Sec Speeches Cryptocurrency Statement on Proposal to Rescind “Pay-to-Play” Rule

Today, by proposing to rescind the “pay-to-play” rule (Rule 206(4)-5 under the Investment Advisers Act of 1940), the Commission is clearly reiterating that the SEC is not the nation’s elections regulator. The “pay-to-play” rule was intended to deter fraud by prohibiting investment advisers from providing compensated investment advisory services to a government client for two years after making a political contribution to certain elected officials or candidates. 

However, since its adoption, it has proven only to be needlessly penalizing, burdensome and complex to implement, and misaligned with the SEC’s mandate. 

After more than 15 years of experience administering the rule, it is clear that it is overly prescriptive and has produced a host of unintended consequences. Beyond operational implementation challenges, it has imposed serious penalties for small, often impulsive donations to candidates in both parties, and routinely punishes and handicaps advisory firms for an employee making a donation even before joining the business. 

Furthermore, advisers’ implementation of the rule has effectively resulted in the suppression of political speech. 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. Such practice discourages full participation in the electoral process through contributions to candidates. People should not have to choose between their political speech rights and a job in a particular industry.

To that end, our proposal would rescind the political contribution rule in its entirety and amend the Advisers Act recordkeeping rule to eliminate the provisions requiring a registered investment adviser to make and keep certain records in connection with the political contribution rule.  

Ultimately, matters involving political contributions are more properly governed by local ordinances, state laws, and federal election regulations—not by the SEC. Rescinding the rule would not open the door to fraud because sufficient protections exist (and have always existed); for example, investment advisers are subject to the Investment Advisers Act antifraud requirements, fiduciary duty obligations, and rules requiring  them to maintain compliance policies and procedures and codes of ethics.

Since day one of my Chairmanship, I have pledged to return the agency to its core mission and Congressional intent. Today’s proposal marks an important step toward realizing that goal.

Thank you to the following members of the Commission staff for their work on the proposal: 

In the Division of Investment Management

Brian T. Daly, Sarah G. ten Siethoff, Robert M. Holowka, Sirimal R. Mukerjee, Lawrence Pace, Janet Jun, and Mark Stewart

In the Division of Economic and Risk Analysis

Joshua White, Lauren Moore, Alexander Schiller, Justin Vitanza, and Robert Girouard

In the Office of the General Counsel

Russell McGranahan, Jeffrey Johnson, D. Bryant Morris, Jeffrey Berger, Elise Bruntel, Natalie Shioji, Monica Lilly, and Rebecca Orban