The pay-to-play rule for investment advisers

Rule 206(4)-5 bars an investment adviser from receiving compensation for advisory services to a government entity for two years after the adviser, or one of its covered associates, makes a political contribution to an official of that entity. A covered associate who is a natural person may give up to $350 per official per election to a candidate they are entitled to vote for, and up to $150 to one they are not, without triggering the time-out.

The rule was adopted in 2010 and is still in effect. On 3 September 2026 the Commission proposed rescinding it in full (Release IA-6994), together with the related records in Rule 204-2(a)(18). The proposal was published in the Federal Register on 10 September 2026, and comments are due by 9 November 2026. It is a proposal only: until the Commission adopts a final rule, Rule 206(4)-5 applies exactly as written, and a contribution made today can still bar compensation for two years.

Who the rule applies to

Rule 206(4)-5 covers:

• advisers registered, or required to be registered, with the SEC
• exempt reporting advisers
• advisers that are unregistered in reliance on the foreign private adviser exemption in section 203(b)(3) of the Advisers Act

It does not cover state-registered advisers. Many states, cities and public pension plans have their own pay-to-play laws, gift restrictions or contract certifications, and those apply regardless of the federal rule. They are not affected by the rescission proposal either.

The key definitions

Government entity means a state or a political subdivision of a state, including its agencies and instrumentalities, the pools of assets it sponsors (such as a public defined benefit plan or a state general fund), its participant-directed plans and programs (such as a 529 plan or a 403(b) or 457 plan), and its officers acting in their official capacity.

Official means an incumbent, candidate or successful candidate for elective office of a government entity, including their election committee, if the office is directly or indirectly responsible for, or can influence, the hiring of an investment adviser, or has authority to appoint someone who is. A governor who appoints pension board members is an official, and so is an elected state treasurer who sits on the pension board.

Contribution means any gift, subscription, loan, advance or deposit of money or anything of value made to influence a federal, state or local election, to pay campaign debt, or to pay the transition or inaugural expenses of a successful state or local candidate. A contribution to a federal campaign is caught when the candidate is also a state or local official, for example a sitting governor running for the Senate.

Covered associate means:

• any general partner, managing member or executive officer, or anyone with a similar status or function
• any employee who solicits a government entity for the adviser, and anyone who supervises that employee, directly or indirectly
• any political action committee controlled by the adviser or by any of those people

Executive officer is defined broadly: the president, any vice president in charge of a principal business unit, division or function, any other officer who performs a policy-making function, and anyone else who performs similar policy-making functions.

The two-year time-out

Under Rule 206(4)-5(a)(1), an adviser may not provide advisory services for compensation to a government entity within two years after a contribution to one of its officials by the adviser or a covered associate. The rule does not prohibit advising the client. It prohibits being paid for it, which for most firms comes to the same thing.

Two points catch firms out:

• Pooled funds count. Under paragraph (c), an adviser to a covered investment pool in which a government entity invests, or is solicited to invest, is treated as advising that entity directly. Covered investment pools include private funds relying on section 3(c)(1), 3(c)(7) or 3(c)(11) of the Investment Company Act, and registered funds offered as an option in a government plan or program.
• The adviser itself has no de minimis. The de minimis exception applies only to contributions by natural persons who are covered associates. A contribution by the firm, or by a PAC it controls, in any amount, triggers the time-out.

The look-back for new covered associates

The rule reaches contributions made before someone joined. Paragraph (a)(1) includes a person who becomes a covered associate within two years after making the contribution. Paragraph (b)(2) shortens that to six months for a person who will not solicit clients for the adviser after becoming a covered associate.

So before a hire or a promotion into a covered associate role, the firm needs to know every contribution the person made in the previous two years, or the previous six months if the role involves no solicitation. A contribution found after the person starts is too late: the time-out has already attached to the firm.

The de minimis exception

Under Rule 206(4)-5(b)(1), the time-out does not apply to contributions by a covered associate who is a natural person that in aggregate do not exceed:

• $350 to any one official, per election, if the covered associate was entitled to vote for that official at the time of the contribution
• $150 to any one official, per election, if they were not

The limits are per official per election, so a primary and a general election are separate. Whether the person could vote for the official decides which limit applies. Living in a different state from the official usually means the $150 limit.

Returned contributions

Paragraph (b)(3) gives a limited cure for a covered associate's contribution that would otherwise trigger the time-out. All of these conditions must be met:

• the firm discovered the contribution within four months of the date it was made
• the contribution was not more than $350
• the contributor obtains its return within 60 calendar days of the firm's discovery

An adviser that reported more than 50 employees on its most recent annual updating amendment may use the exception no more than three times in a calendar year; one with 50 or fewer, no more than twice. It may never be used more than once for the same covered associate.

