9\ Id.
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When contributions influence the award of these advisory roles,
including by constituting a prerequisite to competing for an advisory
role, the process by which government officials select investment
advisers can be
[[Page 57700]]
transformed into one in which contributions to a government entity
official, rather than the competence and cost of investment advisers,
drive the award of contracts.\10\ Because such actions may result in
public pension plans not being managed by the best available investment
advisers or paying higher fees,\11\ investment advisers engaging in
pay-to-play practices have a conflict of interest with, and compromise
their fiduciary duties to, the public pension plan clients they advise
and can defraud those plans, other prospective pension plan clients,
and public pension plan investors.\12\ These practices can harm
retirees that rely on these public pension plans and the taxpayers of
the State and municipal governments that must honor these plan
obligations.\13\
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\10\ See New York Republican State Comm., 927 F.3d at 505, supra
footnote 8.
\11\ See id.
\12\ See 2010 Adopting Release, supra footnote 1, at section
II.A. See also infra section II.A (describing in more detail how
pay-to-play practices constitute fraud).
\13\ See 2024 Annual Survey of Public Pensions, supra footnote 6
(stating that ``36 million people (including inactive employees not
currently contributing to pensions but eligible for future benefits)
participated in state and local retirement plans in 2024'').
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Pay-to-play practices therefore are inconsistent with an adviser's
role as a fiduciary under the Advisers Act and constitute fraud under
the Federal securities laws.\14\ In this regard, while government
corruption and procurement fraud matters generally come under the
jurisdiction of Federal, State, and municipal authorities, investment
advisers also are subject to the Advisers Act and other Federal
securities laws and regulations, which further restrict pay-to-play
practices and other fraudulent conduct and provide for penalties and
bans relating to such conduct.
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\14\ See 2010 Adopting Release, supra footnote 1, at section
II.A (stating that `` `pay to play' arrangements are inconsistent
with an adviser's fiduciary obligations'' and ``payments to state
officials as a quid pro quo for obtaining advisory business as well
as other forms of `pay to play' violate the antifraud provisions of
section 206 of the Advisers Act'').
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B. Existing Regulatory Framework
In 2010, the Commission adopted the political contribution
rule.\15\ The rule sets forth a detailed, prescriptive framework that
generally provides for the following:
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\15\ Several enforcement actions related to pay-to-play schemes
were brought under sections 206(1) or (2) of the Advisers Act [15
U.S.C. 80b-6(1) and (2)] prior to the rule's adoption. See, e.g.,
SEC v. Henry Morris, et al., Litigation Release No. 21036 (May 12,
2009); SEC v. Paul J. Silvester, et al., Litigation Release No.
16759 (Oct. 10, 2000); Litigation Release No. 20027 (Mar. 2, 2007);
Litigation Release No. 19583 (Mar. 1, 2006); Litigation Release No.
18461 (Nov. 17, 2003); Litigation Release No. 16834 (Dec. 19, 2000);
SEC v. DiBella, 587 F.3d 553 (2nd Cir. 2009) (affirming liability
for aiding and abetting violations of section 206(2)); In the Matter
of Thayer Capital Partners, TC Equity Partners IV, L.L.C., TC
Management Partners IV, L.L.C., and Frederick V. Malek, Investment
Advisers Act Release No. 2276 (Aug. 12, 2004) (settled matter); In
the Matter of Frederick W. McCarthy, Investment Advisers Act Release
No. 2218 (Mar. 5, 2004) (settled matter). Certain of these
enforcement actions were also brought under section 10(b) of the
Securities Exchange Act of 1934 (the ``Exchange Act'') and section
17(a) of the Securities Act of 1933 [15 U.S.C. 78j(b) and 77q(a)].
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Prohibitions. The political contribution rule provides for certain
express prohibitions:
<bullet> Ban on compensation and two-year lookback. The political
contribution rule generally makes it unlawful for an adviser \16\ to
receive compensation for providing investment advisory services to a
government entity for a two-year period after the adviser or any of its
covered associates \17\ (including a person who becomes a covered
associate within two years after making a contribution) makes a
contribution to an official \18\ of a government entity or candidate
for such office, whose office is in a position to influence the award
of advisory business. The two-year time out was intended to discourage
investment advisers from engaging in pay-to-play practices by requiring
a ``cooling-off period'' during which the effects of a political
contribution on the selection process can be expected to dissipate.\19\
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\16\ Rule 206(4)-5 applies to any investment adviser that is
registered (or required to be registered) with the Commission, or
that is (1) an adviser unregistered in reliance on the exemption
available under section 203(b)(3) of the Advisers Act [15 U.S.C.
80b-3(b)(3)] (``foreign private advisers'') or (2) an exempt
reporting adviser as defined in rule 204-4(a) under the Advisers
Act. Rule 206(4)-5(a)(1). Section 203(b)(3) of the Advisers Act was
amended in 2010 to remove the exemption for an adviser that does not
hold itself out to the public as an investment adviser and that has
fewer than 15 clients during the last 12 months, and in its place to
insert the current exemption for foreign private advisers. See 15
U.S.C. 80b-3(b)(3).
\17\ A ``covered associate'' of an investment adviser is defined
as: (1) any general partner, managing member or executive officer,
or other individual with a similar status or function; (2) any
employee who solicits a government entity for the investment adviser
and any person who supervises, directly or indirectly, such
employee; and (3) any political action committee controlled by the
investment adviser or by any of its covered associates. Rule 206(4)-
5(f)(2). Under the rule, an ``executive officer'' of an adviser
includes the president, any vice president in charge of a principal
business unit, division or function, other officers with policy-
making functions, and other persons who perform similar policy-
making functions for the adviser. Rule 206(4)-5(f)(4).
\18\ An ``official'' is any person (including any election
committee for the person) who was, at the time of the contribution,
an incumbent, candidate, or successful candidate for elective office
of a government entity if the office is directly or indirectly
responsible for, or can influence the outcome of, the hiring of an
investment adviser by a government entity or has the authority to
appoint any person who is directly or indirectly responsible for, or
can influence the outcome of, the hiring of an investment adviser by
a government entity. See rule 206(4)-5(f)(6).
\19\ See 2010 Adopting Release, supra footnote 1, at section
II.B.2(a).
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<bullet> Ban on solicitation. The political contribution rule
generally prohibits advisers from paying persons to solicit government
entities for advisory business, unless such persons are (1) regulated
persons or (2) an executive officer, general partner, managing member
(or, in each case, a person with a similar status or function), or
employee of the adviser.\20\ The restriction on solicitors or
``placement agents'' was intended to prevent advisers from
circumventing the political contribution rule.\21\ The rule also
prohibits indirect payments, because the rule includes a provision that
makes it unlawful for an adviser or any of its covered associates to do
anything indirectly which, if done directly, would result in a
violation of the rule.\22\ A regulated person under the rule is a
registered investment adviser, a registered broker-dealer, or a
registered municipal advisor, in each case itself subject to pay-to-
play restrictions.\23\
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\20\ See rule 206(4)-5(a)(2).
\21\ See 2010 Adopting Release, supra footnote 1, at section
II.B.2(b).
\22\ See rule 206(4)-5(d).
\23\ See rule 206(4)-5(f)(9) (describing the meaning of
``regulated person'' under the rule).
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<bullet> Covered investment pools. An investment adviser to a
covered investment pool in which a government entity invests or is
solicited to invest is treated as though the adviser is providing or
seeking to provide investment advisory services directly to the
government entity.\24\
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\24\ See rule 206(4)-5(c); rule 206(4)-5(f)(3) (defining
``covered investment pool'').
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<bullet> Ban on coordination. The political contribution rule makes
it unlawful for an adviser or any of its covered associates to
coordinate, or to solicit any person or political action committee to
make, any (1) contributions to an official of a government entity to
which the investment adviser is providing or seeking to provide
investment advisory services; or (2) payments to a political party of a
State or locality where the investment adviser is providing or seeking
to provide investment advisory services to a government entity.\25\
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\25\ See rule 206(4)-5(a)(2)(ii).
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Exceptions. The political contribution rule includes exceptions for
de minimis contributions, new covered associates, and certain returned
contributions: \26\
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\26\ See rule 206(4)-5(b).
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[[Page 57701]]
<bullet> De minimis. Under the de minimis exception, individuals
are permitted to make aggregate contributions without triggering the
two-year time out of up to $350, per election, to an elected official
or candidate for whom the individual is entitled to vote, and up to
$150, per election, to an elected official or candidate for whom the
individual is not entitled to vote.\27\ The de minimis exception is
available only for contributions by individual covered associates, not
the investment adviser itself.
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\27\ See rule 206(4)-5(b)(1).
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<bullet> New covered associates. Under the exception for a new
covered associate, the two-year time out is not triggered by a
contribution made by a natural person more than six months prior to
becoming a covered associate, unless he or she solicits clients after
becoming a covered associate.\28\ As a result, the two-year look back
only applies to covered associates who solicit for the investment
adviser.
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\28\ See rule 206(4)-5(b)(2).
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<bullet> Returned contributions. The exception for certain returned
contributions provides an adviser with a limited ability to cure the
consequences of an inadvertent contribution to an official for whom the
covered associate was not entitled to vote.\29\ This exception is for
contributions that in the aggregate do not exceed $350 to any one
official per election, and the adviser must have discovered the
contribution within four months of the date of such contribution.\30\
Additionally, within 60 days of learning of the triggering
contribution, the contributor must obtain the return of the
contribution.
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\29\ See rule 206(4)-5(b)(3). This exception also includes
limitations on the number of times an adviser can rely on the
exception. See rule 206(4)-5(b)(3)(ii) and (iii).
\30\ See 2010 Adopting Release, supra footnote 1, at section
II.B.2(a)(7).
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Exemptions. An investment adviser may apply to the Commission for
an order exempting it from the two-year compensation ban.\31\ The rule
sets forth certain factors the Commission will consider in determining
whether to grant such an exemption. The Commission takes into account
the relevant facts and circumstances of each application in determining
whether to grant an exemption.\32\
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\31\ See rule 206(4)-5(e).
\32\ See 2010 Adopting Release, supra footnote 1, at section
II.B.2(f); see, e.g., True Venture Mgmt., L.L.C., Investment
Advisers Act Release Nos. 6932 (Dec. 11, 2025) (notice) and 6937
(Jan. 8, 2026) (order) and related application; J.P. Morgan
Investment Mgmt. Inc., Investment Advisers Act Release Nos. 6244
(Feb. 16, 2023) (notice) and 6261 (Mar. 14, 2023) (order) and
related application; AEW Capital Mgmt., L.P., Investment Advisers
Act Release Nos. 6224 (Jan. 24, 2023) (notice) and 6245 (Feb. 22,
2023) (order) and related application; Davidson Kempner Capital
Mgmt. LLC, Investment Advisers Act Release Nos. 3693 (Oct. 17, 2013)
(notice) and 3715 (Nov. 13, 2013) (order) and related application.
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In addition to the political contribution rule, the recordkeeping
rule includes several provisions that require registered investment
advisers to make and keep certain books and records relating to
compliance with the political contribution rule in order to aid the
Commission in examining for compliance with it.\33\
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\33\ See rule 204-2(a)(18) (describing the books and records
that advisers must retain).
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C. The Political Contribution Rule Since Adoption
Since the Commission adopted the political contribution rule in
2010, we have observed numerous challenges associated with the rule's
complexity and how broadly investment advisers have applied the rule.
Market participants \34\ also have stated, among other issues, that the
rule is burdensome, complex, and both lacks clarity and creates a de
facto strict liability standard.\35\ Based on these observations and
feedback from market participants, the Commission understands that the
political contribution rule has resulted in the following outcomes,
which, in certain instances, were not intended or anticipated: \36\
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\34\ For purposes of this Release, unless otherwise noted, we
refer to market participants, industry interest groups, and others
who have discussed with us or submitted comments to us as ``market
participants.''
\35\ See, e.g., Benjamin Neaderland & Thomas Bredar, It's Time
To Fix The SEC's Pay-To-Play Rule, Law360 (Mar. 17, 2025), available
at <a href="https://www.law360.com/articles/2310410">https://www.law360.com/articles/2310410</a>; Benjamin Neaderland &
Thomas Bredar, Recent Exemptions From Rule 206(4)-5 Demonstrate the
Importance of Strong Compliance Policies and Quick Corrective
Action, WilmerHale (Mar. 16, 2025), available at <a href="https://www.wilmerhale.com/en/insights/client-alerts/20230316-recent-exemptions-from-rule-20645-demonstrate-the-importance-of-strong-compliance-policies-and-quick-corrective-action">https://www.wilmerhale.com/en/insights/client-alerts/20230316-recent-exemptions-from-rule-20645-demonstrate-the-importance-of-strong-compliance-policies-and-quick-corrective-action</a>; Investment Adviser
Association Letter to Chairman Atkins Re: Regulation of Registered
Investment Advisers (May 1, 2025), available at <a href="https://www.investmentadviser.org/resources/iaa-letter-to-sec-chairman-atkins/">https://www.investmentadviser.org/resources/iaa-letter-to-sec-chairman-atkins/</a>; Investment Adviser Association Letter to Chairman Clayton
Re: Regulation of Registered Investment Advisers (May 10, 2017),
available at <a href="https://higherlogicdownload.s3.amazonaws.com/INVESTMENTADVISER/aa03843e-7981-46b2-aa49-c572f2ddb7e8/UploadedImages/publications/170510cmnt.pdf">https://higherlogicdownload.s3.amazonaws.com/INVESTMENTADVISER/aa03843e-7981-46b2-aa49-c572f2ddb7e8/UploadedImages/publications/170510cmnt.pdf</a>; Investment Adviser
Association Letter to Secretary Countryman Re: List of Rules to be
Reviewed Pursuant to the Regulatory Flexibility Act (Aug. 9, 2019),
available at <a href="https://www.sec.gov/comments/s7-10-19/s71019-5947271-189129.pdf">https://www.sec.gov/comments/s7-10-19/s71019-5947271-189129.pdf</a>; Managed Funds Association Letter to Chairman Clayton Re:
Managed Funds Association Regulatory Priorities (May 18, 2017),
available at <a href="https://www.mfaalts.org/wp-content/uploads/2017/05/MFA-Regulatory-Priorities-Letter-to-SEC-Chairman-Clayton.pdf">https://www.mfaalts.org/wp-content/uploads/2017/05/MFA-Regulatory-Priorities-Letter-to-SEC-Chairman-Clayton.pdf</a>; Private
Fund Sponsor Pay-to-Play Restrictions for Upcoming U.S. Election
Cycle, Kirkland & Ellis, Kirkland AIM (Aug. 7, 2024), available at
<a href="https://www.kirkland.com/publications/kirkland-aim/2024/08/private-fund-sponsor-pay-to-play-restrictions-for-upcoming-us-election-cycle">https://www.kirkland.com/publications/kirkland-aim/2024/08/private-fund-sponsor-pay-to-play-restrictions-for-upcoming-us-election-cycle</a>.
\36\ See also infra section III.B.1 for a discussion of
practices that investment advisers have adopted to address pay-to-
play risks.
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<bullet> The monetary losses associated with the two-year ban on
receiving compensation for providing investment advisory services to a
government client seem excessive, particularly given that the ban can
be triggered by contributions of as little as $150.\37\
---------------------------------------------------------------------------
\37\ See rule 206(4)-5(b)(1).
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<bullet> The two-year ban on compensation (which is automatically
triggered by the underlying contribution) creates a de facto strict
liability standard that does not permit consideration of the
complexities of the case outside of the exemptive process or the rule's
limited remedial provisions. This can lead to situations where small
donations or ``foot faults'' potentially trigger substantial
prohibitions under the rule.
<bullet> Advisers may be prevented from hiring or promoting
qualified individuals into roles where they would be considered a
``covered associate'' for either six months or two years following an
individual's contribution, despite the contribution potentially having
an attenuated relationship or no relationship to pay-to-play practices.
Whether the time period is two years or six months depends on whether
the person who becomes a covered associate solicits clients on behalf
of the investment adviser; if the employee does not solicit clients,
the shorter six-month time period applies.\38\ This means that if an
existing employee is promoted or transferred into a covered associate
role, under the rule the firm must review the employee's political
contributions from the previous six months or two years, as applicable.
A contribution during that time exceeding the de minimis threshold made
to an official of a government entity could lead to a two-year ban on
receiving compensation from that government entity, even though the
individual was not a covered associate at the time of the contribution.
A similar result can occur in situations where a person makes a
contribution while employed by a different adviser or company but
subsequently applies to a covered associate role at an adviser within
six months or two years (as applicable) following the contribution.
This could prevent an adviser from hiring a top candidate if the
person's past political
[[Page 57702]]
contributions could trigger the rule's two-year time out period on
receiving compensation from an existing government client of the
adviser even if such past contributions do not present a material risk
of engaging in a pay-to-play practice.
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\38\ See rule 206(4)-5(a)(1); rule 206(4)-5(b)(2).
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<bullet> Public pension plans may be unable to hire the most
qualified or cost-effective advisers or may ultimately lose the
services of an existing adviser with institutional knowledge of the
public pension plan's investment strategy and composition because of
contributions by the adviser's covered associates during the two-year
lookback period that do not present a material risk of engaging in a
pay-to-play practice.
