SEC proposal could give PE more freedom over political donations

The US Securities and Exchange Commission is proposing to scrap its “pay-to-play” rule for investment advisers, potentially giving private equity firms greater scope to make political contributions while continuing to manage assets for government-backed investors, according to a report by the Wall Street Journal.

The rule, introduced in 2010 following high-profile scandals involving public pension business in states including California and New York, currently prevents investment advisers from receiving compensation for managing government assets for two years after certain political contributions have been made.

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 Atkins, removing the rule would not weaken existing protections against fraud, as investment advisers would remain subject to the SEC’s broader anti-fraud requirements.

The proposal will be subject to a 60-day public comment period before any change can take effect.

For the private equity industry, the most significant impact could be at 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. In California, for example, the governor appoints members of state pension boards, creating potential restrictions for private equity executives seeking to support gubernatorial candidates.

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.

Private equity firms have nevertheless 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.

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.

Most private equity firms either prohibit political donations outright or require contributions to undergo compliance review, according to Aderton. Removing the SEC rule would therefore not eliminate firms’ need to monitor political activity, given that state and local jurisdictions have their own pay-to-play restrictions.