SEC prepares to ease pay-to-play rule on RIA donations

The SEC's pay-to-play rule can turn a $150 check to a state treasurer's campaign into a two-year loss of public pension business for an advisory firm. The agency has started to loosen that rule. AdvisorHub reported that the SEC sent proposed changes to the White House Office of Management and Budget on Wednesday. Whether the proposal narrows the restrictions or removes them is unclear; a final rule probably won't land before next year.

Paul Atkins, the SEC chairman, has criticized the rule for catching employees who donated before joining a firm or never knew a donation was made. "The current 'pay-to-play' rule creates unnecessary compliance burdens and overly restricts investment advisors," an agency spokesperson said. AdvisorHub reports that Democrats are likely to attack the change as a gift to Wall Street.

As written, the rule bars an adviser from working for state and local pension funds for two years when certain employees give an elected official between $150 and $350 per election. Federal donations are exempt, but the rule reaches state and local officials running for federal office and federal officials running for state or local office.

The rule grew out of a series of pension kickback scandals. State Street Bank and Trust Co. paid $12 million in 2016 to settle SEC accusations that donations helped it win Ohio pension business. Goldman Sachs paid the same amount four years earlier in a case over alleged donations to a Massachusetts gubernatorial candidate. In 2022, Highland Capital Partners paid $95,000 to settle an SEC case over an associate's $1,000 gift to an unsuccessful gubernatorial run.

The enforcement record gives the rule's defenders ammunition, and the compliance-cost argument gives its critics a case. For an RIA seeking public pension clients, the question is whether a $150 donation still costs two years of that business. The SEC's answer is now in White House review.