SEC Moves to Rescind Pay-to-Play Rule for Advisors
The Securities and Exchange Commission is moving to rescind a rule overseeing when advisors may provide services to government clients and when they may make political contributions, arguing the regulation infringes on protected speech.
The rules in question are amendments to the Advisers Act, approved in 2010, that prohibit advisors from “providing compensated investment advisory services” to government clients for two years after making political contributions to those clients.
In the statement accompanying the opening of the public comment period, the commission argued that its adoption led to de facto prohibitions on political contributions by advisors in state and local races.
In a statement, Chairman Paul Atkins argued the SEC “is not the nation’s elections regulator,” calling the rule “needlessly penalizing, burdensome and complex to implement.”
“Furthermore, advisors’ implementation of the rule has effectively resulted in the suppression of political speech,” he said. “Although the current rule includes a de minimis allowance, in practice, many firms simply impose blanket prohibitions on employee political contributions rather than navigate the rule’s complexities.”
The proposal would eliminate the political contribution rule in its entirety, and Atkins claimed that rescinding the rule “would not open the door to fraud,” an assertion echoed by other commissioners Mark Uyeda and Hester Peirce in their statements (since Caroline Crenshaw’s departure earlier this year, the agency is down to three Republican commissioners).
The agency approved the so-called “pay-to-play” rule on June 30, 2010, to halt instances in which advisors are chosen based on campaign contributions rather than merit.
The rule includes advisors and certain employees who made political contributions over specified amounts to relevant government officials (advisors can donate $350 per election cycle for candidates they’re eligible to vote for and $150 for others). Broker/dealers are subject to similar pay-to-play rules via FINRA rulemaking.
In the statement at the time accompanying the release, SEC officials cautioned that such practices could “lead a political official to choose an investment advisor with higher fees or inferior investment performance because the advisor contributed funds to the official’s election campaign,” while stressing the rule imposed “a limited ‘time-out’” for advisors, not a ban or limit on the amount of political contributions an advisor could make.
The rule has led to numerous enforcement actions, including an April 2024 decision against the private equity firm Wayzata Investment Partners. The SEC claimed a firm associate made a $4,000 campaign contribution to a Minnesota candidate for elected office; the office had influence over the selection of investment advisors for a state investment board.
The board had been a Wayzata client since 2007, and the firm continued to provide services to the funds in the years after construction; at the time, Peirce dissented, arguing that the action was “yet another illustration of the overbreadth” of the rule.
Responses to the SEC’s attempt to rescind the rule ran the gamut; the Investment Adviser Association, an advocacy organization for RIAs, applauded the agency’s move, arguing that the rule in practice could produce “significant consequences.”
“We have long raised concerns that the rule imposes severe consequences without regard to whether a political contribution was actually intended to influence the award of advisory business,” IAA President and CEO Karen Barr said.
However, Corey Frayer, the director of investor protection at the Consumer Federation of America (and a former SEC Senior Policy Advisor under prior Chair Gary Gensler), called the idea that the rule infringed on free speech “a bald-faced lie,” saying the rule curbed corruption.
“We are in the most corrupt administration we have ever had, with quite possibly the most corrupt SEC Chair we have ever had, who’s now calling political bribery a foot fault,” Frayer said.
According to Frayer, the SEC originally adopted the rule after bringing charges against numerous advisors who made political donations, allegedly in an attempt to sway officials to select their firms to manage state and local pension funds (and the fees from managing those funds).
Frayer worried that rescinding the rule would create a “financial incentive” for advisors to make campaign contributions to get the role of managing such funds.
“When you create an economic incentive like that, you can expect that investment advisors will make political donations in order to buy themselves into investing a large pool of assets, and charging unfair fees for that service,” he said.
