The Securities and Exchange Commission wants to allow investment advisers to make political donations to government officials they work with, a change that would let private-equity managers spend more on political races particularly at the state and local levels.

The SEC on Thursday issued a proposal to eliminate its "pay to play" rule, which bars investment advisers from being paid to manage money for government clients for two years after making contributions to them.

The rule was enacted in 2010 in the wake of pay-to-play scandals in California and New York. It aims to prevent Wall Street firms from winning government business through campaign spending.

But SEC Chairman Paul Atkins on Thursday said the rule suppresses asset managers' political speech.

It "discourages full participation in the electoral process through contributions to candidates," said Atkins, whom Trump named to the regulator's top post last year. "People should not have to choose between their political-speech rights and a job in a particular industry."

Atkins added that the rule imposes disproportionately strict penalties for minor violations. He said scrapping it won't lead to more fraud, since investment advisers remain subject to antifraud rules.

The pay-to-play rule "has proven only to be needlessly penalizing, burdensome and complex to implement, and misaligned with the SEC's mandate," Atkins said. The SEC's decision can become effective after a 60-day comment period.

Private-equity executives have thrown their weight into political races in recent years, particularly at the federal level. After spending a record sum in 2024, private-equity managers this year have favored Republican candidates and right-leaning political-action committees.

The industry appears to spend much less on state and local elections, though less campaign-finance data is available on these races.

The SEC's pay-to-play rule has had a significant impact on political giving by private-equity firms and other investment advisers, said Adam Aderton, a partner at law firm Simpson Thacher & Bartlett. The main practical impact has been at the state and local levels, because many firms manage money for state and local investment vehicles such as pension funds and therefore avoid contributions to officials with influence over those pools of money.

For example, the California governor appoints members to state pension boards, and therefore is covered by pay-to-play rules. A buyout firm that financially backs a California gubernatorial candidate could run afoul of pay-to-play laws or be barred from doing business with the state's pension systems. There is no federal equivalent of the state pension systems, so giving to federal political candidates typically has fewer pay-to-play implications.

Most private-equity firms either prohibit political giving or require all spending to be vetted by their compliance teams, Aderton said. He added that the elimination of the SEC's rule wouldn't mean that firms could abandon this scrutiny, because there are similar laws at the state and local levels, as well as other antifraud statutes on the books.

"Many state and local jurisdictions have their own pay-to-play rules, and it's possible the elimination of the federal rule could lead to changes or increased enforcement of these rules," Aderton said.

The SEC has issued only a handful of pay-to-play penalties against private-equity firms in the 16 years the rule has been in force.

Most recently, the SEC in 2024 penalized a Minnesota private-equity manager because one of its employees made a campaign contribution to a state official after the Minnesota State Board of Investment invested in the firm's funds.

In 2018, the SEC announced pay-to-play settlements with Oaktree Capital Management and EnCap Investments. The year prior, it penalized 10 firms.

Financial-reform watchdogs blasted the SEC's plan to rescind the pay-to-play rule.

Jim Baker, executive director of private-equity watchdog group the Private Equity Stakeholder Project, said the SEC's decision "could open the door to private-equity bribery and corruption on an unprecedented scale."

Better Markets, a progressive think tank, said the rule has worked as intended, and with its reversal Atkins effectively would be promoting pay-to-play deals.

The Investment Adviser Association, a trade group for asset managers, supports the SEC's move, saying the rule is burdensome and penalizes contributions that don't have pay-to-play risk.