WASHINGTON — The Securities and Exchange Commission is moving to dismantle one of the asset-management industry’s most consequential political-contribution compliance regimes, proposing to rescind a rule that for more than 15 years has restricted investment advisers doing business with state and local governments.

The SEC said September 3 that it is proposing to repeal Rule 206(4)-5 under the Investment Advisers Act of 1940, commonly known as the investment adviser pay-to-play rule. The regulation was adopted in 2010 following longstanding concerns that investment managers could use campaign contributions, fundraising or related political activity to influence public officials responsible for awarding lucrative mandates involving pension assets and other government investment accounts.

Under one of the rule’s central provisions, an investment adviser can be prohibited from receiving compensation for advisory services provided to a government entity for two years after the adviser or certain executives or employees make specified political contributions to an elected official or candidate whose office can influence the government entity’s selection of an investment manager. The restriction can apply whether the advisory relationship is obtained directly or through certain pooled investment vehicles.

The proposed rescission represents a significant shift in the SEC’s approach to policing the intersection of political activity and institutional asset management. Rather than maintaining a specialized prophylactic rule designed to prevent potential corruption before it occurs, the agency would rely more heavily on existing antifraud provisions, advisers’ fiduciary obligations, compliance requirements and codes of ethics, alongside campaign-finance and anti-corruption laws enforced by federal, state and local authorities.

SEC Chairman Paul S. Atkins framed the proposal as the product of the Commission’s experience administering the rule since its adoption. The agency said advisers have reported that the requirements are difficult to implement and can operate in practice like a strict-liability regime, creating potentially severe business consequences even when a contribution is small, inadvertent or unrelated to an effort to obtain government investment business.

The rule does not simply regulate contributions made directly by an advisory firm. It reaches designated “covered associates,” including categories of senior personnel and employees involved in soliciting government clients. That structure has made political-contribution compliance an important component of hiring, promotion, business-development and employee-supervision processes at firms serving public institutions.

One feature that has attracted particular industry attention is the rule’s look-back effect. Depending on an employee’s role, a political contribution made before the individual joins an adviser or becomes a covered associate can potentially affect the firm’s ability to receive compensation from a government client. That possibility has led investment managers to conduct political-contribution reviews during recruiting and personnel changes, especially when employees may become involved in public pension or municipal business.

The existing framework contains limited de minimis exceptions. Individual covered associates generally may contribute up to $350 per election to an official or candidate for whom they are entitled to vote without triggering the compensation restriction, and up to $150 per election when they are not entitled to vote for that person. Those thresholds, however, have not prevented many advisory firms from adopting considerably more conservative internal policies.

The SEC said one unintended consequence has been that advisers sometimes prohibit political contributions outright rather than attempting to administer the rule’s definitions, thresholds, exceptions and monitoring requirements. Atkins argued that such compliance practices effectively suppress political speech by employees who may have no intention of influencing investment-management selections.

Commissioner Hester M. Peirce similarly focused on First Amendment concerns in a statement supporting the proposal. She said the rule’s breadth and relatively narrow exceptions have made it operate as a meaningful restriction on political participation. Peirce also noted that pay-to-play conduct would not become permissible if Rule 206(4)-5 disappears because fraudulent arrangements would remain subject to other legal prohibitions.

Commissioner Mark T. Uyeda emphasized the distinction between genuine corruption and technical violations. He said the existing rule can impose substantial penalties without requiring proof that a contribution actually influenced a government investment decision. In the Commission’s emerging view, a principles-based framework using the Advisers Act’s established antifraud and fiduciary provisions can address improper quid-pro-quo conduct without automatically connecting certain political contributions to a two-year compensation prohibition.

The original rationale for the rule remains important to the debate. When the SEC adopted Rule 206(4)-5 in 2010, it warned that pay-to-play arrangements could cause government officials to select investment advisers because of campaign support rather than investment merit. Public pension beneficiaries could ultimately bear the cost if political considerations result in higher fees, weaker investment performance or inappropriate manager selections.

The 2010 framework therefore sought to remove the economic incentive for advisers to make contributions aimed at influencing officials. Rather than imposing a direct prohibition on political contributions, the rule generally made certain contributions costly by preventing an adviser from receiving compensation from the affected government entity for two years.

The regulation also extends beyond the two-year time-out. It restricts advisers and covered associates from soliciting or coordinating certain contributions to officials, candidates or political parties in jurisdictions where the adviser is seeking or providing government business. It also imposes restrictions involving payments to third-party solicitors that seek government advisory business on an adviser’s behalf.

Those provisions have produced an extensive compliance infrastructure throughout the institutional asset-management industry. Firms frequently require employees to obtain approval before making political donations, maintain contribution records, conduct periodic certifications and evaluate whether elected offices have authority over pension boards or other entities responsible for selecting investment managers.

The SEC’s September proposal would eliminate Rule 206(4)-5 in its entirety rather than simply increasing contribution thresholds or revising individual provisions. The Commission also proposes amending Rule 204-2, the Advisers Act books-and-records rule, to remove recordkeeping obligations specifically associated with the political-contribution regime.

For registered investment advisers, the recordkeeping change could eventually reduce the administrative burden associated with tracking covered associates, government clients and political contributions. Compliance departments have historically needed systems capable of identifying not only who made a contribution but also whether the recipient qualified as an official under the rule and whether that office could directly or indirectly affect the award of investment-management business.

