WASHINGTON - The U.S. District Court for the District of Columbia has dismissed a challenge to the Securities and Exchange Commission's rule to prevent investment advisers from engaging in pay-to-play practices, ruling that it lacks jurisdiction to hear the case.
The plaintiffs - the New York State Republican Committee and the Tennessee Republican Party -- filed a notice on Wednesday that they will appeal to the U.S. Court of Appeals for the District of Columbia Circuit.
The two Republican groups had asked the court in August to invalidate the SEC's restrictions on the political contributions that investment advisor 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 plaintiffs said those rules violate their Constitutional rights and overstep the SEC's authority.
Lawyers have said that the SEC's rule for IAs is very similar to the Municipal Securities Rulemaking Board's Rule G-37 for broker-dealers. Rule G-37 survived a legal test some 20 years ago, but the GOP lawsuit against the SEC caused some market participants to wonder if that rule could withstand another challenge in a legal climate that has shifted to provide greater protection of political contributions as a First Amendment right.
But the district court said Tuesday that federal law denied it the authority to rule on the merits of the lawsuit. Section 213 of the Investment Advisers Act provides that a person or party "aggrieved by an order issued by the commission" can obtain a review of that order in the U.S. Court of Appeals for the District of Columbia Circuit by filing a petition within sixty days of the SEC order. The court relied upon a 1977 decision by the appeals court, Investment Company Institute v. Board of Governors of the Federal Reserve System, in which that court held that the word "order" also encompasses "rules."
The Investment Company Institute ruling remains binding precedent, the district court held, and mandates that such challenges be brought directly appeal to the appellate court.
"Accordingly, this court lacks subject matter jurisdiction to hear the plaintiffs' challenge," the district court decided.
The decision, signed by U.S. District Judge Beryl Howell, noted that the D.C. circuit appears to have conflicted with the Investment Company Institute decision in subsequent decisions, instructing lower courts to "look to the Administrative Procedure Act . . . when an agency's direct-review statute [does] not define 'order.'" The APA draws a distinction between an "order" and "rule making." Despite the conflicts, Howell wrote, the precedent favors direct appellate review.
