WASHINGTON – The Municipal Securities Rulemaking Board's rule changes to prevent municipal advisors from engaging in pay-to-play practices are constitutional and comply with federal statutes, contrary to the claims of three Republican groups, the MSRB told a federal appeals court on Monday.
The MSRB brief, filed with the Sixth Circuit Court of Appeals in Cincinnati, disputes the assertions made by the Tennessee Republican Party, Georgia Republican Party, and New York Republican State Committee in November when they urged the court to vacate the approval of the rule changes.
The Securities and Exchange Commission also filed a brief on Monday that questioned the groups' ability to bring the case and argued the rule changes never actually received explicit commission approval.
The state parties' suit against the SEC and MSRB charges the revised rule changes that extend MSRB Rule G-37 on political contributions to municipal advisors forces MAs to choose between doing their jobs and exercising their right to support political candidates.
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 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."
MSRB general counsel for regulatory affairs Michael Post and Sidley Austin partner Joseph Guerra, who co-authored the MSRB's brief, said the groups would have to show a real and immediate threat of future injury to demonstrate that they have standing, either on their own or as representatives for others, to challenge the rule changes.
Post and Guerra argued that the groups failed to do that because they only included "a few statements about future injury" that mostly discuss unspecified people. The two lawyers added that the one person the groups named as potentially being affected by the rule, Steve McManus, works for an MSRB-registered dealer that is not an MA and was thus already subject to G-37 before the changes.
Post and Guerra also challenge an argument from the Republican groups that G-37 should be set aside because it exceeds the MSRB's statutory authority, citing in part the self-regulator's authority under the Dodd-Frank Act to regulate MAs. The MSRB lawyers say the groups would have to show that the rule was "arbitrary, capricious, or manifestly contrary" to Section 15B of the Securities Exchange Act of 1934 that gives authorization for the MSRB's activities.
They cite the appeals court's decision in Blount to counter that possibility, saying "As the D.C. Circuit recognized, the connection between the MSRB's mandate to protect and perfect the municipal securities market and Rule G-37's anticorruption goal is self-evident."
The MSRB also contends that the groups incorrectly argue that federal campaign law covers almost everything G-37 covers.
Rule G-37, the MSRB lawyers argue, applies to contributions for state and local elections that fall outside of the Federal Election Campaign Act of 1971's scope. The only time the two overlap is when a state or local official is running for federal office, they argued, adding the groups do not address why that would make the rule contradict the powers the MSRB is given in Section 15B.
Additionally, the groups don't show that Congress meant to prohibit regulation of pay-to-play practices in the muni market under the Exchange Act when it passed FECA, they argued.
"The two statutes have different scopes and purposes, and both can be enforced without conflict in the limited area of overlap petitioners identify," Post and Guerra wrote. "Petitioners identify nothing in FECA or the Exchange Act that expressly forbids Rule G-37's application to contributions to incumbent state and local officials running for federal office."
FECA's preemption provision, which reaches only state regulation of federal campaign contributions, "is strong evidence that FECA does not bar other federal regulation," they added.
"Indeed, because FECA bars federal campaign contributions by federal contractors to prevent corruption or its appearance in the administration of federal programs, it is implausible to conclude that Congress clearly intended to allow federal campaign contributions that can cause those same harms at the state and local level," Post and Guerra wrote.
The lawyers also argued that a showing that the MSRB relied on "fair assumptions" about quid pro quo corruption is enough to prove the agency was justified in pursuing the rule and that evidence of "rampant" corruption is not needed as the groups have argued. The groups make an "unsubstantiated assumption" that legal contributions cannot cause pay-to-play dangers, the two lawyers said.
The SEC, in its brief, sought to convince the appeals court that the court does not have jurisdiction to hear the case because the changes never received commission approval. Congressional appropriations language for 2016 prohibited the SEC from finalizing, issuing, or implementing any rule, regulation or order regarding the disclosure of political contributions. The SEC argued that because of the language, it never acted on the proposed changes. The commission's inaction meant that the changes were "deemed approved" after 45 days, as happens under federal law when the SEC doesn't act, the commission said.
While the Republican groups are arguing the SEC's inaction still qualifies as a final order or agency action, either of which would be reviewable by the appeals court, the SEC is disputing that argument.