<bullet> It can be difficult for an adviser to identify which
persons fall within the definition of an ``official'' who is
``indirectly responsible for, or can influence the outcome of, the
hiring of an investment adviser by a government entity.'' \39\ Making
the determination could require analysis of government entity oversight
structures, an official's appointment authority, or the scope of duties
of a State government employee, for which in each case there may be
little publicly available information. The ``indirect'' element of the
definition may also encompass a chain of influence among government
officials that might be attenuated from pay-to-play practices,
potentially capturing contributions to officials who may have no
practical involvement in or knowledge of specific investment contracts.
As a result, advisers may be unable to determine conclusively who is an
official under the rule or an adviser's employees may be deterred from
making contributions that pose little or no pay-to-play risks. If an
adviser is unable to make a conclusive determination, the rule may
encourage the adviser to implement blanket contribution bans. In that
situation, the rule may unintentionally result in a greater restriction
on political speech by advisers than is necessary to serve the
objectives of the rule.
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\39\ See rule 206(4)-5(f)(6).
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<bullet> The definition of ``covered associate'' can be difficult
to interpret and may have been applied more broadly than intended, with
employees whose contributions are unlikely to be related to pay-to-play
practices being subjected to restrictive policies. For example, the
definition of covered associate can equate to a significant number of
employees and be difficult to apply because the definition's
supervisory prong picks up adviser personnel that ``supervises,
directly or indirectly,'' an employee who solicits a government entity
for an investment adviser and it can be difficult to determine whether
an individual ``indirectly'' supervises an employee who solicits
government entities.\40\ Additionally, employees that are not covered
associates but are supervised by one could also trigger a prohibition
due to rule 206(4)-5(d). Any contributions by such employees could be
attributed to the covered associate supervisor as an indirect
contribution and would make such employees subject to the rule's
prohibitions. The definition also could be considered overly expansive
when applied because the definition of ``executive officer'' of the
investment adviser \41\ includes, among other persons, any vice
president in charge of a principal business unit, division or
function,\42\ irrespective of whether such person's role involves
soliciting government entities for the investment adviser or if the
employee has a direct economic stake in the firm's business
relationship with a government client which could implicate pay-to-play
concerns. The ``covered associate'' definition also could be construed
to inappropriately capture independent contractors with whom the
adviser has only an attenuated connection because the definition of
employee in the rule could include consultants and advisors.\43\
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\40\ See rule 206(4)-5(f)(2)(ii).
\41\ See rule 206(4)-5(f)(2)(i).
\42\ See rule 206(4)-5(f)(4).
\43\ The term ``employee'' is not defined in the Advisers Act.
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<bullet> The dollar amounts in the de minimis exceptions have not
been updated for inflation since the adoption of the rule 16 years ago.
Some contributions above the $150 (for officials for whom the covered
associate is not entitled to vote at the time of the contribution) and
$350 (for officials for whom the covered associate was entitled to vote
at the time of the contribution) contribution ceilings are likely small
enough that they would not meaningfully influence the adviser selection
process but still trigger the prohibitions of the rule.\44\ Indeed,
these limits are significantly lower than the contribution limits
imposed under federal campaign finance laws.\45\
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\44\ See rule 206(4)-5(b)(1).
\45\ See, e.g., 2 U.S.C. 441a(a) (establishing contribution
limits under the Federal Election Campaign Act, which increase based
on price index); Contribution limits for 2025-2026 federal
elections, Federal Elections Commission of the United States (Aug.
31, 2026), available at <a href="https://www.fec.gov/help-candidates-and-committees/candidate-taking-receipts/contribution-limits/">https://www.fec.gov/help-candidates-and-committees/candidate-taking-receipts/contribution-limits/</a> (setting
an individual contribution limit of $3,500 per election to
candidates).
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<bullet> The exception for returned contributions requires that the
contributor obtain the return of a contribution within 60 calendar days
of the date of discovery of such contribution by the investment
adviser, which means that advisers must rely on the third party that
received the contribution to satisfy the exception; this may not be
feasible if the funds have been spent.\46\ Consequently, an adviser may
not be able to satisfy the exception despite robust efforts to obtain
the contribution's return.
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\46\ See rule 206(4)-5(b)(3).
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<bullet> The exemptive process through which the Commission may,
upon application, conditionally or unconditionally exempt an investment
adviser from the prohibitions of the rule may be costly and time-
consuming to pursue.
Due to such interpretive difficulties and related operational and
implementation challenges, the political contribution rule has resulted
in significant unintended consequences. For example, the rule's
substantial consequence for a contribution (a two-year ban on
compensation) and its potential to scope in activities that carry a
relatively low risk of leading to pay-to-play practices may result--and
often has resulted--in an adviser prohibiting contributions outright,
which may chill political speech protected by the First Amendment that
does not lead even to the appearance of corruption. As another example,
and as discussed above, we have observed that advisers have been
prevented from hiring or promoting qualified managers because of past
contributions by such individuals that may in fact pose little if any
risk of constituting pay-to-play practices.
Additionally, because the specific objective criteria of the rule
apply to an adviser regardless of its pay-to-play risk profile--
including conditions whose application may prove onerous or
inappropriate for a low risk adviser--and pay-to-play considerations
can be unique to each adviser, an adviser with a lower pay-to-play risk
profile may nonetheless be required to design and implement compliance
policies and procedures which result in unintended adverse effects that
may not be justified by its risk of engaging in pay-to-play practices.
More than fifteen years of complying with the political
contribution rule have provided existing investment advisers with
experience in understanding a complicated political contribution
landscape, assessing whether and how contributions have the potential
to
[[Page 57703]]
influence the award of advisory contracts, formulating tailored
policies, and developing tracking and attestation systems. Separately,
investment advisers have developed experience complying with a variety
of State and local laws, as well as other Federal laws, that may
subject them to restrictions designed to prevent pay-to-play
practices.\47\
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\47\ See also infra section III.C.2 for discussion of how
improvements in data dissemination and new requirements in some
jurisdictions for increased transparency regarding, among other
things, advisory fees and plan investments, have made it easier to
identify anomalous investment patterns that may reflect improper
influence.
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For example, a Rhode Island law requires a State vendor that has
entered into a contract costing $5,000 or more with a State agency to
execute and file an affidavit if it has also contributed over $250 in a
calendar year to any general officer, candidate for general office,
general assembly member, general assembly candidate, or political party
within the 24 months preceding the date of the contract.\48\ As another
example, South Carolina law prevents any person who has been awarded a
contract with the State or local government through non-competitive
bidding practices from making a contribution after the awarding of the
contract or investing in a financial venture in which a public official
has an interest if that official was in a position to act on the
contract's award.\49\ At the local level, the city of Philadelphia
requires that the contractor for every non-competitively bid contract
disclose (during the term of such contract and for one year thereafter)
any contribution of money or in-kind assistance the contractor has made
during such time period to certain city officeholders and candidates
for city office, as well as associations organized in support of such
persons.\50\ Though the burdens of accommodating these various and
diverse State and local restrictions may result in some advisers
implementing blanket contribution bans, other advisers may utilize a
fact-and-circumstances based analysis to determine when and how such
statutes apply.
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\48\ See R.I. Gen. Laws Sec. 17-27-2 (2026).
\49\ See S.C. Code Sec. 8-13-1342 (2026).
\50\ See Phila., Pa., Code Sec. 17-1402 (2026).
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Furthermore, investment advisers and their employees in certain
cases also must comply with other Federal laws that establish criminal
or civil penalties for bribery or fraudulent quid pro quo schemes.\51\
As with State and local laws, though the variability of other Federal
laws may result in some advisers implementing an outright ban on
contributions, it may result in advisers utilizing a fact-and-
circumstances-based analysis to determine when and how such statutes
apply. To the extent that State, local, and other Federal laws apply,
such statutes, in addition to the regulatory framework under the
Advisers Act discussed below, likely address some pay-to-play practices
notwithstanding a rescission of the political contribution rule.\52\
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\51\ See, e.g., 18 U.S.C. 201 and 18 U.S.C. 666; see also Adam
Wright, Corruption as Contract: Taking Quid Pro Quo Seriously, 77
Baylor L. Rev. 1 (2025), available at <a href="https://law.baylor.edu/sites/g/files/ecbvkj1546/files/2025-04/07%20Wright.pdf">https://law.baylor.edu/sites/g/files/ecbvkj1546/files/2025-04/07%20Wright.pdf</a>; Lauren Garcia,
Curbing Corruption or Campaign Contributions? The Ambiguous
Prosecution Of ``Implicit'' Quid Pro Quos Under the Federal Funds
Bribery Statute, 65 Rutgers L. Rev. 1 (2012), available at <a href="https://www.rutgerslawreview.com/wp-content/uploads/archive/vol65/issue1/Garcia.pdf">https://www.rutgerslawreview.com/wp-content/uploads/archive/vol65/issue1/Garcia.pdf</a>.
\52\ See infra section II.A.3 for request for comment on whether
State and local pay-to-play requirements as well as any antibribery
and other applicable Federal laws and regulations address pay-to-
play practices.
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II. Discussion
A. Proposed Rescission of Rule 206(4)-5 Under the Advisers Act
We propose to rescind rule 206(4)-5 in its entirety. The political
contribution rule takes a prescriptive approach to deterring pay-to-
play practices that, based on our experience administering the rule and
feedback from market participants:
<bullet> Creates operational challenges for investment advisers to
implement due to the rule's complexity and the breadth of its
application;
<bullet> Captures activity that may not warrant a two-year
compensation ban;
<bullet> Imposes significant burdens that may not be justified in
connection with what the rule is designed to prevent (including
preventing advisers from hiring or promoting qualified personnel due to
past contributions that do not present a material risk of engaging in a
pay-to-play practice); and
<bullet> Results in advisers prohibiting contributions outright,
which affects core political speech protected by the First
Amendment.\53\
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\53\ For a more detailed discussion of the operational and
scoping challenges of the political contribution rule, see supra
section I.C.
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In view of the challenges we have observed that have resulted from
the political contribution rule, we are of the view that its goals may
be better achieved through a principles-based approach to prevent fraud
and that other existing laws and regulations (including the compliance
rule and the code of ethics rule) provide a sufficient framework to
support such an approach. Accordingly, we propose to rescind the
political contribution rule in its entirety.
1. Basis for the Rescission of the Political Contribution Rule
As a fundamental matter (and separate and apart from the political
contribution rule), investment advisers engaging in pay-to-play
practices violate the U.S. securities laws, including the antifraud
provisions of the Advisers Act. In upholding this long-established
principle, the Commission has brought numerous enforcement actions
under the antifraud provisions of the Advisers Act, as well as other
Federal securities laws, involving pay-to-play practices.\54\
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\54\ See supra footnote 15.
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Specifically, section 206 of the Advisers Act establishes Federal
fiduciary standards that govern the conduct of investment advisers.\55\
Sections 206(1), (2), and (4) of the Advisers Act make it unlawful for
any investment adviser to employ any ``device, scheme, or artifice to
defraud any client or prospective client,'' ``to engage in any
transaction, practice, or course of business which operates as a fraud
or deceit upon any client or prospective client,'' or ``to engage in
any act, practice, or course of business which is fraudulent,
deceptive, or manipulative,'' respectively.
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\55\ See Commission Interpretation Regarding Standard of Conduct
for Investment Advisers, Investment Advisers Act Release No. 5248
(June 5, 2019), [84 FR 33669 (July 12, 2019)]; Transamerica Mortgage
Advisors, Inc. v. Lewis, 444 U.S. 11, 17 (1979).
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Pay-to-play practices are prohibited by the Advisers Act and may
violate other Federal securities laws (for example, certain enforcement
actions have also been brought under section 10(b) of the Exchange Act
and section 17(a) of the Securities Act of 1933).\56\ The Commission
has specifically stated that payments to State officials as a quid pro
quo for obtaining advisory business, as well as other forms of ``pay-
to-play,'' violate the antifraud provisions of section 206 of the
Advisers Act.\57\ As an example, with respect to pooled investment
vehicles, the Commission has previously stated that an adviser that
makes contributions to an official of a government entity to steer
assets to a pooled investment vehicle it manages facilitates fraud by
implementing a government official's quid pro quo scheme.\58\
Furthermore, under section
[[Page 57704]]
203 of the Advisers Act [15 U.S.C. 80b-3], if advisory personnel engage
in pay-to-play practices, the Commission may charge the adviser and its
individual supervisors for failure to reasonably supervise.\59\
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\56\ See supra footnotes 8 through 9 and accompanying text
describing what we refer to as ``pay-to-play practices'' in this
release. See also supra footnote 15 for reference to certain
enforcement actions of the Commission for pay-to-play practices.
\57\ See 2010 Adopting Release, supra footnote 1, at section
II.A.
\58\ See 2010 Adopting Release, supra footnote 1, at section
II.B.2(e); SEC v. DiBella, 587 F.3d 553, 568 (2d Cir. 2009).
\59\ See section 203(e)(6) of the Advisers Act; section 203(f)
of the Advisers Act.
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Pay-to-play practices also involve conflicts of interest. Public
pension plan beneficiaries are harmed when a government official
violates the public trust, for example, by failing to disclose that the
government official has directed the investment of the plan's assets
into a pooled investment vehicle not because of the adviser's
qualifications or competency or the vehicle's financial merits but
rather because the official has received a contribution. By engaging in
such conduct with the government official, the adviser creates a
conflict of interest with the plan and engages in a scheme to defraud
the government plan or program. Additionally, an adviser to a pooled
investment vehicle that is an investment option in a government plan or
program may prepare information about the pooled investment vehicle
that may be used by plan officials to evaluate the vehicle and by
pension plan beneficiaries to decide whether to allocate assets to the
vehicle. Such an adviser engages in or facilitates an act, practice, or
course of business which is fraudulent, deceptive, or manipulative when
the adviser does not disclose that it made a contribution that induces
government officials to make an investment and that the government
officials sponsoring the plan chose the vehicle as an investment option
for beneficiaries not solely on the basis of its merits, but rather as
the consequence of improper quid pro quo payments. Further, as
discussed above, when government officials select investment advisers
based on their contributions rather than the competence of and fees
charged by the adviser, public pension plans are more likely to be
managed by less qualified investment advisers and to pay higher fees,
to the detriment of the plan, and potentially, the plan's beneficiaries
and taxpayers.\60\
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\60\ See supra section I.A; New York Republican State Committee,
927 F.3d at 505.
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In addition to substantive securities law provisions that prohibit
pay-to-play practices, a registered investment adviser already is
subject to other existing Advisers Act requirements that, in our view
and given the experiences described above with the political
contribution rule, establish a sufficient principles-based framework
through which advisers commonly prophylactically address its risk of
engaging in pay-to-play practices. For example, the compliance rule
requires investment advisers to adopt and implement written policies
and procedures reasonably designed to prevent violation, by the adviser
and its supervised persons, of the Advisers Act and the rules
thereunder, and to review, no less frequently than annually, the
adequacy of those policies and procedures and the effectiveness of
their implementation.\61\ Further, the compliance rule requires an
adviser to consider its fiduciary and regulatory obligations under the
Advisers Act and to formalize policies and procedures to address
them.\62\ The compliance rule is designed to permit the Commission to
address the failure of an adviser to have in place adequate compliance
controls, before that failure has a chance to harm clients or
investors.\63\ Accordingly, upon any rescission of the political
contribution rule, a registered investment adviser would still be
required to have policies and procedures reasonably designed to prevent
fraudulent practices, including pay-to-play practices, though the
adviser would have the flexibility to either tailor those policies in a
manner that differs from the specific prescriptive requirements of the
political contribution rule or maintain those polices consistent with
the compliance rule.
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\61\ See rule 206(4)-7. See also Compliance Programs of
Investment Companies and Investment Advisers, Investment Advisers
Act Release No. 2204 (Dec. 17, 2003) [68 FR 74714 (Dec. 24, 2003)]
(the ``Compliance Rule Adopting Release'').
\62\ See Compliance Rule Adopting Release, supra footnote 61, at
section II.A.1.
\63\ Id.
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Advisers have for over twenty years implemented systems of controls
to comply with rule 206(4)-7 that help protect the interests of clients
while being tailored to advisers' particular businesses. The compliance
rule relates to a variety of investment adviser compliance activities
because it requires written policies and procedures reasonably designed
to prevent violation of the Advisers Act and the rules thereunder. For
example, the Commission has stated that it expects that an adviser's
compliance rule policies and procedures, at a minimum, should address
certain areas to the extent that they are relevant to that adviser.\64\
Based on our experience with the political contribution rule, an
adviser's risk of engaging in pay-to-play practices would be mitigated
by the adviser assessing its particular pay-to-play risks, taking into
account its particular business, and developing policies and procedures
addressing those risks under the more principles-based and time-tested
framework of the compliance rule.
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\64\ See id (for example, trading practices, personal trading
activities of supervised persons, custody, and marketing and
solicitation activities).
