NYC Advocate, Others Back SEC Pay-to-Play Rule in Suit

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WASHINGTON — The New York City public advocate has filed a friend-of-the-court brief in support of the Securities and Exchange Commission's pay-to-play restriction on investment advisers, which is under attack in a lawsuit filed by two state Republican parties.

Letitia James announced this week that she filed a brief backing the SEC's position in the lawsuit, which was filed against the commission last year by the New York State Republican Committee and the Tennessee Republican Party. The suit is currently set to be argued before the U.S. Court of Appeals for the D.C. Circuit March 23.

The Republican groups want the court 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.

Muni market participants are watching the case because the SEC's rule for IAs is very similar to the Municipal Securities Rulemaking Board's Rule G-37 for broker-dealers, and lawyers have said that a defeat for the IA rule could potentially spur a new challenge of G-37.

James, an elected official charged with serving as a "watchdog" for New Yorkers and with overseeing the New York City Employees' Retirement System public pension fund, told the court that the rule addresses a type of corruption New York has suffered in the past and should be upheld.

"The New York and Tennessee state Republican parties are jeopardizing the retirement security of millions of Americans so that governors that are running for president can raise more money from Wall Street," James said in a statement. "We know what will happen without these important regulations. New York has a sordid history of pay-to-play corruption, and we must do everything in our power to protect the integrity of our public pensions."

James' brief highlights some examples. The 2006 re-election campaign of then-New York State Comptroller Alan Hevesi, who was first elected 2002, for example, received hundreds of thousands of dollars in contributions from investment firms, James said. Hevesi turned around and invested hundreds of millions of dollars from the New York State Common Retirement Fund with the firms that backed him, and was subsequently convicted on criminal charges of official misconduct. The SEC also charged firms and individuals responsible with fraud and won disgorgement of millions of dollars of ill-gotten gains.

Other interested parties are also backing the SEC. A Massachusetts-based non-profit called Free Speech For People told the court the rule protects the rights of public employees. The group said that if IA firms use their advisory fees from a pension to make contributions to an official, it's equivalent to compelling public employees to contribute to campaigns with which they may disagree. Campaign Legal Center and Democracy 21, organizations concerned with the influence of money in politics, said the SEC's rule advances an important public interest and should be upheld.

The SEC used the IA pay-to-play rule as the basis for an enforcement action for the first time in 2014, when it charged Philadelphia-area TL Ventures in June with engaging in pay-to-pay practices in connection with state and local pension systems.

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