WASHINGTON – The Campaign Legal Center is trying to convince a federal court overseeing a challenge brought by Republican groups that the Municipal Securities Rulemaking Board's rule changes to prevent municipal advisors from engaging in pay-to-play practices are legal and needed to address the potential for corruption in the municipal market.
The CLC made its arguments in a friend-of-the-court brief filed with the Sixth Circuit Court of Appeals in Cincinnati. The brief opposes attempts by the Tennessee Republican Party, Georgia Republican Party, and New York Republican State Committee to get the court to vacate the Securities and Exchange Commission's approval of the rule changes.
The groups' suit against the SEC and MSRB charges the revisions to Rule G-37 on political contributions that extended it to municipal advisors forces MAs to choose between doing their jobs and exercising their right to support political candidates.
Tara Malloy, deputy executive director of CLC and the author of the brief, said the amendments "are based on a simple proposition."
"Substantial campaign contributions from a municipal advisor to officeholders with control over awards of municipal advisory business are likely to give rise to quid pro quo exchanges, or at a minimum, the appearance of such exchanges," she wrote. "That is the premise not only of the challenged amendments, but also the underlying rule, which was upheld by the D.C. Circuit."
Under the changes to G-37, MAs, similarly to dealers, are 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 allows a municipal finance professional associated with a dealer or a 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.
The original Rule G-37 was challenged on similar grounds by an Alabama bond dealer in Blount v. SEC after it was first approved for dealers in 1994, but the U.S. Court of Appeals for the D.C. Circuit rejected the arguments, finding the rule was "narrowly tailored to serve a compelling government interest."
Malloy argues against the groups' assertions that Supreme Court precedent since the Blount case has changed the way the Sixth Circuit should approach the amendments. Instead, she said the core holding from Blount, that G-37 served multiple compelling governmental interests, still applies to the MSRB's MA amendments because the changes "simply extend [G-37's] core standards to municipal advisory services, as Congress intended."
The two Supreme Court cases the Republican groups cite in their filings arguing Blount is outdated, McCutcheon v. FEC and Davis v. FEC, deal with factors like contribution limits, which are not present in the current case and thus limit the cases' applicability, according to Malloy. The amendments to G-37 do not set contribution limits, they only limit business after such contributions, she wrote.
Malloy also defended the amendments as rooted in addressing quid pro quo corruption, something the groups challenged in their filings.
"Although the amendments were intended to prevent a broad range of harms, the interest in preventing quid pro quo exchanges was paramount," she wrote. She referenced MSRB regulatory documents that quote the self-regulator's conclusion that MA selection has been influenced by political contributions in exchange for contracts. She also noted that, in contrast to what the groups had argued, federal campaign law does not make G-37 redundant because federal law under the Federal Election Campaign Act of 1971 is only concerned with the integrity of federal elections.
"It is ludicrous to suggest that Congress believed FECA's contribution limit would prevent quid pro quo arrangements in municipal contracting for advisory services," Malloy wrote.
In response to the groups' allegation that the MSRB has not offered any actual evidence of contributions complying with FECA's limits that create the possibility of corruption, Malloy said the petitioners "ignore the record compiled in the rulemaking" and that the argument "requires willful blindness" to the "numerous public reports of pay-to-play involving municipal advisors – from New Mexico to Pittsburgh."
She additionally challenges the groups' standing to bring the case at all, saying they would have to either show that the amendments would cause them direct harm or that they are acting on behalf of a group of members that would be harmed by the amendments. The groups meet neither criterion, she said, because they don't offer any evidence of possible harm the changes would bring directly and have not detailed any municipal advisors for which they are acting.
"This court should not decide what interests are at stake without the participation of those directly affected by the amended rule," Malloy wrote.