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In addition to the Advisers Act prohibitions on fraud, fiduciary
duty requirements, and the compliance rule, a registered investment
adviser is also required to adopt a code of ethics under the code of
ethics rule. The rule requires that the code of ethics, in part, set
forth the standard of business conduct that the adviser requires of all
of its supervised persons, and the standard chosen must reflect the
adviser's fiduciary obligations and those of its supervised persons,
and must require compliance with Federal securities laws.\65\ Thus, an
adviser, in addition to assessing whether its compliance policies and
procedures address its particular pay-to-play risks, generally should
assess its code of ethics to ``reinforc[e] fiduciary principles that
must govern the conduct of [the adviser and its] personnel'' in the
context of its pay-to-play risks.\66\ Advisers, for example, could
scope out of their code of ethics low risk behaviors in accordance with
their own business models and structure.
---------------------------------------------------------------------------
\65\ See rule 204A-1(a)(1) through (2); Investment Adviser Codes
of Ethics, Investment Advisers Act Release No. 2256 (July 2, 2004)
[69 FR 41696 (July 9, 2004)] (the ``Code of Ethics Adopting
Release'').
\66\ See Investment Adviser Codes of Ethics, Investment Advisers
Act Release No. 2209 (Jan. 20, 2004) [69 FR 4040 (Jan. 27, 2004)].
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Providing an adviser additional flexibility to adapt its policies
and procedures and code of ethics to its specific business and risks
instead of basing them on the specific prescriptive requirements of the
political contribution rule would permit the adviser to address its
pay-to-play risks more holistically consistent with its obligations
under the Advisers Act. It would, at the same time, allow the adviser
to better balance its individual pay-to-play risk and the burden
associated with mitigating such risk relative to what we have observed
under the political contribution rule. Furthermore, to the extent that
the compliance costs of mitigating risk under the political
contribution rule exceed the compliance costs an adviser would bear if
it determines to adjust its code of ethics and compliance policies and
procedures to address its particular pay-to-play risks, these cost
savings may ultimately benefit the adviser's public pension plan
clients and potentially other clients as well (e.g., by allowing the
adviser to allocate more money to portfolio research or more resources
to
[[Page 57705]]
provide investment advice). In addition, the proposal could help an
adviser fulfill its fiduciary duty. For example, when an adviser to a
closed-end fund is subject to a two-year fee timeout for a political
contribution violation involving a pension plan investor in the fund,
all investors in the fund may be negatively impacted if the resulting
loss of fee revenue reduces the adviser's operational resources and
impairs its ability to execute the fund's strategy and fulfill its
fiduciary duties. Rescinding the political contribution rule, as
proposed, could conversely increase the resources available to the
adviser and help the adviser better exercise its fiduciary duty to the
benefit of the fund's investors.
Finally, the rescission of the political contribution rule will
allow advisers and their personnel greater freedom to make political
contributions and to exercise their constitutional right to political
speech. The First Amendment's protection of free speech has its ``
`fullest and most urgent application precisely to the conduct of
campaigns for political office.' '' \67\ ``[T]he First Amendment
safeguards an individual's right to participate in the public debate
through political expression and political association,'' and when an
``individual contributes money to a candidate, he exercises both of
those rights.'' \68\ While ``Congress may regulate campaign
contributions to protect against corruption or the appearance of
corruption,'' \69\ some advisers have chosen to go beyond the rule and
preclude all employees from contribution to all candidates, including
those with no authority to award advisory contracts. Rescission of the
rule would reopen these avenues for political speech and fulfillment of
First Amendment rights without additional limitation (beyond those that
already exist under federal and state law).
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\67\ See Nat'l Republican Senatorial Comm. v. FEC, 146 S. Ct.
2404, 2415 (2026), quoting Cruz, 596 U.S. at 302.
\68\ See McCutcheon v. FEC, 572 U.S. 185, 203 (2014); see also
Buckley v. Valeo, 424 U.S. 1, 15-22 (1976).
\69\ See McCutcheon, 572 U.S. at 191.
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The proposal to rescind the political contribution rule could also
lead to increased competition for public pension plan investment
mandates.\70\ For example, investment advisers who would have been
prohibited from receiving compensation for investment advisory services
under the political contribution rule may be able to compete for public
pension plan clients after the proposed rescission without being
subject to any additional requirements beyond complying with the
various applicable principles-based rules discussed below. This
increased competition may lead to more favorable investment terms.
Further, this increased competition also could ultimately benefit the
retirees that rely on these plans and the taxpayers of the State and
municipal governments that must honor these plans' obligations.\71\
Additionally, public pension plans with a greater number of advisers to
choose from may be able to select advisers that can provide advice
better tailored to the needs of the particular public pension plan and
potentially at a lower cost to the plan.
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\70\ See infra section III.D.2 for further discussion of how the
rescission of the political contribution rule could affect
competition in the investment adviser market for State and local
government clients.
\71\ See 2024 Annual Survey of Public Pensions, supra footnote 6
(stating that ``36 million people (including inactive employees not
currently contributing to pensions but eligible for future benefits)
participated in state and local retirement plans in 2024'').
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While the compliance rule and the code of ethics rule apply only to
investment advisers registered or required to be registered under
section 203 of the Advisers Act (unlike the political contribution
rule, which applies to exempt reporting advisers and foreign private
advisers as well as registered investment advisers), we understand that
registered investment advisers manage a significant amount of public
pension plan assets or other public funds and, therefore, represent the
highest risk of engaging in pay-to-play practices.\72\ We also note
that all investment advisers (including exempt reporting advisers and
foreign private advisers) are subject to section 206 of the Advisers
Act, and all investment advisers subject to section 204 of the Advisers
Act (including exempt reporting advisers) are subject to section 204A
of the Advisers Act.\73\ Further, an adviser registered or required to
be registered must provide each of its supervised persons with a copy
of its code of ethics and any amendments, and its supervised persons
must provide the adviser with a written acknowledgement of their
receipt of the code and any amendments.\74\
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\72\ See rule 206(4)-5(a)(1) and rule 206(4)-5(a)(2); supra
footnote 16.
\73\ An investment adviser to a pooled investment vehicle is
also subject to rule 206(4)-8, which prohibits the making of false
or misleading statements of material fact to current or prospective
investors in the pooled investment vehicle, or otherwise engaging in
any fraudulent, deceptive, or manipulative conduct with respect to
those investors.
\74\ See rule 204A-1(a)(5).
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We acknowledge that, before adopting the political contribution
rule, the Commission previously discussed policies and procedures as
being insufficient for preventing pay-to-play practices. In adopting
the political contribution rule, the Commission stated that (1) codes
of ethics or compliance procedures alone may not be adequate to stop
pay-to-play practices; \75\ (2) ``policies and procedures alone,
without critical objective criteria, such as obtaining a return of the
contribution, are insufficient in our view to justify an exception to
our prophylactic rule''; and (3) ``voluntary actions are insufficient
to deter pay to play, which may yield lucrative management contracts.''
\76\ The Commission in 2010, however, apparently did not anticipate the
unintended consequences of the political contribution rule. Our
experience administering the political contribution rule for over a
decade and the difficulty in designing specific objective criteria for
such a rule without unintended adverse effects on adviser
contributions, employee hiring, and investment advisory services as
well as significant compliance burdens that may not be justified by the
benefits (as discussed above), has caused us to reconsider those
previously-stated views.\77\ Given that experience, we now believe that
rescinding the political contribution rule and taking a more
principles-based approach, permitting advisers to tailor their
compliance policies and procedures and codes of ethics in accordance
with their own business models and risk profiles to address their pay-
to-play risks, would be appropriate. As indicated above, we are of the
view that the existing Advisers Act framework, including prohibitions
on fraud and fiduciary duty requirements along with the compliance
[[Page 57706]]
rule and code of ethics rule, is likely sufficient to avoid many of the
issues discussed above regarding the political contribution rule and
would lead to appropriate measures to address pay-to-play
practices.\78\ Additionally, the Commission brought enforcement actions
involving pay-to-play practices prior to the adoption of the political
contribution rule; any withdrawal of the rule would accordingly not
prevent the Commission from continuing to pursue fraudulent cases
involving pay-to-play practices.\79\
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\75\ See also 2010 Adopting Release, supra footnote 1, at
section II.B.2(a) (noting that violations of codes of ethics or
compliance procedures do not themselves establish violations of the
Federal securities laws, and senior officers of an adviser that have
the greatest incentives to engage in pay-to-play and therefore are
most likely to make contributions, would themselves ultimately be
responsible for enforcing their own compliance with the adviser's
code of ethics or compliance procedures).
\76\ See, e.g., 2010 Adopting Release, supra footnote 1, at
section II.B.2(b). Further, the Commission also articulated in the
2010 Adopting Release that disclosure of political contributions
would be insufficient to address the concerns the political
contribution rule is designed to address.
\77\ In addition, our experience has emphasized the challenge in
designing a rule that is not also operationally complex, which in
turn could result in significant compliance burdens that may not be
justified by the benefits. For example, a rule that cross references
State and local contribution limits or is premised on constituting a
de minimis portion of total campaign spending could be challenging
to develop and implement given widely varying State and local laws
and continuously evolving campaign spending.
\78\ In addition, technological advancements and increased data
dissemination could facilitate the detection of pay-to-play
practices. See infra section III.C.2 (discussing improvements in
data dissemination and increased transparency in certain
jurisdictions related to advisory fees, plan investments, and
information related to other relevant concerns that may have made it
easier to identify anomalous investment patterns that may reflect
improper influence).
\79\ See supra footnote 15 for Commission enforcement actions
addressing pay-to-play schemes. In addition, since the political
contribution rule was adopted in 2010, the Commission has
established the SEC Whistleblower Program, including a system and
form regarding tips, complaints, and referrals. See SEC
Whistleblower Program, available at <a href="https://www.sec.gov/enforcement-litigation/whistleblower-program">https://www.sec.gov/enforcement-litigation/whistleblower-program</a>; Form TCR, available at <a href="https://www.sec.gov/files/formtcr.pdf">https://www.sec.gov/files/formtcr.pdf</a>. The SEC Whistleblower Program was
established to incentivize whistleblowers to report specific,
timely, and credible information about possible federal securities
laws violations and, accordingly, may provide the Commission with
information regarding fraud, including pay-to-play practices.
---------------------------------------------------------------------------
The rescission of the political contribution rule in its entirety
would also result in the rescission of the prohibition under the
current rule on an adviser from paying a third party that is not a
``regulated person'' (i.e., a registered investment adviser, registered
broker-dealer, or registered municipal advisor) to solicit government
entities for investment advisory services.\80\ For the reasons
discussed in this proposal with respect to the political contribution
rule more broadly, we believe that it would be more appropriate to
address the risk of fraud arising from the use of persons for
solicitation activities through a principles-based approach that would
allow an adviser to tailor its policies and procedures to the specific
pay-to-play risks faced by the adviser.\81\ However, advisers may still
face restrictions on using certain persons for purposes of soliciting
government entities to the extent that other rules and regulations that
govern the use of solicitors, including the MSRB Political Contribution
Rule, FINRA Rule 2030, and Exchange Act rule 15Fh-6 (because, for
example, those advisers are dually registered as investment advisers
and broker-dealers, or as investment advisers and municipal advisors),
or State and local laws regulating the use of placement agents, apply
to advisers.\82\
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\80\ See current rule 206(4)-5(a)(2)(i). See also supra section
I.B.
\81\ Rule 204-2 under the Advisers Act would also continue to
require an investment adviser to maintain all written agreements
entered into by the investment adviser with government entity
clients, third-party solicitors and placement agents, which would be
available for the Commission to review upon examination. See current
rule 204-2(a)(10); infra section II.B for discussion of the proposed
amendments to rule 204-2.
\82\ See, e.g., Section 424-A of the New York Retirement &
Social Security Law (prohibiting the New York State Common
Retirement Fund (``CRF'') from investing with an outside investment
manager that is using the services of a placement agent or other
intermediary to assist the investment manager in obtaining
investments by the CRF).
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2. Compliance Policies and Procedures and Codes of Ethics
By rescinding the political contribution rule, we would better
enable advisers who provide or seek to provide investment advisory
services to State or local governments to tailor their compliance
policies and procedures and the standard of business conduct contained
in their code of ethics to address their particular pay-to-play risks.
The compliance rule does not enumerate specific elements that an
adviser must include in its policies and procedures.\83\ Rather, it
provides an adviser with flexibility to apply the rule in a manner best
suited to its organization. The Commission has stated, however, that
``in designing its policies and procedures, [an adviser] should first
identify conflicts and other compliance factors creating risk exposure
for the firm and its clients in light of the firm's particular
operations, and then design policies and procedures that address those
risks.'' \84\
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\83\ But see Compliance Rule Adopting Release, supra footnote
61, at section II.A.1 (stating that the Commission expects that an
adviser's policies and procedures, at a minimum, should address
certain issues to the extent that they are relevant to that
adviser).
\84\ See id.
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If the political contribution rule is ultimately rescinded, some
investment advisers who provide or seek to provide investment advisory
services to State or local governments may determine, after assessing
their pay-to-play risks, to update their compliance policies and
procedures to replace policies and procedures that were established
pursuant to the prescriptive nature of the political contribution rule
with policies and procedures that are tailored to address the risks of
pay-to-play practices to their organization. Other investment advisers,
however, may determine, after assessing their pay-to-play risks, to
maintain policies and procedures established pursuant to the political
contribution rule as a component of their compliance policies and
procedures addressing the risks of pay-to-play practices to their
organization.
Following any rescission of the political contribution rule, to the
extent an adviser provides or seeks to provide investment advisory
services to State or local governments and determines to update its
compliance policies and procedures, identifying factors creating pay-
to-play risk exposure particular to the adviser and its clients in
light of its particular business needs, organizational structure, and
the exact nature of its business, would be relevant to making this
update. Leveraging the compliance framework that it already has in
place, such adviser would then design and implement policies and
procedures that address those risks and tailor them as appropriate to
reflect the adviser's unique characteristics that are relevant to
preventing pay-to-play practices.
Below are several factors to consider in completing this
assessment, and the extent to which any of these considerations apply
would depend on the individual facts and circumstances and pay-to-play
risks of each adviser:
<bullet> Compliance with applicable law. The adviser's policies and
procedures would need to address pay-to-play practices that violate the
Advisers Act and the rules thereunder. For purposes of efficiency and
cohesiveness of internal policies, the adviser could leverage these
policies and procedures to also consider addressing its compliance with
political donation and other relevant anti-corruption laws and
regulations (including any State or local laws and regulations or other
applicable Federal laws and regulations) governing the adviser's
existing and/or prospective public pension plan clients.
<bullet> Risk identification. The adviser's policies and procedures
would need to identify and assess the risk of the adviser or its
personnel engaging in pay-to-play practices (including by making
contributions to government officials, political parties and political
action committees) that violate the Advisers Act and the rules
thereunder, and may consider identifying and assessing those risks that
violate other applicable laws in connection with an award or retention
of investment advisory services (including through an investment in the
adviser's advised funds). Pay-to-play risks may vary substantially
across different types of advisers and across the industry generally
and the adviser's policies and procedures would need to take into
account these risks (e.g., organization
[[Page 57707]]
specific factors such as the size of the adviser's investment and
business development teams; indirect conduct such as structuring
transactions in a manner intended to hide the true purpose of a
contribution or payment using third-parties, such as consultants,
attorneys, family members, friends or companies affiliated with the
adviser, to hide the true source of the donation). Factors that might
affect the adviser's risk assessment include:
<bullet> Governmental relationships. Whether the adviser has an
existing relationship with one or more government entities or
government entity officials or whether the adviser is seeking to, or
has begun the process of, providing investment advisory services to
such government entities or officials and, if so, whether any
contributions or related activities should be analyzed to assess the
adviser's risk.
<bullet> Personnel. The nature of the position of any personnel
making a contribution (e.g., advisory, senior level decision makers, or
business development personnel, on the one hand, or back-office,
administrative, or clerical employees, on the other hand) and the
associated risk (e.g., contributions by personnel in positions
involving client solicitation may carry heightened pay-to-play risks)
and whether any personnel carry heightened pay-to-play risks for other
reasons (e.g., some personnel may carry heightened pay-to-play risks
due to their history of contributions).
<bullet> Pre-clearance. The adviser could consider incorporating
into its policies and procedures a process of pre-clearance of
contributions by the adviser or its personnel to officials of
government entities depending on its risk assessment, the nature of its
business, and its particular facts and circumstances. As part of any
such process, the adviser could consider whether to maintain reports
documenting contributions by personnel to help better identify pay-to-
play risk depending on its risk assessment, the nature of its business,
and its particular facts and circumstances, which could also aid the
adviser in performing the required annual review of its overall
compliance program (including any policies and procedures specific to
pay to play). An adviser with a small number of employees could
determine that it does not need a formalized pre-clearance program.
Alternatively, a large adviser with multiple advisory contracts with
several public pension plans could determine that it is appropriate to
have an electronic pre-clearance system for contributions similar to
what typically is used for pre-clearing personal securities
transactions.
