WASHINGTON – Two Republican state committees that challenged the constitutionality of a Securities and Exchange Commission political contributions rule are insisting the SEC reject a Municipal Securities Rulemaking Board proposal to extend pay-to-play prohibitions to municipal advisors.
Jason Torchinsky, one of the lawyers representing the New York Republican State Committee and the Tennessee Republican Party, would not say whether his clients plan to challenge the amendments to MSRB Rule G-37 on political contributions in court if the SEC approves them. "Pay to play rules that infringe on First Amendment rights with respect to otherwise disclosed and lawful campaign contributions are hanging by a thin thread," he said.
"Once a court can get at the merits of these rules, the fabric will unravel. And we are looking forward to seeing that happen," Torchinsky said.
The two Republican groups told the SEC in a comment letter on the proposal that the MSRB's changes are a "direct effort to deter municipal advisors and dealers from engaging in conduct that is protected by the First Amendment and permitted by federal statute."
"In effect, the MSRB amendments force municipal advisors and dealers to choose between making otherwise-lawful campaign contributions and providing advisory or dealer services," the parties said.
The two groups also challenged the MSRB's ability to regulate campaign contributions, arguing it is usurping a power reserved for Congress and the Federal Election Commission.
"Congress has already significantly curtailed the constitutional right to support candidates through campaign contributions by limiting such contributions to $2,700 per candidate per election or $10,000 per year to state party committee federal accounts," they said. "If the MSRB wants to impose even more stringent restrictions on the First Amendment rights of municipal advisors or dealers, then it must show that those restrictions are necessary to further a sufficiently important interest, and do so in a sufficient tailored manner. This the MSRB does not and cannot do."
The Republican groups started their previous challenge of the SEC's contributions rule for investment advisors in a 2014 federal district court case. The case was ultimately dismissed for a lack of subject matter jurisdiction. The groups appealed the ruling to the U.S. Court of Appeals for the District of Columbia Circuit, which dismissed the appeal on Aug. 25 last year because it was filed after the 60-day deadline to challenge a rule under the Investment Advisors Act of 1940.
The SEC rule was adopted in 2010 and requires IAs that contribute more than a specified de minimis amount to a state or local official who can influence the award of investment business to wait two years before providing services for compensation to that government client.
Rule G-37 similarly prevents dealers from engaging in negotiated transactions with an issuer for two years if the dealer, one of its municipal finance professionals, or a political action committee controlled by the dealer or an MFP makes a significant contribution to an issuer official who can influence the award of muni bond business. MFPs can give $250 to a candidate whom they can vote for without triggering the ban.
The DC appellate court found Rule G-37 was constitutional in 1995, saying it was "narrowly tailored to serve a compelling government interest." The Supreme Court declined to take up an appeal of the ruling at the time.
The proposed amendments would extend the rule to municipal advisor firms and their municipal advisor professionals, with certain differences if an MA firm acts as a third-party solicitor. MAPs would be defined similarly to MFPs under the rule and, like MFPs, could give $250 to a candidate whom they can vote for without triggering the ban.
When it filed the amendments with the SEC on Dec. 16, the MSRB said the changes will address "an area of potential corruption, or appearance of corruption, in connection with the awarding of municipal advisory business, which impedes a free and open market in municipal securities and may harm investors, issuers, municipal entities and obligated persons."
Dealer and MA groups who also commented on the filing said they generally support the MSRB's effort to extend the rule to MAs, but asked the SEC for certain revisions and clarifications to the responsibilities and disclosure requirements for dealers and MAs under the proposed amendments.
