WASHINGTON - The Republican parties of New York State and Tennessee will square off against the Securities and Exchange Commission in a federal court on March 23 over rules restricting finance professionals from giving money to political candidates.
The lawsuit filed against the SEC last year by the New York State Republican Committee and the Tennessee Republican Party challenges the commission's restrictions on the political contributions that investment advisory firms and their employees can make to state and local officials or candidates who are in a position to influence the award of investment business. The GOP groups charged those rules violate their constitutional rights and overstep the commission's authority.
The SEC's rule for IAs is very similar to the Municipal Securities Rulemaking Board's Rule G-37 for broker-dealers, which the MSRB has proposed to apply to municipal advisors as well. Both rules restrict finance professionals from engaging in certain municipal or investment business with a government client for two years after making a political contribution to a public official or candidate who can influence the award of business. Both rules contain exceptions allowing individuals to make small contributions to candidates that they are entitled to vote for: $350 per election in the SEC's rule and $250 in the MSRB's.
Rule G-37 survived a legal test some 20 years ago, but muni lawyers have said it could be in jeopardy if the IA rule suffers a defeat. Both the SEC and the Republicans have filed their written arguments with the U.S. Court of Appeals for the D.C. Circuit, which the GOP is hoping will reverse the Sept. 30 decision of a federal district court that it did not have jurisdiction to hear the case.
After hearing oral arguments next month, the appeals court will have to decide the jurisdictional question. The district court ruled that challenges to the Investment Advisers Act of 1940, which established the pay-to-play restriction for IAs, could only be challenged in an appeals court. In its written comments, the SEC told the appeals court it should strike down the challenge because it was not brought within 60 days of the establishment of the SEC rule in 2010 as, according to commission, is required by the Advisers Act. The SEC also argued that the Republican parties are not themselves IAs damaged by the rule and therefore lack standing to file the suit.
But the GOP's lawyers told the appeals court in its own written brief that it should either order the district court to hear the case or overturn the political contributions rule itself. Lawyers for the Republican parties argued that recent court precedents support their own argument that the district court has jurisdiction to hear the case. They also argued that, regardless of which court hears the case, the SEC cannot constitutionally use a 60-day time limit to prevent all challenges to "a sweeping rule that deters core First Amendment activity."
The state parties have standing to bring the lawsuit, their lawyers told the appeals court, because the rule harms them by preventing investment advisers from giving contributions they might otherwise have given.
"There can be no serious dispute that the rule directly affects the ability of the state parties to obtain contributions," the GOP lawyers wrote.
The SEC used the IA pay-to-play rule as the basis for an enforcement action for the first time in 2014, when it charged a Philadelphia-area firm in June.