<bullet> Risk mitigators. After identifying conflicts and other
compliance factors creating pay-to-play risk, the adviser would need to
design policies and procedures to address those risks. Those policies
and procedures would vary by adviser depending on the nature of the
adviser's business and its particular facts and circumstances. For
example, an adviser's policies and procedures could provide that the
adviser or its personnel be able to make contributions during a
particular window that the adviser determines to have low pay-to-play
risk. As another example, the policies and procedures could set forth
contribution thresholds, including where contributions falling under
such a threshold would not be subject to all or certain elements of the
adviser's policies and procedures pertaining to pay-to-play (e.g., not
subject to pre-clearance, if such a protocol were to be adopted).
<bullet> Third-party solicitors. To the extent an adviser uses
third-party solicitors, the adviser would need to address in its
policies and procedures the unique pay-to-play risks associated with
such practices. For example, the adviser could consider limitations
such as requiring engagements to be approved by the adviser's Chief
Compliance Officer or requiring any third-party solicitating government
business on behalf of the adviser to be a registered investment
adviser, registered broker-dealer, security-based swap dealer, or
registered municipal adviser who has not made a political contribution
to the government entity it is soliciting.
<bullet> Periodic monitoring. The adviser's policies and procedures
could incorporate a process for more frequent periodic monitoring of
compliance with and the effectiveness of any elements it has included
with respect to pay-to-play conduct, as part of its overall review of
the effectiveness of the implementation of its policies and procedures
under the compliance rule.\85\ Periodic monitoring could include
periodic audits of pre-clearance requests against a report documenting
contributions by personnel to ensure compliance with its pre-clearance
process, and/or other required protocols the adviser has adopted as
part of its policies and procedures.
---------------------------------------------------------------------------
\85\ See rule 206(4)-7(b) (requiring a registered investment
adviser to review, no less frequently than annually, the adequacy of
the policies and procedures and the effectiveness of their
implementation).
---------------------------------------------------------------------------
<bullet> Remedial steps. The adviser would need to include in its
policies and procedures steps or a framework to address contributions
that are inconsistent with the policies and procedures. For example,
the policies could require seeking the return of contributions within a
specific timeframe or potential disciplinary or other appropriate
actions against employees that violate the policies and procedures.
Likewise, the code of ethics rule does not require an adviser to
adopt a particular standard of business conduct. Instead, it requires
that the standard an adviser chooses reflect its fiduciary obligations
and those of its supervised persons and require compliance with the
Federal securities laws.\86\ Accordingly, in choosing a standard of
business conduct, an adviser who provides or seeks to provide
investment advisory services to State or local governments would need
to review and, if necessary, adjust its code of ethics to include a
standard of business conduct that aligns with any policies and
procedures the adviser adopts under the compliance rule in the context
of its pay-to-play risks. For example, if the adviser restricts certain
types of contributions as part of its policies and procedures, the
adviser should consider amending its code of ethics to reference that
restriction. Further, an adviser is required in its Form ADV Part 2A
(Item 11) to briefly describe its code of ethics and to explain that it
will provide a copy of the code of ethics to any client or prospective
client upon request.\87\
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\86\ See Code of Ethics Adopting Release, supra footnote 65.
\87\ See Part 2A of Form ADV: Firm Brochure, Item 11.
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3. Request for Comment
We request comment on all aspects of the proposal to rescind the
political contribution rule, including the following:
1. Should the Commission rescind rule 206(4)-5 in its entirety, as
proposed? Why or why not?
2. Do commenters agree with our observation that the political
contribution rule has generally resulted in unintended consequences and
a broader application of the rule than intended such as some advisers'
policies and procedures outright prohibiting political contributions
altogether? Do commenters believe that the proposed rescission of the
political contribution rule would encourage more political speech by
way of increased political contributions in circumstances that do not
generate pay-to-play risk?
3. Does the political contribution rule raise significant questions
under the First Amendment?
[[Page 57708]]
4. Would an adviser's policies and procedures adopted under the
compliance rule be a more appropriate means of addressing the risks
associated with pay-to-play practices? Would such an approach reduce
burdens for the adviser relative to the burdens incurred with
compliance with rule 206(4)-5 or otherwise avoid the challenges
associated with the current rule? Would an adviser's adoption of a
standard of business conduct under the code of ethics rule that
addresses an adviser's particular pay-to-play risks help prevent
fraudulent pay-to-play conduct?
5. If the political contribution rule is rescinded, would other
existing requirements under the Advisers Act and the rules thereunder
sufficiently address pay-to-play practices? Would rescinding the
political contribution rule increase the likelihood of pay-to-play
practices? Why or why not? If so, would keeping the rule or adopting
some other alternative be preferable?
6. Should the Commission amend the political contribution rule to
provide for some specific standards within a more principles-based
framework? If so, describe what framework should be provided. For
example, would an amended, more principles-based rule under the
Advisers Act specific to pay-to-play practices help an adviser develop
policies and procedures and codes of ethics sufficiently robust to
prevent pay-to-play practices (e.g., addressing pay-to-play practices
that may arise from the use of political action committees (``PACs'')
or third-party solicitors)?
7. Should the Commission amend the rule to require an adviser to
adopt and implement policies and procedures tailored to its pay-to-play
risks taking into account its particular business, but also prescribe
certain elements in the policies and procedures? If so, what elements
and why? For instance, should any such policies and procedures be
required to expressly include (1) a risk identification and assessment
element that would require an adviser to identify and assess the
adviser's or its covered personnel's risk of making contributions to
officials of government entities that could result in the award or
retention of investment advisory services or the decision to invest or
maintain an investment in an investment pool advised by the investment
adviser; (2) a political contributions guidelines element that would
require an adviser to establish firm-wide guidelines that would
identify covered personnel and certain prohibited conduct and establish
contribution limits and protocols with respect to contributions (e.g.,
pre-clearance, periodic monitoring, and a report documenting
contributions made); or (3) an annual review and report element that
would require an adviser to review at least annually the adequacy of
the policies and procedures and the effectiveness of their
implementation and prepare a written report describing the review, its
results, and any material changes made to the policies and procedures
resulting from any deficiencies identified and any actions taken in
response to any violations of the policies and procedures or
guidelines? Would such a rule lead to different results than what an
adviser would institute under the compliance rule and the code of
ethics rule, and if so how?
8. As an alternative to the proposed rescission, should the
Commission instead modify specific provisions of the political
contribution rule? If so, which provisions and why? For example, should
the Commission modify (1) the de minimis exception to increase the
dollar amounts to $3,500 or another amount; (2) the two-year timeout
and the lookback provisions to eliminate, or reduce the time periods
(e.g., one calendar year, one fiscal quarter) contained in, the
provisions; (3) certain definitions to simplify compliance by
eliminating the ``indirect'' concept in the definitions of ``official''
and ``covered associate''; and/or (4) the exemptive process set forth
in rule 206(4)-5(e) to expand the bases for relief? If a partial
rescission of the rule or targeted modifications is a preferable
approach, how specifically should the Commission amend the rule to
address market participants' concerns about complexity, breadth, and
burden?
9. Should the Commission further clarify application of the
compliance rule with respect to pay-to-pay practices, or otherwise
provide additional guidance to assist advisers in updating and
tailoring their policies and procedures and codes of ethics if the
political contribution rule is rescinded as proposed? If so, what
clarification or guidance would be helpful?
10. Should the Commission adopt enhanced disclosure obligations
(e.g., Form ADV disclosures to provide an alternative means of
transparency) if the rule is rescinded as proposed? If so, what should
the disclosures be and why? For example, should the Commission require
advisers to briefly disclose how their policies and procedures address
pay-to-play risk? Would such a requirement result in different
disclosure than advisers would provide under Item 11 of Form ADV Part 2
in describing their code of ethics if the political contribution rule
were rescinded? Would enhanced disclosure regarding an adviser's
policies and procedures addressing pay-to-play risk help to reduce
instances of pay-to-play practices? Why or why not?
11. Do State and local pay-to-play requirements as well as any
anti-bribery and other applicable laws and regulations including
Federal laws and regulations regarding the procurement process (while
not all targeted at investment advisers specifically and not consistent
across or present in all jurisdictions) diminish the need for rule
206(4)-5? Why or why not? Alternatively, is having a Federal rule
addressing pay-to-play practices necessary given the variability among
State and local pay-to-play laws and the complex analyses required to
determine whether these regulations are applicable? Why or why not?
12. Would the proposed rescission of the political contribution
rule affect the application of other rules or regulations (including,
but not limited to, the MSRB Political Contribution Rule, FINRA Rule
2030, and Exchange Act rule 15Fh-6) applicable to pay-to-play conduct
by registered broker-dealers, registered municipal advisers, security-
based swap dealers, or any other registered firms? Why or why not? If
so, which rules and how? For example, if the political contribution
rule were rescinded as proposed, would limitations on the use of
solicitors under other rules and regulations continue to apply to
advisers? Why or why not? Additionally, what impact (e.g., compliance
burdens or otherwise) would the proposed rescission have on dually
registered investment advisers and broker-dealers? Is our understanding
accurate that most advisers that provide investment advisory services
to government clients (or seek to do so) and, therefore, that present
the greatest pay-to-play risk, are investment advisers registered with
the Commission?
13. Do commenters believe that the proposed rescission of the
political contribution rule would increase pay-to-play risk for exempt
reporting advisers and foreign private advisers given that these
advisers are not subject to the code of ethics rule or the compliance
rule? Why or why not?
B. Proposed Amendments to Rule 204-2 Under the Advisers Act
The proposal would amend the recordkeeping rule to eliminate the
provisions requiring a registered investment adviser to make and keep
certain records in connection with the
[[Page 57709]]
political contribution rule.\88\ Paragraph (a)(18) of rule 204-2
requires an adviser to make and keep records containing a list or
record of its covered associates, government entity clients,
contributions to officials, State political parties and PACs, and
payments to regulated persons soliciting government business on the
adviser's behalf. Because the proposal would rescind rule 206(4)-5 in
its entirety, we propose to eliminate paragraph (a)(18) of rule 204-2.
---------------------------------------------------------------------------
\88\ Staff in the Division of Investment Management is reviewing
certain of our staff's no action letters addressing the application
of the recordkeeping rule to determine whether any such letters
would need to be withdrawn in connection with a rescission of the
political contribution rule. One letter being reviewed is the letter
from the Investment Company Institute. See Investment Company
Institute, SEC Staff No-Action Letter (Sept. 12, 2011).
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As discussed above, however, an adviser must manage the risk of
engaging in pay-to-play practices, including by adopting policies and
procedures under the compliance rule and a code of ethics under rule
204A-1 as appropriate.\89\ Rule 204-2 requires an adviser to maintain a
copy of its policies and procedures and records documenting the
adviser's annual review of those policies and procedures.\90\ Further,
the rule requires an adviser to maintain a copy of its code of ethics
and a record of any violation of that code along with actions taken as
a result of the violation, and copies of its supervised persons'
written acknowledgment of receipt of the code.\91\ An adviser must also
maintain records of all written agreements with any client or otherwise
relating to the business of the adviser, which would include written
agreements with its government entity clients.\92\ Thus,
notwithstanding any rescission of the political contribution rule as
proposed, rule 204-2 would continue to require an adviser to maintain
these records, including any portion relating to preventing pay-to-play
practices. These records would be available for the Commission to
review upon examination.
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\89\ See supra section II.A.
\90\ See rule 204-2(a)(17)(i) through (ii).
\91\ See rule 204-2(a)(12)(i) through (iii).
\92\ See rule 204-2(a)(10).
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We request comment on all aspects of the proposed amendments
relating to the recordkeeping rule, including the following:
14. Should the recordkeeping rule be amended to eliminate all the
current political contribution recordkeeping requirements, as proposed?
15. Alternatively, should we retain certain recordkeeping
requirements within rule 204-2(a)(18)? If so, which requirements and
why? Are there any additional recordkeeping requirements related to
pay-to-play practices that we should require? If so, what requirements
and why? For example, are there specific records that we should require
an adviser to maintain that would assist the Commission in identifying
fraudulent pay-to-play practices?
III. Economic Analysis
A. Introduction
We are mindful of the costs imposed by, and the benefits obtained
from, our rules. Section 202(c) of the Advisers Act \93\ provides that
when the Commission is engaging in rulemaking under the Advisers Act
and is required to consider or determine whether an action is necessary
or appropriate in the public interest, the Commission shall also
consider whether the action will promote efficiency, competition, and
capital formation, in addition to the protection of investors. The
following analysis considers, in detail, the likely significant
economic effects that may result from the rescission of rule 206(4)-5,
including the benefits and costs to investors and other market
participants as well as the broader implications of the proposed rule
amendments for efficiency, competition, and capital formation.
---------------------------------------------------------------------------
\93\ See 15 U.S.C. 80b-2(c).
---------------------------------------------------------------------------
Pay-to-play practices in investment adviser markets, when they
occur, can impose significant losses on public investment systems and,
historically, have not been fully corrected by market forces.\94\
Government officials have legal obligations to government fund
beneficiaries. However, such officials can receive private benefits
that incentivize them to diverge from their obligations to government
fund beneficiaries. This behavior can be checked by law enforcement or
by public scrutiny. However, pay-to-play practices are rarely explicit;
it may be difficult to prove that an adviser (or one of its executives
or employees) made political contributions for the purpose of obtaining
the government business, or that it engaged a solicitor for his or her
political influence rather than substantive expertise.\95\ Further, the
public often lacks insight into the adviser selection process.
---------------------------------------------------------------------------
\94\ See supra the history of enforcement actions taken by the
Commission at footnote 15 and accompanying text.
\95\ See 2010 Adopting Release, part II.
---------------------------------------------------------------------------
These problems can persist as a type of collective action
problem.\96\ Investment advisers may be locked out from the market for
government contracts if they do not make contributions, and the
expected financial return on contributions can make participation
individually rational despite its collective cost. Meanwhile,
government officials benefit from the arrangement so long as they
retain authority to decide which investment advisers are granted
government contracts, and candidates that wish to campaign against pay-
to-pay practices could see their campaigns financially handicapped by
the loss of contributions from advisers and officials who benefit from
pay-to-play.
---------------------------------------------------------------------------
\96\ See Blount v. SEC, 61 F.3d 938 (D.C. Cir. 1995), cert.
denied, 517 U.S. 1119 (1996).
---------------------------------------------------------------------------
Pay-to-play practices transfer wealth from taxpayers and fund
beneficiaries to investment advisers and government officials
responsible for selecting them. For example, they undermine the fair
competition for government contracts and can result in higher fees and
lower performance for pension funds and other government investments.
They could also force investment advisers to dedicate resources to
unproductive activity (i.e., spending time and money maintaining
political connections) and away from productive activity. Finally, they
could also result in the erosion of public trust in government
officials and the distortion of capital markets.
The political contribution rule, rule 206(4)-5, was designed as a
prophylactic measure to address pay-to-play practices before they
occur. In practice, however, this rule has imposed unintended costs on
investment advisers, their employees, their State and local government
clients, and indirectly on other market participants.\97\ Although the
rule was not intended to discourage lawful political donations, some
investment advisers have, possibly in response to the rule, enacted
policies prohibiting their employees from making any political
donations. Nor was the rule intended to affect investment adviser labor
markets or disincentivize investment advisers from competing for
government contracts. However, discussions with market participants
lead us to believe that the rule may have distorted both markets.
---------------------------------------------------------------------------
\97\ The rule creates a de facto strict liability standard that
can lead to situations where small donations or ``foot faults''
potentially trigger substantial prohibitions under the rule. See
supra section I.C.
---------------------------------------------------------------------------
The proposal would rescind the political contribution rule and
thereby eliminate the compliance costs and unintended consequences
associated with the rule. While rescinding the rule could increase the
risk of pay-to-play practices in investment adviser markets, we believe
that this risk would be mitigated by several regulatory
[[Page 57710]]
frameworks. Pay-to-play practices were unlawful under various anti-
bribery laws and the Advisers Act before the political contribution
rule was promulgated and would continue to be unlawful if the rule is
rescinded. The compliance rule would continue to require registered
investment advisers to adopt and implement policies and procedures that
are reasonably designed to prevent violation of the Advisers Act and
the rules thereunder, including by tailoring their compliance policies
and procedures in accordance with their own business models and risk
profiles to address their pay-to-play risks. Advisers' fiduciary duties
will continue to require them to assess and mitigate pay-to-play risks.
The code of ethics rule will continue to require registered investment
advisers to adopt a code of ethics that sets forth a standard of
business conduct reflecting this fiduciary obligation.
B. Economic Baseline
The baseline against which the costs, benefits, and the effects on
efficiency, competition, and capital formation of the proposed rule are
measured consists of the current state of the investment adviser
market, current practice as it relates to pay-to-play policies and
procedures, and the current regulatory framework.\98\
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\98\ See, e.g., Nasdaq v. SEC, 34 F.4th 1105, 1111-14 (D.C. Cir.