Large alternative-asset managers, traditional institutional investment firms and other advisers competing for public pension mandates may be among the businesses most directly affected. Government entities collectively oversee enormous pools of retirement and other public assets, making state and municipal institutions significant clients for private equity, private credit, hedge fund, real estate and traditional securities managers.

Eliminating the federal rule could reduce one source of regulatory risk around those relationships, but advisers would still face a fragmented compliance landscape. State and local governments can maintain their own political-contribution restrictions, ethics rules and procurement requirements. Public pension systems may impose additional conditions on managers, while investment-management agreements and side letters can contain independent representations or restrictions concerning political activity.

Proskauer Rose, in an analysis published September 4, cautioned advisers against immediately dismantling their existing policies. The law firm noted that the SEC action remains a proposal and that other laws, pension-plan policies and contractual obligations could continue to constrain political contributions even if the federal rule is ultimately rescinded.

That distinction is critical for investment-management firms evaluating their immediate response. Rule 206(4)-5 remains in effect during the SEC’s rulemaking process. Political-contribution approvals, employee certifications, recordkeeping controls and other compliance measures tied to the rule therefore cannot simply be abandoned because the Commission has announced its intention to repeal it.

The SEC said the comment period will remain open for 60 days after the proposing release is published in the Federal Register. Market participants, public pension officials, compliance professionals, campaign-finance specialists and investor representatives will have an opportunity to address whether the existing regulation should be eliminated and whether other provisions of securities law provide sufficient protection against corrupt adviser-selection practices.

The Commission’s proposal poses a central policy question: whether the risk of political influence in public investment mandates justifies a bright-line regulatory restriction that can apply without evidence of an actual quid pro quo. Supporters of rescission argue that fraud and corruption can be prosecuted directly while avoiding collateral consequences for ordinary political activity. Defenders of the existing framework may contend that preventing corruption before it occurs is especially important because political influence can be difficult to prove once a government contract has been awarded.

InvestmentNews reported September 4 that the proposed elimination would end a 16-year-old restriction that the Commission now characterizes as burdensome and disproportionate. The shift is notable because the rule was originally adopted with the explicit objective of protecting public pension plans and other government investors from manager-selection decisions distorted by political contributions.

The proposal also illustrates a broader regulatory philosophy under Atkins: narrowing SEC rules that the current Commission believes exceed the agency’s core securities-market mandate or impose prescriptive requirements where existing antifraud principles may be sufficient. In his September 3 statement, Atkins argued that regulation of political contributions belongs principally with state and local governments and federal election authorities rather than the securities regulator.

Still, rescission would not eliminate advisers’ fiduciary responsibilities when competing for government mandates. Investment advisers remain subject to the Advisers Act’s antifraud provisions, including prohibitions against fraudulent, deceptive or manipulative conduct. Registered firms must also maintain compliance policies and procedures reasonably designed to prevent securities-law violations and codes of ethics governing employee conduct.

The SEC has pointed to its ability to pursue genuine pay-to-play misconduct under those broader authorities. Commissioners supporting repeal have noted that the agency brought cases involving political corruption and investment advisers before Rule 206(4)-5 was adopted. That history forms an important part of the Commission’s argument that a specialized contribution-triggered prohibition is not necessary for effective enforcement.

For public pension systems and other government investors, the practical consequences will depend partly on how much their safeguards currently rely on federal securities regulation rather than their own procurement and ethics regimes. Many large pension systems already operate under detailed rules governing manager selection, disclosure, conflicts of interest and political contributions. Those protections would not automatically disappear with the SEC rule.

For advisers, meanwhile, the prospect of rescission could eventually alter employee political-contribution policies substantially. Firms that currently impose blanket prohibitions may consider more permissive approaches if the rule is repealed. Others could maintain conservative restrictions because they serve multiple jurisdictions, have contractual commitments to institutional clients or prefer policies designed to avoid even the appearance of conflicts.

The industry is therefore unlikely to move toward a single post-rescission compliance model. Managers with extensive government business may continue centralized pre-clearance systems, while advisers with limited exposure to public-sector clients could simplify their controls. Multi-state firms would still need to map campaign-finance and pay-to-play requirements across jurisdictions rather than treating SEC rescission as a nationwide elimination of contribution restrictions.

Another issue is reputational risk. Even where a political contribution is legally permissible, institutional investors may scrutinize contributions connected to officials overseeing pension assets or procurement decisions. Fiduciaries responsible for public funds are sensitive not only to actual conflicts but also to public perceptions surrounding manager appointments. Advisers may therefore preserve internal controls that exceed minimum legal requirements.

The rulemaking will also test whether commenters can demonstrate measurable investor-protection benefits from the existing regulation. The SEC says the rule has generated significant operational costs and unintended consequences, while its current leadership believes other legal protections can address improper conduct. Critics of rescission could seek to show that the rule has had a deterrent effect precisely because it imposes clear consequences before a corrupt exchange needs to be proven.

Until the process is complete, the regulatory position is unchanged: advisers covered by Rule 206(4)-5 remain responsible for compliance. Any final rescission would require further Commission action after consideration of public comments and the administrative rulemaking record.

For the asset-management industry, however, the September 3 proposal marks the clearest indication since the rule took effect that the federal pay-to-play framework may be approaching its end. If the SEC ultimately follows through, firms competing for public money would gain relief from one of the sector’s more technical political-contribution regimes, while responsibility for preventing improper influence would shift more heavily toward general securities-law duties, government procurement safeguards and the patchwork of campaign-finance rules maintained outside the SEC.