Outside these limits, the only route is an exemptive application to the Commission under paragraph (e), which weighs factors such as whether the firm had policies in place before the contribution, whether it knew of the contribution, the steps it took to get it returned, and the contributor's apparent intent.

Placement agents and third-party solicitors

Rule 206(4)-5(a)(2)(i) prohibits paying anyone to solicit a government entity for advisory services unless the person is the adviser's own executive officer, general partner, managing member or employee, or a regulated person:

• an SEC-registered investment adviser that, with its covered associates, has not made a disqualifying contribution or coordinated one within two years of the solicitation
• a registered broker-dealer that is a FINRA member, because the Commission found by order (Release IA-4532, 20 September 2016) that FINRA Rule 2030 imposes substantially equivalent or more stringent restrictions
• a registered municipal advisor, because the Commission made the same finding for MSRB Rule G-37 (Release IA-4531, 20 September 2016)

A finder or consultant who is none of these cannot be paid to solicit a government client, however the payment is labeled.

Other prohibitions

• Coordinating and soliciting. Under paragraph (a)(2)(ii), the adviser and its covered associates may not solicit or coordinate contributions to an official of a government entity the adviser serves or is seeking to serve, or payments to a state or local political party where it is providing or seeking to provide services to a government entity. Hosting a fundraiser can do this with no money from the firm at all.
• Indirect violations. Paragraph (d) makes it unlawful to do indirectly anything that would violate the rule if done directly, such as routing a contribution through a spouse, a consultant or a lawyer.

The records

Rule 204-2(a)(18) requires an SEC-registered adviser to keep:

• the names, titles and business and residence addresses of all covered associates
• all government entities the adviser advises or has advised, or that invest or invested in a covered investment pool it advises, in the past five years (but not before 13 September 2010)
• all direct and indirect contributions by the adviser and its covered associates to government officials, and payments to state or local political parties or PACs, in chronological order with the contributor, recipient, amount, date, and whether the returned contribution exception was used
• the name and business address of each regulated person paid to solicit a government entity

The covered associate list and the contribution log are required only if the adviser advises a government entity or a government entity invests in a covered investment pool it advises. A firm that might seek such a client has reason to keep them anyway, because contributions made in the two years before it wins one still count.

What a working program includes

1. A covered associate list, maintained as people join, change roles or leave, with a clear view of who supervises anyone who solicits.
2. Preclearance of contributions by covered associates before they are made. Some firms extend preclearance to every employee, because roles change and the look-back follows the person.
3. A look-back questionnaire for every hire or promotion into a covered associate role, covering two years.
4. A list of government clients and investors, including investors in private funds and plans offering the firm's funds.
5. Solicitor diligence confirming that any paid placement agent is a regulated person.
6. Periodic certifications from covered associates, kept with the contribution log.
7. Testing in the annual review under Rule 206(4)-7, for example by comparing covered associates against public campaign finance databases.

What examiners look for

• No preclearance, so the firm first hears of a contribution after the time-out has attached.
• A covered associate list that leaves out people who solicit government entities or who supervise those who do.
• New hires onboarded without the look-back.
• Government investors in private funds missing from the client list.
• Placement agents paid with no evidence they were regulated persons.

Common questions

What is the pay-to-play de minimis amount?

$350 per official per election if the covered associate can vote for the official, and $150 per official per election if they cannot. The exception applies only to natural persons, never to the firm or a PAC it controls.

What is the pay-to-play look-back period for new hires?

Two years before the person becomes a covered associate, or six months if they will not solicit clients for the firm. A contribution in that window counts as if the person were already a covered associate.

Does the pay-to-play rule apply to state-registered advisers?

No. It applies to SEC-registered advisers, exempt reporting advisers and foreign private advisers. State-registered advisers should check their state's law and any requirements in their government clients' contracts.

Is the SEC repealing the pay-to-play rule?

The Commission proposed rescinding it on 3 September 2026, with comments due 9 November 2026. The rule remains in effect unless and until a final rule is adopted and takes effect. State and local pay-to-play laws, FINRA Rule 2030 and MSRB Rule G-37 would not be affected by the proposal.

Can a covered associate fix a contribution by asking for it back?

Only within the returned contribution exception: discovered within four months, not more than $350, returned within 60 days of discovery, used no more than two or three times a year depending on firm size, and once per person. Otherwise the time-out applies unless the Commission grants an exemption.

Keep the record before the contribution

Luna's compliance manual template includes a political contributions section built on Rule 206(4)-5, and the books and records template maps the Rule 204-2(a)(18) records. For how the rule fits into the wider program, see Solo adviser compliance from A to Z and the gifts and entertainment guide.