2022). This baseline approach also follows Commission staff guidance
on economic analysis for rulemaking. See Current Guidance on
Economic Analysis in SEC Rulemaking (Mar. 16, 2012), available at
<a href="https://www.sec.gov/divisions/riskfin/rsfi_guidance_econ_analy_secrulemaking.pdf">https://www.sec.gov/divisions/riskfin/rsfi_guidance_econ_analy_secrulemaking.pdf</a> (``The economic
consequences of proposed rules (potential costs and benefits
including effects on efficiency, competition, and capital formation)
should be measured against a baseline, which is the best assessment
of how the world would look in the absence of the proposed
action''); Id. at 7 (``The baseline includes both the economic
attributes of the relevant market and the existing regulatory
structure.''). Any staff statements cited herein represent the views
of the staff. They are not a rule, regulation, or statement of the
Commission. Furthermore, the Commission has neither approved nor
disapproved their content. Any staff statements cited herein, like
all staff statements, have no legal force or effect; they do not
alter or amend applicable law; and they create no new or additional
obligations for any person.
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1. Current Regulatory Framework and Market Practice
a. Regulatory Baseline
The antifraud provisions of the Advisers Act make it unlawful for
an adviser to employ any device, scheme, or artifice to defraud any
client or prospective client, to engage in any transaction, practice,
or course of business which operates as a fraud or deceit upon any
client or prospective client, or to engage in any act, practice, or
course of business which is fraudulent, deceptive, or manipulative.\99\
Therefore, pay-to-play practices are prohibited by the Advisers Act and
also may violate other provisions of the Federal securities laws.\100\
In certain circumstances, pay-to-play schemes may also violate laws
expressly prohibiting quid pro quo bribery schemes.
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\99\ See Advisers Act sections 206(1), (2), and (4).
\100\ See supra section II.A.
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Further, the compliance rule under the Advisers Act requires an
adviser that is registered, or required to be registered, to adopt and
implement written policies and procedures reasonably designed to
prevent violations, by the adviser and its supervised persons, of the
Advisers Act and the rules that the Commission has adopted under the
Advisers Act, which include requirements to prevent certain pay-to-play
practices. The adviser must review these policies' adequacy and
effectiveness on at least an annual basis.\101\
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\101\ See rule 206(4)-7.
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The political contribution rule acts as a prophylactic rule to
prevent pay-to-play activity. The rule generally prohibits an
investment adviser from providing investment advisory services for
compensation to a government client for two years after the adviser or
any of its covered associates makes a contribution to an elected
official of a government entity, or candidate for such office, whose
office is in a position to influence the selection of the adviser.\102\
The rule provides for situations in which the Commission can provide
exemptions from this prohibition. The rule also prohibits advisers from
paying or agreeing to pay persons to solicit government entities on
their behalf unless the persons are the advisers' own executive
officers, general partners, managing members, or employees, or are
certain regulated persons who are themselves subject to pay-to-play
restrictions.\103\ Under the rule, an adviser and its covered
associates are further restricted from soliciting or coordinating
contributions or payments to certain government officials or political
parties related to the adviser's business and may also not do
indirectly anything which, if done directly, would violate the
rule.\104\ Covered investment pools in which a government entity
invests or is solicited to invest are treated as if they were the
government entity for the purposes of the rule.\105\ The political
contribution rule includes de minimis exceptions (i.e., contribution
dollar thresholds below which the ban on contributions does not apply),
an exception for new covered associates, and an exception for certain
returned contributions.\106\ The recordkeeping rule requires a
registered investment adviser to make and keep certain records in
connection with the political contribution rule.\107\
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\102\ See rule 206(4)-5(a)(1) and 206(4)-5(f)(6) (defining
``official''); see also supra section I.B. The investment advisers
covered by the political contribution rule include advisers who are
registered or required to be registered; advisers who are
unregistered in reliance on the exemption available under section
203(b)(3) of the Advisers Act (for foreign private advisers); and
exempt reporting advisers as defined in rule 204-4(a) (i.e., certain
venture capital fund advisers and private fund advisers). See rule
206(4)-5(a) and (d).
\103\ See rule 206(4)-5(a)(2)(i).
\104\ See rules 206(4)-5(a)(2)(ii), 206(4)-5(d).
\105\ See rule 206(4)-5(c).
\106\ See rule 206(4)-5(b).
\107\ See rule 204-2(a)(18).
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Exchange Act rule 15Fh-6 imposes political contribution
restrictions on security-based swap dealers and their covered
associates that are parallel to the political contribution rule's
restrictions on investment advisers and their covered associates.\108\
Rule 15Fh-6 might apply to investment advisers to the extent that they
are dually registered as investment advisers and security-based swap
dealers. Under the MSRB Political Contribution Rule (rule G-37),
brokers, dealers, municipal securities dealers, and municipal advisors
are subject to a two-year prohibition on engaging in municipal
securities business or municipal advisory business, as applicable, if
they made certain contributions to officials of municipal entities
within the preceding two-year period, with a shorter six-month lookback
period for certain personnel, and an exception for de minimis
contributions. MSRB rule G-38 prohibits brokers, dealers, and municipal
securities dealers from paying persons who are not affiliated persons
for solicitation of municipal securities business on their behalf. The
comparable requirements of rule 206(4)-5 were closely modeled on MSRB
rules G-37 and G-38.\109\ A registered municipal advisor subject to
MSRB rule G-37 is a ``regulated person'' under rule 206(4)-5(f)(9) and
as such, an investment adviser may pay the registered municipal advisor
to solicit a government entity for investment advisory services.\110\
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\108\ See rules 15Fh-6(b)(1) (ban on compensation and two-year
lookback); 15Fh-6(b)(3)(i) (ban on solicitation by other than
regulated persons); 15Fh-6(b)(3)(ii) (ban on coordination); 15Fh-
6(b)(2), (d), (e) (exceptions and exemptions).
\109\ See 2010 Adopting Release, supra footnote 1, at sections
I, II.B.2(a), IV.A.
\110\ See rule 206(4)-5(a)(2)(i)(A); see also Rules Implementing
Amendments to the Investment Advisers Act of 1940, Investment
Advisers Act Release No. 3221 (June 22, 2011) [76 FR 42950 (July 19,
2011)], at section II.D.1; Political Contributions by Certain
Investment Advisers: Ban on Third-Party Solicitation; Order With
Respect to MSRB Rule G-37, Investment Advisers Act Release No. 4531
(Sept. 20, 2016) [(81 FR 66526 (Sept. 28, 2016)].
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[[Page 57711]]
FINRA adopted rule 2030 and a related recordkeeping rule, rule
4580, to enable its member firms to continue to engage in distribution
and solicitation activities for compensation with government entities
on behalf of investment advisers following the adoption of rule 206(4)-
5. The elements and terms used in rule 2030 are ``substantially
equivalent'' to those in rule 206(4)-5, because one of the objectives
of FINRA's proposal is to satisfy the ``regulated person'' definition
in rule 206(4)-5(f)(9) so that an investment adviser may pay a FINRA
member firm to solicit a government entity for investment advisory
services.\111\
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\111\ See Self-Regulatory Organizations; Financial Industry
Regulatory Authority, Inc.; Order Approving a Proposed Rule Change
to Adopt FINRA Rule 2030 and FINRA Rule 4580 to Establish ``Pay-To-
Play'' and Related Rules, Securities Exchange Act Release No. 78683
(Aug. 25, 2016) [81 FR 60051 (Aug. 31, 2016)]. The Commission
subsequently determined that that FINRA Rule 2030 imposes
substantially equivalent or more stringent restrictions on broker-
dealers than the Commission's political contribution rule imposes on
investment advisers and is consistent with the objectives of the
political contribution rule. See Political Contributions by Certain
Investment Advisers: Ban on Third-Party Solicitation; Order with
Respect to FINRA Rule 2030, Investment Advisers Act Release No. 4532
(Sept. 20, 2016) [(81 FR 66526 (Sept. 28, 2016)].
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Some States and municipalities place similar restrictions on
investment advisers subject to their jurisdiction or government
entities that can contract with investment advisers, though there is
significant variation in the individuals, firms, or entities to which
these rules apply and how they are restricted. State and local
restrictions vary considerably in their scope and approach. Some
jurisdictions prohibit principals of investment advisory firms from
contributing to campaigns or other organizations related to offices
with discretion in the selection or compensation of an investment
adviser.\112\ Some jurisdictions require public disclosures of
contributions for firms with procurement contracts with the State or
its subdivisions.\113\ Some jurisdictions disallow government entities
in the State from contracting with investment advisers who have made
contributions to campaigns for--or holders of--certain government
offices, and restrict government contractors from making, soliciting,
or pledging political campaign contributions.\114\ Some jurisdictions
prohibit the use of placement agents.\115\ Some jurisdictions have no
restrictions resembling those in the political contribution rule.
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\112\ See, e.g., Conn. Gen. Stat. Sec. 9-612 (2026).
\113\ See, e.g., Md. Code Regs. 21.07.01.20 (2026).
\114\ See, e.g., N.J. Stat. Ann. Sec. 19:44A-20.13 et seq.
(2026).
\115\ See, e.g., Press Release, New York City Pension Funds
Enact Placement Agent Ban (June 9, 2014), <a href="https://comptroller.nyc.gov/newsroom/new-york-city-pension-funds-enact-placement-agent-ban/">https://comptroller.nyc.gov/newsroom/new-york-city-pension-funds-enact-placement-agent-ban/</a>(announcing joint resolution by the New York
City Employees' Retirement System, Teachers' Retirement System, New
York City Police Pension Fund, New York City Fire Department Pension
Fund, and Board of Education Retirement System).
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Pay-to-play practices are inconsistent with an adviser's role as a
fiduciary under the Advisers Act and constitute fraud under the Federal
securities laws.\116\ In addition, the code of ethics rule requires an
adviser that is registered, or required to be registered, to have a
code of ethics that sets forth standards of business conduct for its
supervised persons, which reflect the adviser's fiduciary obligations
and those of its supervised persons, and, among other things,
provisions requiring the adviser's supervised persons to comply with
applicable Federal securities laws.\117\ The Commission may also
penalize an adviser for failing to reasonably supervise persons under
its supervision who commit Federal securities law violations, including
pay-to-play practices.\118\ Rule 204-3 and Form ADV require a
registered adviser to deliver a firm brochure to each client or
prospective client describing, among other things, its code of ethics
and explaining that the adviser will provide a copy of the code of
ethics to any client or prospective client upon request.\119\ The
provisions collectively constitute a regulatory framework that governs
pay-to-play risk in investment advisory markets independent from the
political contribution rule.
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\116\ See supra section I.A.
\117\ See rule 204A-1.
\118\ See Advisers Act section 203(e)(6).
\119\ See rule 204-3(a) and (b); Part 2A of Form ADV: Firm
Brochure, Item 11.
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b. Current Market Practice
To comply with rule 206(4)-5 and to otherwise ensure that an
adviser is complying with the Advisers Act, we understand that advisers
have enacted compliance frameworks to identify sources of pay-to-play
risk, manage their covered associates, and document the activities of
the advisers and their covered associates. Activities within this
framework include: establishing pre-clearance procedures and/or annual
certifications for political contributions; developing training
programs to educate employees about the rule and its implications;
maintaining records of employee contributions and other relevant
activities; reviewing public contribution databases; and creating
disciplinary protocols for associates who violate the adviser's
policies.
According to an industry survey of investment advisers,\120\
approximately 40 percent of advisers conduct periodic training of
relevant personnel on pay-to-play issues, 31 percent require periodic
reporting of all political contributions by covered associates, 31
percent require new personnel to be vetted for political contributions
before being hired as a covered associate, 12 percent prohibit all
political contributions, 9 percent review expense reports of relevant
personnel for pay-to-play red flags, and 4 percent require periodic
reporting of political contributions over $150. Some advisers also
require associates to pre-clear contributions, with 27 percent
reporting to require this for contributions over $150 and 13 percent
reporting to require this for contributions over $350.\121\
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\120\ See 2024 Investment Management Compliance Testing Survey,
supra footnote2.
\121\ Advisers completing the survey were allowed to select
multiple possible answers for the question ``Which of the following
policies have you adopted with regard to political contributions by
`Covered Associates' as defined within the Pay-to-Play Rule? (Check
all that apply).'' While an adviser that has a policy requiring pre-
clearance for contributions over $150 necessarily also has a policy
requiring pre-clearance for contributions over $350, it is unclear
how many of the 13 percent of advisers that selected that they
require pre-clearance for contributions above $350 did so because
they have this policy and not one for a $150 (or lower) threshold or
because they have this policy by virtue of having a policy with a
threshold of $150 (or lower).
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According to the same survey, approximately 16 percent of
investment advisers increased the type, scope, and/or frequency of pay-
to-play-related compliance testing compared to the previous year.
Additionally, 11 percent of surveyed advisers cited pay-to-play as an
area of focus during their most recent SEC examination.
2. Affected Parties
As of December 2025, and incorporating filings received through
April 30, 2026, there were 16,434 registered investment advisers, with
roughly $166.0 trillion in total regulatory assets under management and
approximately 1,110,000 employees. There were also 6,463 exempt
reporting advisers with additional assets of approximately $7.5
trillion.\122\ We do not currently have
[[Page 57712]]
data on the extent to which advisers use third parties to solicit
government entities.
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\122\ Exempt reporting advisers are not required to report their
regulatory assets under management on Form ADV. Here we cite the
total gross assets of these advisers' private funds.
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The rule also affects government entities that may use investment
advisory services. In particular, State and local government retirement
funds currently have $9.6 trillion in assets, representing 33 percent
of all U.S. pension assets, and State-run qualified tuition plans
currently manage $603 billion in assets.\123\
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\123\ Pension plan data are as the end of the second quarter of
2025 and come from tables in Financial Accounts of the United
States--Z.1, Bd. Of Governors of the Fed. Rsrv. Syhttps://
<a href="http://www.federalreserve.gov/releases/z1/20250911/html/default.htm">www.federalreserve.gov/releases/z1/20250911/html/default.htm</a> (last
updated Sept. 11, 2025). State and local government employee
retirement funds have $9.6 trillion in total financial assets (Table
L.120), while Federal government employee retirement funds have $4.9
trillion (Table L.119) and private pension funds have $14.2 trillion
(Table L.118). 9.6/(9.6 + 4.9 + 14.2) = 33%. State-run qualified
tuition plan data are as of December 31, 2025, as reported by the
College Savings Plan Network. See Coll. Sav. Plan Network, 529 Plan
Data (2025), available at <a href="https://www.529network.org/wp-content/uploads/2026/06/CSPN-data-for-12.31.25.pdf">https://www.529network.org/wp-content/uploads/2026/06/CSPN-data-for-12.31.25.pdf</a>.
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C. Benefits and Costs
1. Benefits of Rescinding the Political Contribution Rule
Rescinding the political contribution rule would likely lower the
ongoing direct compliance costs for advisers to comply with the
Advisers Act. The extent of the cost savings would vary with many
factors. Notably, cost savings would vary with the extent to which an
adviser would choose to modify its policies and procedures related to
identifying pay-to-play risks and eliminating pay-to-play practices.
In particular, removing the prescriptive requirements of rule
206(4)-5 would allow investment advisers to tailor their policies and
procedures to their specific pay-to-play risks, resulting in lower
compliance costs for most advisers. For example, some advisers that
currently vet the past political contributions of prospective employees
or employees being considered for a transfer or a promotion may no
longer do so or do so in fewer situations. These savings could free
adviser employees for other tasks or reduce the need for dedicated
compliance staff, or both. Advisers may pass these cost savings on to
their government clients through lower fees or improved service
quality.
Some advisers might change their policies and procedures to remove
specific requirements designed to comply with rule 206(4)-5, while
retaining the same or similar obligations as a matter of practice. An
adviser might choose to retain a particular policy either because its
State's regulations are already more stringent than an analogous policy
imposed by the political contribution rule,\124\ because the adviser is
a dual-registered entity subject to rule 15Fh-6, or because the adviser
has an affiliated broker or dealer that is required to comply with the
MSRB Political Contribution Rule (rule G-37), MSRB Rule G-38, or FINRA
Rule 2030. These rules have substantially similar prohibitions to those
in the political contribution rule, and to the extent that compliance
resources are shared between affiliated entities, it may not be cost
effective for an adviser to tailor its specific advisory practices in
response to a rescission of the political contribution rule. Likewise,
an adviser might choose to retain some elements because after
conducting its risk assessment, it may decide that such elements are
appropriate to address its particular pay-to-play risks.\125\
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\124\ For example, N.J. Admin. Code Sec. 17:16-4.3 prohibits
the engagement of, and requires the termination of, an investment
management firm, if an investment management professional associated
with the firm makes certain political contributions greater than
$250 within the two-year period prior to and during the engagement.
\125\ Some advisers already have policies in place (such as
complete prohibitions on political donations) that are more
stringent than those required by the political contribution rule,
and may choose to retain these policies for the same reasons that
they originally implemented these policies.
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Some advisers may choose not to change a policy, other than by
removing specific requirements for complying with rule 206(4)-5 and
related recordkeeping requirements, because the initial cost of
changing policies is larger than the ongoing savings that would accrue
from switching to a different policy.\126\ Still other advisers would
not be affected because they neither currently have nor intend to seek
government entity clients.
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\126\ We do not anticipate any substantive or material change in
an adviser's code of ethics. See infra note 166.
