WASHINGTON – The Securities and Exchange Commission is arguing that any court challenge to the constitutionality of revised Rule G-37 on political contributions can be made when an enforcement action is taken over a violation of the rule.
"Just because the [Municipal Securities Rulemaking Board] rule cannot be reviewed in this [court] at this time does not mean that the MSRB rule can never be reviewed," the SEC's lawyers said in a filing with the U.S. Court of Appeals for the Sixth Circuit in Cincinnati.
The SEC is battling the Tennessee Republican Party, Georgia Republican Party, and New York Republican State Committee, which brought a lawsuit against it and the Municipal Securities Rulemaking Board in April over revised Rule G-37, claiming the rule violates securities professionals' constitutional right to free speech.
Under the changes to Rule G-37, municipal advisors, similarly to dealers, will be barred from engaging in municipal advisory business with an issuer for two years if the firm, one of its professionals, or a political action committee controlled by either the firm or an associated professional, makes significant contributions to an issuer official who can influence the award of municipal advisory business.
The revised rule contains a de minimis provision like the original rule. It would allow a municipal finance professional or municipal advisor professional to give a contribution of up to $250 per election to any candidate for whom he or she can vote without triggering the two-year ban.
But the SEC and parties' lawyers have been wrangling over federal law provisions and their impact on this case.
In a motion to dismiss the parties' claims on July 19, the SEC argued that it never took any actions on the revised rule because fiscal 2016 appropriations act provisions prohibited it from using funds to "finalize, issue, or implement any rule, regulation, or order regarding disclosure of political contributions."
Under the Dodd-Frank Act, if the SEC has not taken action within 45 days of it publishing an MSRB rule, the rule is deemed approved. As a result of the SEC's lack of action, the revised rule was deemed approved and it is scheduled to take effect on Aug. 17.
In a July 27 response to the SEC's motion to dismiss, the state parties' lawyers said, among other things, that the SEC's argument against the current possibility of review, if accepted, eliminates the potential for any court to take up the revised rule.
But SEC lawyers disagreed, saying a court review would be possible when an enforcement action under the rule is challenged.
The SEC's core contention, first explained in its motion to dismiss, is that because the revised rule was "deemed approved," the SEC never issued a "final order" as defined in the Securities and Exchange Act and never took a reviewable "agency action" as defined in the Administrative Procedure Act (APA). As a result, the state parties cannot challenge the rule in court, the commission said.
Lawyers for the state parties, however, claim the SEC violated the appropriations act by not disapproving the revised G-37.
"Had the SEC disapproved the MSRB's rule, it would not have 'finalized, issued, or implemented' the rule; it would have prevented those very outcomes," the parties' lawyers wrote.
They also said that the Exchange Act makes clear that when the MSRB proposes or revises a rule, the SEC is required to either approve or disapprove it. There is only one way for the SEC to carry out that duty, they argue, "by order." The APA also supports the contention through its definition of an order as something that is an "affirmative" and "final disposition."
The SEC's lawyers responded to those claims in their Aug. 3 filing saying the parties' disregard key language in the statutes and cannot "cite to any commission order approving the rule" because "no such order exists."
"Petitioners concede the point when they contend that the Appropriations Act required the commission to disapprove the MSRB rule by order, but failed to do so," the SEC's lawyers said. "While this argument rests upon a misreading of the appropriations statute … it acknowledges the absence of a final order, the hook for jurisdiction" under the Exchange Act.
The SEC lawyers also address the allegations that the appropriations act forces the commission to disapprove the rule, pointing to the word "regarding" in the act.
"If Congress sought to write the statute so as to preclude the commission from using funds to approve the MSRB rule, it would have used the word 'approving' instead of 'regarding.' But it did not," the SEC lawyers wrote.
The SEC lawyers also said in their Aug. 3 filing that the commission did not issue the "equivalent of an order" or fail "to take a discrete agency action that it is required to take," which would be required under Supreme Court precedent to establish the existence of an agency action.
