WASHINGTON – A three-judge appeals court panel has dismissed a challenge from three Republican groups to the Municipal Securities Rulemaking Board changes to Rule G-37 that the groups had alleged restrict the political contributions of municipal advisors, saying the groups lacked standing to bring the case.

The judges from the U.S. Court of Appeals for the Sixth Circuit in Cincinnati issued its decision on Thursday after hearing oral arguments on the matter in early May.

The Tennessee Republican Party, Georgia Republican Party, and New York Republican State Committee sued the Securities and Exchange Commission and MSRB last April, alleging the MSRB’s G-37 revisions to extend the scope of the political contributions rule to municipal advisors, unconstitutionally forces MA and dealer employees to choose between doing their jobs and exercising their right to support political candidates. The revised rule, designed to curb pay-to-play practices in the muni market, took effect on Aug. 17, 2016.

The groups' focus on the amendments and not the rule itself was a key reason why the court found they did not have standing.

The MSRB said in a release that the “constitutionality of Rule G-37 is not contradicted by today’s ruling that the challengers did not have standing to bring a case against the recent amendments.”

“As a result of today’s ruling, the important amendments to Rule G-37, which extended this longstanding rule to municipal advisors, remain in place,” the board said in the release. It added that it believes the rule is “narrowly tailored to address quid pro quo corruption, and the appearance of this type of corruption, in the awarding of business by state and local governments to regulated firms and their professionals that have made political contributions to official in a position to influence such awards.”

Jason Torchinsky, a lawyer for the groups, said they are "disappointed that the court declined to address the merits of these unconditional burdens regulatory agencies are imposing on First Amendment Rights" and added, "We are evaluating our options to move this forward."

The Securities and Exchange Commission declined to comment.

Municipal Securities Rulemaking Board
The MSRB said that the Sixth Circuit's finding does not contradict the constitutionality of Rule G-37.

Under the changes to Rule G-37, municipal advisors, 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 muni advisory business.

The revised rule contains a de minimis provision like the original rule. It would allow a municipal advisor professional, as well as a municipal finance 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 appeals court, in reaching its decision, focused on whether the three groups were able to meet the “injury in fact” element required to invoke federal jurisdiction in a case. Injury in fact requires the petitioner to “show that he or she suffered ‘an invasion of a legally protected interest’ that is ‘concrete and particularized’ and ‘actual or imminent, not conjectural or hypothetical.’” The court said that the burden has to be met by referring to specific facts supported by the administrative record or affidavits and other evidence in the original brief initiating the challenge.

Judge Karen Nelson Moore, writing for the panel, said that the groups did not put forward an affidavit from a particular municipal advisor professional who would have contributed more than $250 were it not for the 2016 rule changes and that she could find no reason why that was not possible.

“The record is devoid of information that would permit us reasonably to infer that the 2016 amendments would injure petitioners,” Moore wrote.

She added that the groups identified one participant in the muni market, Steve McManus, who at first seemed to be affected by the amendments. However, Moore said that the groups were not able to show whether McManus, who was associated with a registered investment advisor and a broker-dealer, was already constrained by the rule before the amendments became effective.

“This detail matters,” Moore wrote. “Petitioners challenge only the 2016 amendments; they do not challenge Rule G-37 as a whole.”

The groups also failed to establish that there was any injury based on the administrative record, affidavits, or other evidence, the court found. Moore said that the directors of the three Republican groups, who each filed affidavits, were not able to prove standing in an individual capacity because they conflated the original G-37 rules with the 2016 amendments when presenting their arguments. That meant that the court could not determine whether the amendments themselves were the cause of any problem.

There also was no evidence from the groups that they have organizational standing to challenge the rule, Moore wrote. They would have had to show that at least one member had suffered or would suffer harm from the amendments and they were unable to name any specific members, Moore wrote.

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