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The 2010 Adopting Release estimated the ongoing compliance costs
related to the political contribution rule. These costs include ongoing
monitoring of employee contributions, compliance training,
recordkeeping, and related expenses.\127\ Rescinding the rule would
eliminate these costs. In aggregate, we expect that rescinding the
political contribution rule would save annual, ongoing compliance
expenses of approximately $3,750 per smaller firm,\128\ $161,500 per
medium firm,\129\ and $323,000 per larger firm,\130\ resulting in
annual aggregate cost savings of approximately $416 million.\131\
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\127\ See 2010 Adopting Release, supra footnote 1, at section
IV.B.1.
\128\ The 2010 Adopting Release estimated ongoing costs of 10
hours of compliance manager time (this title was replaced by the
term financial examiner--see infra footnote 240). 10 hours x $375
per hour = $3,750. Smaller firms are defined as those with fewer
than five employees who perform investment advisory functions.
\129\ The 2010 Adopting Release estimated ongoing costs of 375
hours of compliance manager time (this title was replaced by the
term financial examiner--see infra footnote 240) and 125 hours of
clerical time. 375 hours x $375 per hour + 125 hours x $167 per hour
= $161,500. Medium firms are defined as those with between five and
15 employees who perform investment advisory functions.
\130\ The 2010 Adopting Release estimated ongoing costs of 750
hours of compliance manager time (this title was replaced by the
term financial examiner--see infra footnote 240) and 250 hours of
clerical time. 750 hours x $375 per hour + 250 hours x $167 per hour
= $323,000. Larger firms are defined as those with more than 15
employees who perform investment advisory functions.
\131\ See infra footnote 183 for an explanation of how we
estimated the total number of advisers affected by the rule (2,091).
Of the 1,518 advisers who report having direct government clients on
Form ADV, 358 (23.6%) are smaller firms, 460 (30.3%) are medium
firms, and 700 (46.1%) are larger firms. Assuming that advisers who
do not have direct government clients but do advise pools with
government entity investors have the same size distribution, we
estimate that there are 2,091 x 23.6% = 493 smaller firms affected
by the rule, 2,091 x 30.3% = 634 medium firms affected by the rule,
and 2,091 x 46.1% = 964 larger firms affected by the rule. $3,750 x
493 smaller firms + $161,500 x 634 medium firms + $323,000 x 964
larger firms = $415,611,750. Note that this estimate is for the
savings accruing only to registered investment advisers because for
other types of advisers we do not generally have data on their
number of employees or whether they have government clients. Note
also that, as described earlier in this section, some advisers may
choose to retain some policies developed in response to the
political contribution rule, and so may not fully realize these cost
savings.
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Advisers that currently apply or consider applying for an exemption
under the political contribution rule would also see reduced costs
because they would no longer spend time and resources deliberating,
preparing, or submitting applications for an exemption. We estimate
that the reduction in costs related to advisers that would otherwise
file for an exemption would result in $68,916.49 in savings in
aggregate per year,\132\ with potentially some additional savings in
deliberative time for advisers that
[[Page 57713]]
considered but ultimately declined to file for exemptive applications.
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\132\ According to the PRA analysis in Table 2, we estimate one
fewer well-precedented application with an average external cost of
$15,259.94, and one fewer medium complexity application with an
average external cost of $51,948.56, for a total cost savings of
$15,259.94 + $51,948.56 = $67,208.50. Additionally, each filing
would save an hour of internal paralegal or legal assistant time, at
a cost of $281/hour. $67,208.50 + $281/hour x 2 hours = $67,770.50.
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Market participants have claimed that the political contribution
rule has distorted investment adviser labor markets by causing advisers
to screen candidates based on prior political contributions rather than
professional qualifications. When these screenings remove personnel
from consideration whose contributions pose no appreciable pay-to-play
risk, they reduce the quality of advisory teams without providing any
corresponding benefit. The rule may have further distorted labor
markets if qualified individuals chose not to seek employment at
certain investment advisers because of those firms' policies on
political contributions. To the extent that rescission of the rule
would result in advisers hiring employees with prior contributions that
the adviser previously would have rejected despite posing no
appreciable pay-to-play risks or qualified applicants becoming more
likely to apply for these positions, the quality of investment
management available to public pension plans may improve, which would
directly benefit plan beneficiaries. The Commission does not have data
on measures indicating the extent of adviser competition that would
allow us to quantify the magnitude of any such distortions.
The political contribution rule may also have made government
contracts less appealing, and so the rule may have disincentivized
investment advisers from seeking such contracts: Some advisers might be
reluctant to limit their employees' political contributions while
others might fear the risks associated with unintended minor
infractions of the political contribution rule by their covered
associates, as this could lead to the loss of profits from a client
over a two-year period. The compliance costs that advisers incur under
the political contribution rule in order to compete for government
contracts might also deter some advisers, particularly smaller
advisers, from competing for government contracts. Similarly, some
advisers may not compete for government contracts because of a prior
contribution, despite a lack of any associated pay-to-play risk. To the
extent that rescission expands the pool of advisers competing for
government contracts, government clients may benefit from lower
advisory fees or improved investment performance. State and local
government retirement funds currently hold $9.6 trillion in
assets.\133\ Even modest improvements in net-of-fee returns resulting
from increased competition could generate substantial benefits for the
36 million plan participants who depend on these funds.\134\
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\133\ See supra footnote 123.
\134\ See supra footnote 13.
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In some circumstances, the two-year compensation ban may have
harmed the government clients and beneficiaries the rule was designed
to protect. When an adviser loses the right to receive compensation
from a government client, the loss of compensation could cause an
adviser to reduce the resources available to service that client (e.g.,
reducing research capacity, staffing, or execution quality), although
many factors could affect the degree to which this occurs. In the case
of non-listed closed-end funds or other structures where investors
cannot redeem or trade their positions on a secondary market,
beneficiaries cannot exit in response to deteriorating service quality,
making them particularly vulnerable to this harm. The proposed
rescission would ameliorate this outcome for government clients and
their beneficiaries.
Market participants have also suggested that rule 206(4)-5 has made
advisers to government clients and covered associates of these advisers
less likely to make contributions to government officials. This is
supported by survey data in which 12 percent of investment adviser
respondents indicated that they have some type of blanket prohibition
on political contributions for their employees.\135\ The rule was not
intended to discourage lawful political donations. To the extent that
rescission leads advisers to modify their policies in ways that permit
employees to make or increase the size of lawful political
contributions, adviser personnel would benefit by regaining the ability
to make lawful donations (i.e., more political speech) that the rule
may have discouraged.\136\
---------------------------------------------------------------------------
\135\ See 2024 Investment Management Compliance Testing Survey,
supra footnote 2; see also supra section III.B.1.b.
\136\ See supra footnote 67 and accompanying text.
---------------------------------------------------------------------------
To the extent that the rule has reduced competition in the market
for third-party solicitors by limiting such solicitors to certain
regulated persons, and thus increased the price for such solicitation,
rescinding the rule may also allow more advisers to use a greater
variety of placement agents to solicit government clients. This could
allow smaller advisers who do not have the internal resources to
solicit government clients to compete for such contracts, which may
increase competition in that market. However, this effect could be
mitigated by applicable rules and regulations that govern the use of
solicitors, including the applicable MSRB and FINRA rules, as well as
other applicable State and local rules prohibiting third-party
solicitation, to the extent they are relevant to the adviser and would
still be in effect.\137\
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\137\ See supra section III.B.1.a; see also supra footnote 82
and accompanying text.
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2. Costs of Rescinding the Political Contribution Rule
All advisers would face a one-time cost in determining whether to
modify their policies and procedures and code of ethics in response to
a rescission of the political contribution rule. Advisers that choose
to modify their practices would incur additional costs as a result. We
estimate that this cost will be approximately $51 million in
aggregate.\138\ Transition costs are likely to be larger for advisers
operating in States and municipalities that have their own pay-to-play
restrictions. To the extent that specific requirements of the political
contribution rule are currently more stringent than similar rules in
other jurisdictions, these advisers would need to re-evaluate local
rules when designing their policies and procedures. However, for many
advisers, we expect that these costs would be small relative to the
ongoing cost savings that they would achieve from tailoring their
policies to their particular circumstances. In addition, for the
reasons discussed above, some advisers might change their policies and
[[Page 57714]]
procedures to remove requirements to comply with rule 206(4)-5, while
retaining substantially similar obligations as a matter of practice.
For example, some advisers are unlikely to make substantive
modifications to their policies and procedures if doing so would
ultimately lead to higher costs for the adviser or if an adviser's
operations in a particular jurisdiction require them to adopt similar
policies.
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\138\ According to the PRA analysis (see infra footnote 235 and
associated text) we estimate that, on average, smaller firms would
spend 1.5 hours, medium firms would spend 50 hours, and larger firms
would spend 125 hours modifying their policies and procedures in
response to the proposed rescission. We estimate that the 1.5 hours
by smaller firms would generally be from financial examiners (who
have an average wage of $375/hour, see infra footnote 230 and
associated text). For medium firms, we estimate that 37.5 hours
would be from financial examiners with the remaining 12.5 hours from
bookkeeping, accounting, and auditing clerks (who have an average
wage of $167/hour, see infra footnote 241 and associated text). For
larger firms, we estimate that 93.75 hours would be from a financial
examiner with the remaining 31.25 hours from bookkeeping,
accounting, and auditing clerks. The aggregate cost is therefore 493
smaller firms x 1.5 hours x $375/hour + 634 medium firms x (37.5
hours x $375/hour + 12.5 hours x $167/hour) + 964 larger firms x
(93.75 hours x $375/hour + 31.25 hours x $167/hour) =
$49,437,912.50. See supra footnote 131 for an explanation of the
estimate of the number of firms. The PRA additionally estimates that
all affected firms would spend, on average, two hours of financial
examiner time updating their compliance policies and procedures.
2,091 x 2 hours x $375/hour = $1,568,250. In total, $49,437,912.50 +
$1,568,250 = $51,006,162.50. Note that this estimate only accounts
for costs accruing to registered investment advisers because for
other types of advisers we do not generally have data on their
number of employees or whether they have government clients.
---------------------------------------------------------------------------
Rescinding the political contribution rule may increase the risk of
pay-to-play practices by investment advisers. While we believe that
this risk can be mitigated, as discussed in detail below, any pay-to-
play activity that does occur comes with significant costs. Pay-to-play
activities can result in the selection of one adviser over a more
qualified adviser, potentially leading to diminished returns, higher
costs, or other reductions in service quality (such as speed of
execution or quality of communication and coordination) to pensions and
other investments managed by governments. In addition, markets with
pay-to-play dynamics create potentially large barriers to entry. If
business contracts are preferentially awarded to providers who make
political donations or pay third-party solicitors, then these costs
become an expense to any adviser, or to the employees of that adviser,
wishing to compete for these contracts. Either the provider bears these
costs directly or the provider experiences a reduction in the
likelihood of acquiring contracts, thereby decreasing the expected
return from competing for that business. The increased cost or reduced
gain of doing business in this market could lead to decreased
competition in the market for investment advisory services and
ultimately lower-quality services for government clients.
The academic literature provides evidence to suggest that campaign
donations from financial institutions (e.g., private equity funds) are
associated with an increased likelihood of winning government
contracts, including from government pensions and other government-run
investment programs.\139\ Similar academic research suggests that the
financial rate of return on campaign contributions is quite large. One
study estimated that, on average, each dollar contributed to a campaign
was associated with a $400 increase in government contract revenue,
although this analysis is based on aggregate evidence across all
government contracts, of which advisory contracts are just one small
part.\140\ While these studies are not necessarily indicative of quid
pro quo arrangements, they suggest that political contributions are
correlated with the awarding of government contracts.
---------------------------------------------------------------------------
\139\ See, e.g., Jaejin Lee, How Political Connections Affect
Public Pension Fund Investments? Evidence from Close State Elections
(Feb. 27, 2025), available at <a href="https://papers.ssrn.com/sol3/papers.cfm?abstract_id=4668018">https://papers.ssrn.com/sol3/papers.cfm?abstract_id=4668018</a> (retrieved from SSRN Elsevier
database); Alexsandar Andonov et al., Political Representation and
Governance: Evidence from the Investment Decisions of Public Pension
Funds, 73 J. Fin. 2041 (2018).
\140\ See Nicholas Stephanopoulos, Campaign Finance and ``Real''
Corruption, in Campaign Finance and the First Amendment: Fifty Years
of Supreme Court Decisions and Campaign Finance Reforms (Lee C.
Bollinger & Geoffrey R. Stone eds., 2026), available at <a href="https://ssrn.com/abstract=4822687">https://ssrn.com/abstract=4822687</a> (retrieved from SSRN Elsevier database).
While we do not have readily available data on State or local
government contracts, and the proportions are likely to differ
significantly from Federal contracts, Federal government contracts
to investment advisers in fiscal year 2025 were approximately $120
million, compared to nearly $780 billion for Federal government
contracts. Data for these estimates come from <a href="http://www.usaspending.gov">www.usaspending.gov</a>
using NAICS code 5239 as an estimate of contracts for investment
advisory services. See U.S. Dep't of Treasury, Bureau of the Fiscal
Serv., USAspending, <a href="https://www.usaspending.gov/">https://www.usaspending.gov/</a> (last visited July
9, 2026).
---------------------------------------------------------------------------
In support of the political contribution rule, the Commission cited
a number of enforcement actions taken between 2000 and 2009 against
investment advisers relating to alleged pay-to-play practices.\141\
Since the rule's compliance date, no similar enforcement actions have
been brought by the Commission. Although there are many possible
explanations for the decline in enforcement actions relative to the
pre-rule state, and it is unclear to what extent such decline in
enforcement actions also reflects a decline in pay-to-play practices
overall, it is possible that the political contributions rule has had
some deterrent effect. However, it is also possible that the pre-rule
enforcement actions, brought under the antifraud provisions of the
Advisers Act, operated to deter pay-to-play practices. In that case,
given that similar enforcement actions would continue to be possible
after the political contributions rule is rescinded, any resulting
change in deterrent effect from the rule's rescission may not be that
significant.
---------------------------------------------------------------------------
\141\ A staff analysis of cases involving investment advisers in
alleged pay-to-play misconduct identified these same thirteen cases,
as well as two additional cases that occurred contemporaneously with
the 2010 Adopting Release. It found no additional cases before those
cited. For comparison, the Commission took at least 107 enforcement
actions against investment advisers in fiscal year 2010 alone (see
Table 2 from Select SEC and Market Data, Fiscal 2010, available at
<a href="https://www.sec.gov/about/secstats2010.pdf">https://www.sec.gov/about/secstats2010.pdf</a>).
---------------------------------------------------------------------------
Changes to the technological, political, and legal landscape since
the political contribution rule was adopted in 2010 may also help
explain the absence of SEC enforcement actions and suggest that the
rule's rescission could have a more limited impact on the actual
incidence of pay-to-play practices. For example, spending in political
campaigns is significantly higher today than it was in 2010.\142\ As a
result, the value of each marginal dollar is likely smaller. Thus,
there might be less incentive for candidates to reward investment
advisers for the type of pay-to-play practices that would be enforced
under the political contribution rule. In addition, there is evidence
to suggest that public scrutiny of the relationship between government
clients and investment advisers may have grown independent of Federal
regulatory oversight.\143\ Improvements in data dissemination and, in
some jurisdictions, new requirements for increased transparency related
to advisory fees, plan investments, and information related to other
relevant concerns may have made it easier for beneficiaries,
journalists, and oversight bodies to identify anomalous investment
patterns that may reflect improper influence.\144\ Increased
transparency can deter pay-to-play practices by raising the likelihood
that these practices would be detected and prosecuted. It can also
create greater reputational costs, for both advisers and
[[Page 57715]]
government officials, from even the appearance of impropriety.
---------------------------------------------------------------------------
\142\ See, e.g., Douglas M. Spencer & Abby K. Wood, Citizens
United, States Divided: An Empirical Analysis of Independent
Political Spending, 89 Ind. L.J. 315 (2014) (finding that
independent expenditures in State campaigns increased following
Citizens United v. FEC, 558 U.S. 310 (2010), with a significantly
greater increase in States that had previously banned independent
expenditures).
\143\ For example, some academic research suggests that
increased transparency in public pensions has led to investment
managers receiving below-average compensation from these funds, and
the hiring of lower-skill managers. See Alexander Dyck et al.,
Outraged by Compensation: Implications for Public Pension
Performance, 35 Rev. Fin. Stud. 2928 (2022). The authors argue that,
because investment managers generally receive compensation higher
than that of the general public, ``pension trustees fear the
triggering of public outrage if they compensate their investment
managers at a market rate level.'' This could suggest that the
public scrutinizes pension investment practices.
\144\ See, e.g., Cal. Gov't Code Sec. 7514.7, Tex. Gov't Code
Ann. Sec. Sec. 801 and 802, and S.C. Code Ann. Sec. 9-16-90. See
also, e.g., Public Plans Data, <a href="https://publicplansdata.org">https://publicplansdata.org</a> (last
updated Nov. 17, 2025) (website of the Center for Retirement
Research which, with partner organizations, publishes public pension
plan data dating back to 2001). In general, the more net-of-fee
performance information is available and comparable for a range of
government funds, the more evidence the public will have to
determine whether funds could be using an adviser for reasons other
than net-of-fee performance. Similarly, these data may reveal that
government clients are invested in funds managed by advisers with a
history of campaign contributions or some other connection to a
government official, or that an adviser charges fees abnormally high
for the types of assets in which the client invests.
