The Trump administration is taking steps to eliminate a regulation aimed at preventing private equity firms from engaging in corrupt practices involving public officials amid various pay-to-play controversies.
Last Thursday, the U.S. Securities and Exchange Commission (SEC) sought to repeal a regulation that prohibits investment advisers from receiving payment for advisory services to government clients for a period of two years following a political contribution to specific candidates or elected officials. (RELATED: SEC Files Lawsuit Against LSU As School Plans On Playing Professional Athletes)
The SEC contends that Rule 206(4)-5, which is part of the Investment Advisers Act, has violated “free speech” rights and caused unintended negative outcomes since it was established back in 2010.
TODAY 🚨: The SEC proposed to rescind its “pay-to-play” rule that prohibits investment advisers from providing compensated services to a government client for 2 years after making a political contribution to certain elected officials or candidates.
🔗: https://t.co/lKmNNyM6Fs pic.twitter.com/2zru4E9ceb
— U.S. Securities and Exchange Commission (@SECGov) September 3, 2026
This rule restricts “covered associates” of investment advisers from offering paid advisory services to government clients for two years after political contributions are made to certain candidates or officials. Generally, candidates running for federal office are exempt unless they also hold relevant state positions. It also includes limitations on gifts and other contributions.
The term covered associates is broadly defined, encompassing a lookback period for new employees in an investment advisory firm.
Consequently, many firms have applied this provision widely within their teams. The rule’s anti-circumvention measures also extend to placement agents and similar third parties.
Although the rule was mainly initiated due to issues tied to private equity firms, it covers the broader financial industry, including venture capital and hedge funds as well.
Former SEC Commissioner Troy Paredes from the Obama administration expressed in 2010 that the rule was purposefully broad. (RELATED: EXCLUSIVE: DOJ’s New Top 2A Enforcer Sits Down For First Interview Since Getting Gig)
Local and state prosecutors have often found it difficult to establish a clear quid pro quo in pay-to-play cases, which led the SEC to consider a federal regulation as a stronger deterrent.
This regulation was unanimously approved by the SEC back in 2010.
Now, instead of suggesting a replacement, the SEC argues that current federal, state, and local laws are adequate to manage pay-to-play situations.
The Trump administration is moving to legalize corruption.
Under Trump, the SEC is seeking to rescind a rule that stops private equity funds from bribing public officials.
They say the rule stifles “free speech” and had too many unintended consequences.https://t.co/jGf6dyiQGR
— More Perfect Union (@MorePerfectUS) September 8, 2026
The SEC explained that its proposal aims to tackle the unintended effects of the rule, such as hindering investment advisers and employees from engaging in political contributions due to firm compliance practices. (RELATED: Private Equity’s Next Frontier: Your Retirement Savings)
Market participants argue that the rule places excessive burdens on them and is overly complicated, effectively establishing a strict liability standard, according to a JD Supra report.
The commission believes that current safeguards—including fraud prevention rules, fiduciary duties, compliance requirements, and ethics codes—are capable of addressing pay-to-play issues while offering investment advisers more flexibility to customize their policies according to their individual risks.
Thus, the SEC is proposing to completely repeal Rule 206(4)-5 rather than amending it and will also revise recordkeeping requirements for investment advisers accordingly.
