The US Securities and Exchange Commission is proposing to scrap its “pay-to-play” rule for investment advisers, a change that could give private equity firms greater scope to make political contributions while continuing to manage assets for government-backed investors, according to Private Equity Wire. The existing rule, introduced in 2010, prevents investment advisers from receiving compensation for managing government assets for two years after certain political contributions have been made, according to Private Equity Wire.
What the SEC is proposing and how the current rule works
The SEC’s proposal would scrap the “pay-to-play” rule for investment advisers, according to Private Equity Wire. The current rule was introduced in 2010 following high-profile scandals involving public pension business in states including California and New York, according to Private Equity Wire.
Under the existing framework, certain political contributions trigger a two-year ban on receiving compensation for managing government assets, according to Private Equity Wire. The proposal will be subject to a 60-day public comment period before any change can take effect, according to Private Equity Wire.
SEC chair Paul Atkins’ rationale
SEC chairman Paul Atkins said the regulation has unnecessarily restricted investment advisers’ participation in the political process and imposed disproportionately severe consequences for relatively minor breaches, according to Private Equity Wire. Atkins also said that removing the rule would not weaken existing protections against fraud because investment advisers would remain subject to the SEC’s broader anti-fraud requirements, according to Private Equity Wire.
Where private equity could see the biggest practical impact
For the private equity industry, Private Equity Wire reported that the most significant impact could be at the state and municipal level, where buyout firms frequently manage capital for public pension schemes and other government investment vehicles. Political contributions can create conflicts under existing pay-to-play requirements when the recipient is in a position to influence the allocation of public investment capital, according to Private Equity Wire.
In California, the governor appoints members of state pension boards, and Private Equity Wire reported that this creates potential restrictions for private equity executives seeking to support gubernatorial candidates. Private Equity Wire also reported that the federal impact is potentially more limited because there is no direct equivalent of state pension systems at the national level, meaning contributions to federal candidates generally present fewer pay-to-play concerns for investment advisers.
Political spending and compliance practices cited in the report
Private Equity Wire reported that private equity firms have become increasingly active in US politics. The industry reached record political spending levels during the 2024 election cycle and has increasingly backed Republican candidates and conservative political action committees this year, according to Private Equity Wire.
Private Equity Wire reported that state and local political spending by the industry is considerably harder to measure because campaign-finance data is less comprehensive at those levels. Adam Aderton, a partner at Simpson Thacher & Bartlett, said the existing SEC rule has had a material effect on political contributions by private equity firms and other investment advisers, particularly where firms manage public-sector money, according to Private Equity Wire.
Aderton said most private equity firms either prohibit political donations outright or require contributions to undergo compliance review, according to Private Equity Wire. Private Equity Wire reported that removing the SEC rule would not eliminate firms’ need to monitor political activity, because state and local jurisdictions have their own pay-to-play restrictions.
