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    Aug. 6, 2026

Five Articles to Avoid Pay to Play Violations During the 2026 Midterm Elections

The large number of federal, state and local officials running in the midterm elections in November 2026 creates more scenarios in which political contributions could unwittingly trigger Rule 206(4)‑5 of the Investment Advisers Act of 1940 - the Pay to Play Rule – or applicable state and local laws. That risk is compounded by the strict liability regime imposed by the Pay to Play Rule, including a two-year ban on receiving compensation from government clients. In the lead-up to the elections, firms must monitor contributions by applicable personnel and navigate varying rules across jurisdictions, making robust preclearance and monitoring systems critical. To help private fund managers mitigate pay to play risks, the Private Equity Law Report is highlighting five articles from its archives that identify potential legal pitfalls and suggest compliance practices that managers can adopt. Those include summaries of previous SEC enforcement efforts targeting pay to play violations, advice on using preclearance checklists for contributions, analysis of risks posed by managers’ investor relations departments and details about precautions managers must take when marketing to public pension plans to avoid violating the Pay to Play Rule. The week starting August 17, 2026, the Private Equity Law Report will resume its normal publication schedule.

Key Pay to Play Issues for Fund Managers During an Election Year

Rule 206(4)‑5 of the Investment Advisers Act of 1940 - known as the Pay to Play Rule – comes into focus in major election years. With political activity gaining momentum heading into the upcoming midterm elections, the Private Equity Law Report interviewed Skadden partner Ki P. Hong to help fund managers identify and avoid pay to play compliance risks and other potential legal pitfalls. The article outlines relevant federal, state and local pay to play rules; examines key differences between those regimes; summarizes SEC enforcement activity targeting political contributions; and prescribes steps fund managers can take to ensure compliance. For additional commentary from Hong, see our two-part series: “Federal Pay to Play Rules” (Feb. 14, 2019); and “State and Local Pay to Play Rules; Traps for the Unwary; and Compliance” (Feb. 21, 2019).

Use a Preclearance Checklist to Avoid Violating the Pay to Play Rule

In any presidential or midterm election year, a fund manager is likely to see an increase in employees’ contributions to various political campaigns. As a result, fund managers that have government-entity investors (e.g., public pension funds) must be particularly careful to ensure employee political contributions do not run afoul of Rule 206(4)‑5 of the Investment Advisers Act of 1940 – known as the Pay to Play Rule. The centerpiece of many pay to play compliance policies and procedures is a requirement that employees preclear donations. The article reviews the requirements and restrictions of the Pay to Play Rule; discusses the importance of preclearance; and provides a checklist that CCOs can use to approve or deny employee contributions. For a look at the consequences of violating the Pay to Play Rule, see “With Midterm Elections Looming, Fund Managers Must Review the Pay to Play Rule” (Sep. 20, 2018); “SEC Continues to Target Pay to Play Violations” (Aug. 30, 2018); and “Pay to Play, Revenue Sharing and Wrap Fees Remain on the SEC’s Radar” (Apr. 20, 2017).

SEC Pay to Play Settlements Prompt Strong Dissent From Commissioner Peirce

Rule 206(4)‑5 under the Investment Advisers Act of 1940, known as the Pay to Play Rule, establishes what amounts to a strict liability regime. An adviser whose covered associate makes a political contribution to someone with the ability to influence a government entity’s choice of adviser is barred for two years from receiving advisory fees from that entity – regardless of intent and whether a quid pro quo was involved. The SEC settled four enforcement actions for alleged violations in which a covered associate made a political contribution to an official of either a state university or a public pension plan that already invested with the applicable respondent. In each case, the respondent continued to provide advisory services for compensation to the university or pension plan during the two-year period after the contribution. The settlements prompted a strong dissent from Commissioner Hester M. Peirce, who saw little benefit from the settlements and urged the SEC to revisit the fundamentals of the Pay to Play Rule. The article details the facts giving rise to the enforcement actions, the terms of the settlements and Peirce’s dissent. See “SEC’s Latest Enforcement Results and Budget Request Affirm Focus on Fraud” (Jun. 11, 2026); and “2026 Securities Enforcement Forum Panel Discusses Current Enforcement Climate” (May 14, 2026).

When Investor Relations Become Procurement Lobbying

Employees in the investor relations departments of fund managers typically do not consider themselves “lobbyists.” State and local regulators sometimes have a different view, however, in the event that firms attempt to secure investments from public pension funds, university endowments and other government funds. In those scenarios, fund managers can incur various types of penalties if they fail to adhere to each applicable state’s registration and reporting requirements for lobbyists. A guest article by Covington lawyers Zachary G. Parks, Derek Lawlor and Kimberly Railey explains the types of investor relations activities that could trigger lobbying requirements; summarizes the state lobbying registration and reporting requirements that may apply to investment firms; and describes the potential penalties for violations of the rules. It also highlights elements of investment firms’ compliance programs that can help ensure they remain on the right side of these laws and includes a list of practical questions CCOs can consider. See our two-part series on clashes between investor relations and compliance: “Contexts and Reasons for the Strained Relationship and Potential Ramifications” (Mar. 16, 2021); and “Practical Tips for Building a Strong Partnership Between the Teams” (Mar. 23, 2021).

Obstacles and Considerations When Marketing to Public Pension Plans

In addition to the requirements applicable to marketing in general, fund managers face a significant additional layer of federal, state and local requirements when marketing their funds to public pension plans. Beyond issues related to political contributions, fund managers need to be mindful about gift and entertainment rules and also various lobbying laws that can be implicated. Further, fund managers need to be mindful of the role of placement agents acting improperly on their behalf, including the risk they may not be appropriately registered. This two-part series summarizing a seminar presented by the Regulatory Compliance Association delves into the panoply of issues and considerations that arise when a fund manager markets to public pension plans. The first article discusses municipal advisor registration; political contributions; and gifts and entertainment. The second article examines honest services fraud; the use of solicitors and placement agents; lobbyist registration; and disclosure, recordkeeping and other requirements that apply when doing business with public pension plans. For other issues related to public pension plans, see “What Fund Managers Should Know About the Anti‑ESG Movement Targeting State Pension Plans” (Oct. 4, 2022).

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