The DC Circuit Court has rejected an effort by the New York and
Tennessee Republican Parties to set aside Securities and Exchange
Commission Rule 206(4)-5. The 2010 SEC rule prohibits
investment advisers from providing services for compensation to a
government entity within two years after a political contribution
to a government official has been made by the investment adviser or
its covered associates. The plaintiffs contend that the rule
exceeds the Commission's statutory authority, and violates the
Administrative Procedures Act and the First Amendment.
The plaintiffs in New York Republican State Committee and
Tennessee Republican Party v. SEC had originally filed their
challenge in federal district court. That court dismissed the
suit for lack of jurisdiction, concluding that the federal courts
of appeals have exclusive jurisdiction to hear challenges to rules
adopted under the Investment Advisers Act of 1940. The
plaintiffs subsequently appealed that decision to the Circuit Court
and, in the alternative, asked the Circuit Court for direct review
of the rule. The Circuit Court denied both requests in its
August 25th ruling.
According to the Circuit Court, longstanding precedent supports the
view that challenges to orders and rules under the Investment
Advisers Act must be brought to the courts of appeals. In
addition, a direct review by the Circuit Court is now time-barred
because the Investment Advisers Act requires challenges to be
brought within 60 days of the promulgation of a rule. In
short, the plaintiffs were four years too late in bringing their
case to the right court.
The Court noted that the plaintiffs still may petition the SEC to
repeal or amend the rule. And, if the agency denies the
petition, they can petition the Circuit Court for review of the SEC
decision.
While the Circuit Court never got to the merits of the
plaintiffs' challenge, this case is one of many in recent years
in which pay-to-play laws and rules have been upheld by state and
federal courts. Just last month a unanimous 11-member panel
of the same court upheld the long-standing ban on federal political
contributions by federal government contractors.
Financial services public contractors face significant compliance
challenges from federal and state restrictions on political
giving. The SEC pay-to-play rule is both complicated and
confusing, and the Commission has stepped up its enforcement of the
rule over the past two years. In addition, similar
restrictions may apply to financial services firms under Municipal
Securities Rulemaking Board Rule G-37 if they engage in municipal
securities work. Many states and localities also limit
political giving by investment advisers and municipal bond
brokers/dealers through laws, rules promulgated by State Treasurers
and Comptrollers, and policies adopted by state and municipal
pension funds.
Financial services providers that do work for public entities would
be wise to consult counsel to ascertain their risk exposure to
federal and state pay-to-play laws. Non-compliance –
even through inadvertent violations – can result in
substantial penalties, loss of business, and reputational harm.
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