---------------------------------------------------------------------------
Importantly, pay-to-play practices were unlawful under the Advisers
Act and other State and Federal laws before rule 206(4)-5 was adopted
and would remain unlawful following its rescission.\145\ Registered
investment advisers would continue to be required to maintain policies
and procedures reasonably designed to prevent fraudulent pay-to-play
practices, to satisfy their fiduciary obligations to assess and
mitigate pay-to-play risks, to adopt codes of ethics reflecting those
obligations, and to reasonably supervise persons under their
supervision with a view to preventing violations. Accordingly, the
deterrence attributable to the political contribution rule is limited
to conduct that the existing legal framework would not otherwise deter.
The Commission believes that the breadth of the antifraud provisions
and the mandatory compliance rule framework applicable to registered
advisers appropriately deters pay-to-play practices.\146\ For exempt
reporting advisers and foreign private advisers, who are not subject to
the compliance rule or the code of the ethics rule, the reduction in
pay-to-play deterrence from rescission could be greater than for
registered advisers.
3. Costs and Benefits of Amending Rule 204-2
The proposal would amend the recordkeeping rule to eliminate the
provisions requiring a registered (or required to be registered)
investment adviser to make and keep certain records in connection with
the political contribution rule. This revision would result in lower
costs to advisers since it would reduce the number of records that are
required to be maintained. In aggregate, we estimate that this revision
would result in a lower burden of approximately $646,000.\147\
Apart from these cost savings, there would be no independent
effects associated with this amendment beyond those that would arise in
conjunction with the rescission of the political contribution rule.
Importantly, advisers would continue to be required to maintain certain
records of their policies and procedures associated with managing their
pay-to-play risk.\148\
4. Aggregate Monetized Benefits and Costs
Throughout this economic analysis, we have estimated, as
applicable, monetized benefits and costs per affected entity or filing.
In this section, we present aggregate measures of these monetized
effects across entities and time. These totals include only benefits
and costs, as applicable, that are monetized in the economic analysis
and thus do not encompass all of the proposed rule's benefits and
costs. In addition, these estimates assume each entity will realize the
full extent of possible benefits and costs as a result of the proposed
rescission; actual benefits or costs may vary across entities depending
on their existing practices and whether those practices continue after
the adopted rule.
a. Initial and Annual Aggregate Monetized Benefits and Costs
Tables 1 and 2 report the benefits and costs, respectively, that
are monetized in this economic analysis, aggregated across all affected
entities and instances of filings. To aggregate these monetized effects
we use estimates of the number of affected parties and filings \149\
and burdens under the Paperwork Reduction Act in Section IV.
We estimate that the total aggregate initial monetized benefit is
$0 and the total aggregate annual monetized benefit is $416,325,639.50.
Table 1--Aggregate Monetized Benefits
[2026 Dollars]
------------------------------------------------------------------------
Aggregate
initial Aggregate annual
benefit (A) benefit (B)
------------------------------------------------------------------------
Ongoing compliance costs under Rule $0 \a\
206(4)-5............................ $415,611,750.00
Exemption filings under Rule 0-4..... 0 \b\ 67,770.50
Recordkeeping under Rule 204-2....... 0 \c\ 646,119.00
----------------------------------
Total............................ 0 416,325,639.50
------------------------------------------------------------------------
Notes:
\a\ See supra footnote 141.
\b\ See supra footnote 142.
\c\ See supra footnote 157.
We estimate that the total aggregate initial monetized cost is
$51,006,162.50 and the total aggregate annual monetized cost is $0.
---------------------------------------------------------------------------
\145\ See supra sections II.A.1, III.B.1 (describing other
Federal and State laws prohibiting and imposing civil or criminal
liability for pay-to-play schemes).
\146\ See supra section II.A.1.
\147\ According to the PRA analysis in section IV, we estimate
that 2,091 advisory firms have government clients and that, for
these firms, the average annual burden per advisory firm would be
reduced by 2 hours. These hours are a blend of clerks with an
average wage of $154.50/hour (see infra footnote 189 and
accompanying text). The aggregate savings is 2,091 firms x 2 hours/
firm x $154.50/hour = $646,119. Note that the estimate of 2 hours
per firm with government clients is equivalent to the estimate in
the PRA estimate of .2545 hours per total firm (see infra footnote
192 and accompanying text) as 2 x 2,091/16,434 = .2545.
\148\ See section II.B.
\149\ See supra sections III.B.2, III.C.1 through III.C.3.
[[Page 57716]]
Table 2--Aggregate Monetized Costs
[2026 Dollars]
------------------------------------------------------------------------
Aggregate
Aggregate initial annual cost
cost (A) (B)
------------------------------------------------------------------------
Modifying Policies and Procedures.... \a\ $0
$51,006,162.50
----------------------------------
Total............................ 51,006,162.50 0
------------------------------------------------------------------------
Notes:
\a\ See supra footnote 148.
b. Present Values and Annualized Values of Aggregate Monetized Benefits
and Costs
Consistent with the requirements of Executive Order 12866, the
Commission reports estimated total monetized benefits and costs for all
affected entities in two additional ways specified in OMB Circular A-
4.\150\ The two presentations are intended to address the fact that the
various benefits and costs of the proposed rule would not accrue at the
same point in time; rather, benefits and costs that accrue sooner are
generally more valuable than those that occur later in time.\151\
---------------------------------------------------------------------------
\150\ See E.O. 12866 (Sept. 30, 1993) [58 FR 51735 (Oct. 4,
1993)], at 51741 (requiring agencies to provide an analysis of
benefits, costs, and regulatory alternatives to OIRA for significant
regulatory actions); OMB, Circular A-4, at 31-34, 45 (Sept. 17,
2003) (``Circular A-4'') (providing guidance to agencies regarding
compliance with E.O. 12866); see also E.O. 14215 (Feb. 18, 2025) [90
FR 10447, 10448 (Feb. 24, 2025)] (requiring independent agencies to
comply with E.O. 12866). In addition, E.O. 14192 requires agencies
to provide their best approximation of the total costs or savings
associated with each new regulation or repealed regulation
consistent with the analyses required by E.O. 12866. See E.O. 14192
(Jan. 31, 2025) [90 FR 9065, 9066 (Feb. 6, 2025)]. For purposes of
approximating the total cost savings and costs under E.O. 14192, the
Commission uses the annualized monetized benefits and costs using a
real discount rate of 7%. See Table 4 and accompanying discussion.
\151\ See Circular A-4, at 32.
---------------------------------------------------------------------------
We report (1) the present values of expected benefits and costs
that are monetized in our Economic Analysis, aggregated across all
affected entities, over a 10-year time horizon, starting in 2026, as
well as (2) the annualized values over the same time horizon that are
derived from the present values. This time horizon represents the
period over which the principal benefits and costs that are monetized
in the Economic Analysis are expected to accrue.\152\ The present
values and annualized values account for the timing of benefits through
discounting, which is a procedure that accounts for the time value of
money.\153\
---------------------------------------------------------------------------
\152\ See id. at 31 (``The ending point should be far enough in
the future to encompass all the significant benefits and costs
likely to result from the rule''). For the purposes of this
analysis, we assume the effective date of the rule, as well as the
start year for the analysis's time horizon, is the present year. The
analysis uses calendar years and accounts for the compliance periods
included in the release (see note a in Table 2).
\153\ See id. at 32 (``The Rationale for Discounting'') and 45
(``Treatment of Benefits and Costs over Time''); see also OIRA,
Regulatory Impact Analysis: A Primer, (Aug. 15, 2011), available at
<a href="https://www.reginfo.gov/public/jsp/Utilities/circular-a-4_regulatory-impact-analysis-a-primer.pdf">https://www.reginfo.gov/public/jsp/Utilities/circular-a-4_regulatory-impact-analysis-a-primer.pdf</a> (``To provide an accurate
assessment of benefits and costs that occur at different points in
time or over different time horizons, an agency should use
discounting. Agencies should provide benefit and cost estimates
using both 3 percent and 7 percent annual discount rates expressed
as a present value as well as annualized.''); Harvey S. Rosen & Ted
Gayer, Public Finance 151 (8th ed. 2008) (defining present value as
``the value today of a given amount of money to be paid or received
in the future'').
---------------------------------------------------------------------------
Table 3 reports the present values of the aggregate monetized
benefits and costs from Tables 1 and 2, combining initial and annual
monetized benefits and costs. The analysis uses annual real discount
rates of 3 percent and 7 percent over a 10-year time horizon, starting
in 2026.\154\ We estimate that the present value of total monetized
benefits is $3,604,218,640 using a 3 percent discount rate and
$3,024,709,535 using a 7 percent discount rate. We estimate that the
present value of total monetized costs is $51,006,162.50 using a 3
percent or 7 percent discount rate.
---------------------------------------------------------------------------
\154\ This approach is consistent with OMB Circular A-4. See
Circular A-4, supra footnote 150, at 31-34 (stating that, ``[f]or
regulatory analysis, [agencies] should provide estimates of net
benefits using both 3 percent and 7 percent'' discount rates and
discussing why those rates are reasonable default rates). Also, we
use a mid-year discount rate. See OMB, Circular A-94, at 21-22 (Oct.
19, 1992) (stating that, ``When costs and benefits occur in a steady
stream, applying mid-year discount factors is more appropriate.'').
Table 3--Present Value of Aggregate Monetized Benefits and Costs Over 10
Years From 2026 to 2035
[2026 Dollars]
------------------------------------------------------------------------
3% real discount 7% real discount
Estimated effects \a\ rate rate
------------------------------------------------------------------------
Benefits.................... $3,604,218,640 $3,024,709,535
Costs....................... 51,006,162.50 51,006,162.50
------------------------------------------------------------------------
Notes:
\a\ For each discount rate, the present value calculations are based on
these assumptions: (i) all one-time monetized implementation costs are
incurred immediately and not discounted; (ii) recurring annual
monetized benefits begin to accrue in the year in which affected
entities first comply. We assume that monetized benefits occur in a
steady stream, and we use a mid-year discount rate.
Table 4 reports annualized aggregate monetized benefits using real
discount rates of 3 percent and 7 percent over a 10-year horizon.\155\
The lump sum present values of aggregate monetized benefits reported in
Table 3 are converted in Table 4 into a constant stream of annualized
benefits over a 10-year time horizon, starting in 2026.\156\
[[Page 57717]]
Annualized benefits and costs may differ from an aggregation of the
recurring monetized annual benefits discussed earlier in the Economic
Analysis because they incorporate the timing of benefits and costs,
through discounting, and combine one-time and recurring benefits and
costs.\157\ We estimate that annualized total monetized benefits are
$416,325,640 per year using a 3 percent or 7 percent discount
rate.\158\ We estimate that annualized total monetized costs are
$5,891,755 per year using a 3 percent discount rate and $7,020,566 per
year using a 7 percent discount rate. Because the annualized costs are
discounted and include initial costs, they should not be compared
directly to the aggregate annual monetized costs in Table 2.
---------------------------------------------------------------------------
\155\ This approach is consistent with the recommended treatment
of benefits and costs over time in Circular A-4. See Circular A-4,
supra footnote 150, at 45 (``You should present annualized benefits
and costs using real discount rates of 3 and 7 percent'').
\156\ For each discount rate, the annualized monetized benefits
in Table 4 represent the constant annual stream of benefits whose
present value over the time horizon equates the corresponding
present value in Table 3. See note a, Table 4 for additional
calculation details.
\157\ The annualized benefits and costs present these values
over the 10-year time horizon, starting in 2026.
\158\ Because we do not estimate any initial benefits and
estimate a constant annual benefit from the proposal, the annualized
aggregate benefit is simply equal to this constant annual benefit,
regardless of the discount rate.
Table 4--Annualized Aggregate Monetized Benefits and Costs Over 10 Years
From 2026 to 2035
[2026 Dollars]
------------------------------------------------------------------------
3% real discount 7% real discount
Estimated effects \a\ rate rate
------------------------------------------------------------------------
Benefits.................... $416,325,640 $416,325,640
Costs....................... 5,891,755 7,020,566
------------------------------------------------------------------------
Notes:
\a\ For each discount rate, the annualized values are calculated by
dividing the corresponding present values in Table 3 by the sum of
discount factors over the time horizon. The discount factor in year t
of the time horizon is equal to 1/(1 + discount rate)(t-0.5).
D. Effects on Efficiency, Competition, and Capital Formation
1. Efficiency
The Commission believes that rescinding the political contribution
rule would allow advisers to enact policies and procedures tailored to
their specific pay-to-play risks, reducing compliance costs and
avoiding the unintended consequences associated with the current rule.
Where advisers can tailor their policies and code of ethics to their
specific pay-to-play risks and eliminate requirements that are not
relevant to their business, the efficiency of their compliance programs
would increase. To the extent that these resources are redeployed to
investment management and client-facing activities, advisers'
productive efficiency would increase, which could result in higher-
quality services for advisers' government clients.
As described in the cost and benefits section above, rescinding the
political contribution rule could change the quality, either positively
or negatively, of investment advisers retained by government entities.
This disparity in quality may be meaningful from the perspective of the
State or local government client as discussed in the previous section.
Further, to the extent that rescission systematically changes the types
of advisers retained by government entities, the aggregate effect on
public pension asset allocation could be meaningful. The direction and
magnitude of this effect are uncertain and would depend on whether
advisers newly able to compete for government mandates following
rescission have systematically different investment approaches than
current incumbent advisers. If such an effect were large enough, it
could affect asset price efficiency in markets where public pension
funds are significant investors.
2. Competition
The rescission of the political contribution rule could increase
competition in the investment adviser market for State and local
government clients. As described above, some advisers currently face
barriers to competing for State and local government clients because of
the existence of the political contribution rule, and the policies and
procedures they have adopted to comply with it. To the extent that, as
a result, advisers have not participated, or have been less likely to
participate, in the solicitation of State and local government
contracts, the rescission of the political contribution rule would
remove this impediment to competition in the advisory market.
Prospective government clients with a greater number of advisers to
choose from may be better positioned to select an adviser that can
provide advice better tailored to their specific investment needs.
Additionally, increased competition could lead to better investment
terms for government clients and could ultimately benefit plan
beneficiaries as well as taxpayers.
Conversely, the rescission of the political contribution rule could
decrease competition in those same markets if the rescission were to
generate pay-to-play expectations in these markets, despite the
associated activity remaining unlawful.\159\ However, we believe that
any such effect is likely to be small, as we believe that the risks of
increased pay-to-play activity from rescinding the rule can be
mitigated.\160\
---------------------------------------------------------------------------
\159\ Markets with pay-to-play dynamics can create an
expectation among advisers to provide donations in order to receive
consideration for government business. These expectations generate
barriers to competition, as some providers cannot, or will not, pay
these costs and so would be functionally removed from consideration.
\160\ See supra III.C.2.
---------------------------------------------------------------------------
The rescission of the rule may also increase labor market
competition among investment adviser professionals by removing two
distortions in those markets.\161\ First, investment advisers may
currently screen candidates based on prior political contributions,
excluding qualified applicants for reasons unrelated to job
performance. Second, some prospective applicants may currently choose
not to work for an investment adviser because they value their ability
to make political contributions and do not wish to have that ability
restricted by their employer.
---------------------------------------------------------------------------
\161\ See supra III.C.1.
---------------------------------------------------------------------------
Finally, rescinding the rule could lead to increased competition in
the market for government solicitations. Since the rule currently
prohibits unregulated persons from soliciting government clients on
behalf of an adviser (unless they have one of an enumerated list of
relationships to that adviser), rescinding the rule could increase the
types of parties able to act in that capacity, and thus increase
competition in that market. However, this effect could be mitigated by
applicable rules and regulations that govern the use of solicitors,
including the MSRB Political Contribution Rule, FINRA Rule 2030, and
Exchange Act rule 15Fh-6, as well as applicable State and local rules
prohibiting third-party solicitation to the extent they are relevant to
the adviser and would still be in effect.\162\
---------------------------------------------------------------------------
\162\ See supra section III.B.1.a.
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[[Page 57718]]
3. Capital Formation
The proposal is unlikely to significantly affect capital formation
in aggregate. However, on the margin, rescission could increase capital
managed by investment advisers if greater competition for government
mandates expands adviser use by government entities. Conversely, if
rescission leads to a perceived increase in pay-to-play risk, some
investors (among both government clients and the broader market) may
reduce allocations through investment advisers. This may indirectly
lead to changes in capital formation for certain assets if investment
advisers are more or less likely than are investors' alternatives to
invest in a particular asset.
E. Reasonable Alternatives
1. Policies and Procedures Requirement
We considered combining the proposed rescission of the political
contribution rule with a new, more particularized rule specifically
requiring that investment advisers adopt and implement policies and
procedures reasonably designed to detect and prevent pay-to-play
activities. These policies and procedures could have been required to
contain certain prescribed features, such as political contribution
limits, annual review and written reports, risk assessments, and the
types of employees that must be covered. The prescribed features would
have been designed to be minimal, imposing requirements necessary to
address the pay-to-play risks of any adviser seeking government clients
while preserving flexibility for advisers to address their specific
risks.
The benefits of this approach would be similar to those for the
proposed rescission. Investment advisers are already required to adopt
and implement policies and procedures reasonably designed to prevent
violation of the Advisers Act; additionally, the Commission has stated
that pay-to-play arrangements violate the antifraud provisions of
section 206 of the Advisers Act. The additional deterrence this
alternative would provide, relative to the proposed rescission, would
be limited to situations in which an adviser's policies and procedures,
under the proposed rescission, would not contain the features
prescribed under the alternative and where these minimal requirements
under the alternative would have better deterred pay-to-play practices.
However, a separate policies and procedures provision would risk
advisers anchoring to the types of provisions required by this
alternative rather than designing their own policies and procedures to
be better tailored to the particular risks and business practices of
the firm. It also could incentivize some advisers with no pay-to-play
risk (for example, an adviser with no government clients and no
intention of ever soliciting or accepting government clients) to enact
policies at some cost to comply with the provision even in the absence
of a substantive concern. Accordingly, the costs of this alternative
would be greater than those of the proposed rescission.
2. Amending the Requirements of Rule 206(4)-5
Instead of rescinding the political contribution rule, we
considered amending the rule to make it less costly to comply with. For
example, we considered raising the de minimis threshold to $3,500 or
another increased amount, reducing or eliminating the two-year timeout
and the lookback provisions, narrowing the definitions of ``official''
and/or ``covered associate'', and/or expanding the bases for relief in
the exemptive process set forth in rule 206(4)-5(e). In general, this
alternative approach would have a lower cost reduction compared to the
proposed rescission, because this approach would prescribe certain
elements that, absent such a requirement, some advisers would choose
not to implement. It also would not alleviate the challenges of
applying a single set of definitions across a variety of State and
local government structures. Conversely, to the extent that, under the
alternative, these requirements would prevent pay-to-play activities at
those advisers and would not have been deterred under the proposed
rescission, this alternative would provide greater investor protection
than the proposal.
Moreover, under this alternative, some advisers may treat the
amended rule's requirements as sufficient to comply with their pay-to-
play-related obligations under the Advisers Act, regardless of their
actual pay-to-play risk, rather than designing their own policies and
procedures to be better tailored to the particular risks and business
practices of the firm. In this respect, the proposed rescission may,
for some advisers, result in more effective pay-to-play compliance than
targeted amendments to the existing rule.
3. Considering Adviser Size
We considered exempting smaller advisers, measured by total assets
under management or government client assets under management, from the
rule's requirements or subjecting them to less stringent requirements
than larger firms.\163\ To the extent that it would be easier for
larger advisers with more government contracts and possibly more
political connections to engage in pay-to-play practices, this approach
might more closely align compliance costs with an adviser's pay-to-play
risk than the current rule does. However, the opposite may also be
true: Smaller advisers might have a more difficult time being
considered by prospective government clients and so may have greater
incentives to engage in pay-to-play practices. Further, this approach
would not have retained the cost savings for larger firms that we
foresee arising from the proposed rescission. Additionally, it could
incentivize firms to engage in regulatory arbitrage, forming smaller
adviser firms to circumvent the rule's requirements. For example,
advisers near the threshold might restructure their business (e.g., by
spinning off government-focused advisory activities into separate
entities or by managing their assets under management to remain below
the threshold) to avoid the more stringent requirements applicable to
larger advisers. Such regulatory arbitrage would undermine the investor
protection objectives of this alternative while imposing restructuring
costs on the industry.
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\163\ There are approximately 460 small SEC-registered
investment advisers, 34 of which have indicated on Form ADV that
they have State or local government clients. In addition, smaller
exempt reporting advisers and foreign private advisers are subject
to the political contribution rule, although we do not have data on
the number of such advisers that have State or local government
clients. See infra section V.C.
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F. Request for Comment
We seek comment on all aspects of the economic analysis of the
proposed rescission, including whether the analysis accurately
characterizes the costs and benefits. To the extent possible, we
request that commenters provide supporting data and analysis. In
particular, we ask commenters to consider the following questions:
16. We state that we do not have data to estimate the effect of the
political contribution rule on competition in either the investment
adviser market for government clients or the investment adviser labor
market. Are there sources of data and/or estimation methods that would
allow us to make these estimates?
17. We state that we do not currently have data on the extent to
which advisers use third parties to solicit government entities. Are
there sources of data and/or estimation methods that would allow us to
make these estimates?
[[Page 57719]]
18. In section III.C.2, we discuss ways that the world has changed
since 2010 that could impact the prevalence of pay-to-play practices
independent from the political contribution rule. Is this discussion
accurate? Are there other ways in which the world has changed that
could deter or encourage pay-to-play practices that are deterred by the
political contribution rule?
19. In section III.C.2, we characterize ways in which advisers may
be more or less likely to make significant changes to their policies
and procedures in response to a rescission of the rule. Are these
characterizations accurate? Are there other important determinants of
the extent to which advisers would modify their policies and
procedures? Is the magnitude of the response reasonably estimated?
20. Would the proposed rescission impose any costs on State and
local governments that we do not consider here? For example, do they
rely on the political contribution rule for some aspect(s) of their
internal vetting process when selecting investment advisers or as a
means of verifying compliance with their own requirements?
IV. Paperwork Reduction Act
A. Introduction
The proposal would revise an existing ``collection of information''
within the meaning of the Paperwork Reduction Act of 1995 (the
``PRA'').\164\ The titles for the collections of information are:
``Rule 204-2 under the Investment Advisers Act of 1940'' (Office of
Management and Budget (the ``OMB'') control number 3235-0278), ``Rule
0-4: General Requirements of Papers and Applications'' (OMB control
number 3235-0633), and ``Investment Advisers Act rule 206(4)-7, 17 CFR
Sec. 275.206(4)-7, Compliance procedures and practices'' (OMB control
number 3235-0585). The Commission is submitting this collection of
information to the OMB for review and approval in accordance with the
PRA.\165\ An agency may not conduct or sponsor, and a person is not
required to respond to, a collection of information unless it displays
a currently valid OMB control number.
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\164\ See 44 U.S.C. 3501 et seq.
\165\ See 44 U.S.C. 3507(d); 5 CFR 1320.11.
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We discuss below the collection of information burdens associated
with the proposed rescission of rule 206(4)-5, which would impact the
PRA burden calculations for rule 204-2, rule 0-4, and rule 206(4)-
7.\166\ Exempt reporting advisers and advisers that are exempt from
Commission registration under section 203(b) (including foreign private
advisers) are not subject to rules 204-2 and 206(4)-7.
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\166\ We are not submitting a revised collection of information
regarding rule 204A-1 because we do not believe that the proposed
rescission of rule 206(4)-5 would result in a substantive or
material change in an adviser's code of ethics as to warrant a
burden adjustment for PRA purposes.
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B. Rule 204-2
Section 204 of the Advisers Act provides that investment advisers
registered or required to be registered with the Commission must make
and keep certain records for prescribed periods, furnish such copies
thereof, and make and disseminate certain reports. Rule 204-2 sets
forth the requirements for maintaining and preserving specified books
and records. This collection of information is mandatory. The
collection of information under rule 204-2 is necessary for the
Commission staff to use in its examination and oversight program, and
the information generally is kept confidential subject to the
provisions of applicable law.\167\ The following estimates of average
burden hours and costs are made solely for purposes of the Paperwork
Reduction Act of 1995 and are not derived from a comprehensive or even
representative survey or study of the cost of Commission rules and
forms. The respondents to this collection of information are investment
advisers registered or required to be registered with the Commission.
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\167\ See section 210(b) of the Advisers Act [15 U.S.C. 80b-
10(b)].
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The proposed amendments to rule 204-2 would eliminate paragraph
(a)(18) of the rule, which provides for the requirement that a
registered adviser that provides investment advisory services to a
government entity, or to a covered investment pool in which a
government entity is an investor, must make and keep certain records
relating to its covered associates; government entities to which the
adviser provides or has provided investment advisory services (or which
are or were investors in any covered investment pool to which the
adviser provides or has provided investment advisory services);
contributions made by the adviser and its covered associates to
government entity officials, or payments to State political parties or
PACs; and regulated persons soliciting government entities on behalf of
the adviser. Advisers are currently required to maintain such records
for five years.\168\ We propose to amend the PRA burden related to rule
204-2 to reflect the removal of this recordkeeping requirement and to
reflect updated data, including the implementation of a new wage
calculation methodology.\169\
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\168\ See rule 204-2(e)(1).
\169\ To calculate the occupational hourly rates used in this
release, the Commission uses occupational mean hourly wage data from
the Occupational Employment and Wage Statistics (OEWS) program of
the Bureau of Labor Statistics (BLS) for ``Securities, Commodity
Contracts, and Other Financial Investments and Related Activities''
(NAICS 523). See Occupational Employment and Wage Statistics, U.S.
Bureau of Labor Statistics, available at <a href="https://www.bls.gov/oes/">https://www.bls.gov/oes/</a>;
see also Standard Occupational Classification, U.S. Bureau of Labor
Statistics, available at <a href="https://www.bls.gov/soc/">https://www.bls.gov/soc/</a> (describing
occupational classification system used by BLS); Exec. Off. of The
President, Off. of Mgmt. & Budget, North American Industry
Classification System (2022), available at <a href="https://www.census.gov/naics/reference_files_tools/2022_NAICS_Manual.pdf">https://www.census.gov/naics/reference_files_tools/2022_NAICS_Manual.pdf</a> (describing the
industry classification system used by BLS and other agencies). The
mean hourly wage for each occupation is adjusted for changes in the
seasonally adjusted employment cost index for private wages and
salaries between the data reference period and when the data are
released by BLS. See Employment Cost Index, U.S. Bureau of Labor
Statistics, available at <a href="https://www.bls.gov/eci/">https://www.bls.gov/eci/</a>. The adjusted mean
hourly wage is then multiplied by a factor that accounts for nonwage
costs borne by employers, such as bonuses, benefits, and overhead.
This factor is calculated as an average over the 10 most recently
available years of data of the ratio of the Bureau of Economic
Analysis's annual gross output data for NAICS 523 to total annual
wages across all occupations for NAICS 523 in the OEWS data. See
Gross Output by Industry, U.S. Bureau of Economic Analysis,
available at <a href="https://www.bea.gov/data/industries/gross-output-by-industry">https://www.bea.gov/data/industries/gross-output-by-industry</a>; Occupational Employment and Wage Statistics, U.S. Bureau
of Labor Statistics, available at <a href="https://www.bls.gov/oes/">https://www.bls.gov/oes/</a>. The
final product is the occupational hourly rate. See generally Updated
Methodology for Calculating Occupational Hourly Rates (Dec. 19,
2025), available at <a href="https://www.sec.gov/files/method-occupational-hourly-rates.pdf">https://www.sec.gov/files/method-occupational-hourly-rates.pdf</a>.
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When rule 206(4)-5 was adopted, the Commission estimated that 1,697
registered advisers provided investment advisory services to government
clients and to certain pooled investment vehicles in which government
entities invest, and thus would be affected by the rule 204-2(a)(18)
recordkeeping requirements.\170\ The Commission estimated that the
requirements would increase the recordkeeping burden of each impacted
adviser by two hours, with the total burden among impacted advisers
estimated to be 3,394 hours.\171\ This resulted in an estimated annual
aggregate burden for all advisers under rule 204-2 of approximately
2,106,046 hours, with an estimated average total burden per adviser of
181.45 hours.\172\ This average total burden per adviser represented an
approximately 0.30 hour per adviser increase from the previously
approved burden calculation.\173\
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\170\ See 2010 Adopting Release, supra footnote 1 at section
V.A.
\171\ See id.
\172\ See id.
\173\ See id.
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[[Page 57720]]
The total annual collection of information burden currently
approved by OMB for rule 204-2 is 2,941,494 hours, with total internal
monetized costs of $239,732,050.80.\174\ This currently approved annual
aggregate burden is based on an estimate of 15,906 total registered
advisers, or approximately 184.9298 hours per registered adviser.\175\
The estimated total annual aggregate external cost burden is $0. We
determined that advisers would likely use a combination of compliance
clerks and general clerks to make and keep the information required by
the rule.\176\ We estimated that the hourly wage for compliance clerks
was $86 per hour, including benefits, and the hourly wage for general
clerks was $77 per hour, including benefits.\177\ We then calculated a
blended hourly rate of $81.5 per hour.\178\ For each adviser, 184.9298
burden hours would be required to make and keep the information and
records required under the rule. The total cost per respondent
therefore was an estimated $15,071.80,\179\ for an estimated total
burden cost of $239,732,050.80.\180\
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\174\ See Rule 204-2 under the Investment Advisers Act of 1940,
Updated Supporting Statement for PRA Submission (June 8, 2026), (the
``2026 rule 204-2 PRA''), available at <a href="https://www.reginfo.gov/public/do/PRAViewDocument?ref_nbr=202512-3235-015">https://www.reginfo.gov/public/do/PRAViewDocument?ref_nbr=202512-3235-015</a>.
\175\ 2,941,494 hours/15,906 registered advisers = 184.9298
hours per registered adviser.
\176\ See 2026 rule 204-2 PRA submission, supra footnote 174.
\177\ The hourly wage rates used in our prior estimates were
based on data from SIFMA's Office Salaries in the Securities
Industry 2013, modified by SEC staff to account for an 1800-hour
work-year and inflation, and multiplied by 2.93 to account for
bonuses, firm size, employee benefits and overhead.
\178\ ($86 + $77) / 2 = $81.5 per hour.
\179\ $81.5 per hour x 184.9298 hours per adviser = $15,071.8.
\180\ $15,071.8 per adviser x 15,906 advisers = $239,732,050.8.
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As of December 2025, and incorporating filings received through
April 30, 2026, there were 16,434 SEC registered investment advisers.
This represents an increase of 528 registered advisers from the
previously approved burden. Therefore, we estimate that the total
aggregate burden under rule 204-2 will increase by approximately
97,642.93 hours \181\ for a total aggregate burden of approximately
3,039,136.33 hours,\182\ or 184.9298 hours per adviser.
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\181\ 528 registered advisers x 184.9298 = 97,642.93 hours.
\182\ 16,434 registered advisers x 184.9298 = 3,039,136.33
hours.
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We estimate that approximately 2,091 advisers currently provide
investment advisory services to government clients and to certain
pooled investment vehicles in which government entities invest.\183\ We
continue to estimate that an adviser spends approximately two hours to
comply with the rule 204-2(a)(18) recordkeeping requirement, with a
total current estimated burden on impacted advisers of 4,182
hours.\184\ The total annual estimated recordkeeping burden would be
reduced by this amount to account for the impact of the proposal. Thus,
the revised total aggregate burden for all respondents to the rule 204-
2 recordkeeping requirements would be approximately 3,034,954.33
hours.\185\ The revised total average burden per registered adviser
would be approximately 184.6753 hours.\186\
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\183\ This estimate is based on registration information from
the Investment Adviser Registration Depository (``IARD system'') as
of December 2025, incorporating filings received through April 30,
2026. We are applying the same methodology as in the 2009 Proposing
Release and the 2010 Adopting Release. According to responses to
Item 5.D(i) of Part 1 of Form ADV, 1,518 advisers have clients that
are State or municipal government entities, which represents
approximately 9.24% of all advisers registered with the Commission
(16,434). 14,919 advisers have not responded that they have clients
that are State or municipal government entities. Of those, however,
responses to Item 5.D(f) of Part 1 of Form ADV indicate that 5,493
advisers have some clients that are other pooled investment
vehicles. Estimating that the same percentage of these advisers
advise pools with government entity investors as advisers that have
direct government entity clients--i.e., 9.24%. Approximately 508 of
these advisers would be subject to the rule (5,493 x 9.24% = 508).
Out of the 14,919 advisers that have not responded that they have
clients that are State or municipal government entities, after
backing out the 5,493 which have clients that are other pooled
investment vehicles, responses to Item 5.D(d) of Part 1 of Form ADV
indicate that 705 advisers have some clients that are registered
investment companies. Estimating that approximately the same
percentage of these advisers advise pools with government entity
investors as advisers that have direct government entity clients--
i.e., 9.24%. Approximately 65 of these advisers would be subject to
the rule (705 x 9.24% = 65). Although we limited the application of
rule 206(4)-5 with respect to registered investment companies to
those that are investment options of a plan or program of a
government entity, we estimate that 65 advisers would have to comply
with the recordkeeping provisions because of the difficulty in
further delineating this estimated number. Therefore, we estimate
that the total number of registered advisers subject to the rule
would be: 1,518 advisers with State or municipal clients + 508
advisers with other pooled investment vehicle clients + 65 advisers
with registered investment company clients = 2,091 advisers subject
to rule. We expect certain additional advisers may incur compliance
costs associated with rule 206(4)-5, but we do not have relevant
data on these advisers. For example, we anticipate some advisers may
be subject to the rule bec
[…truncated; see source link]Indexed from Federal Register on September 10, 2026.
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