WASHINGTON — A lawsuit challenging the Securities and Exchange Commission's investment adviser pay-to-play rule is moving forward in a D.C. federal appeals court, with implications for muni market pay-to-play restrictions hanging in the balance.
The petitioners — the New York State Republican Committee and the Tennessee Republican Party — are hoping the U.S. Court of Appeals for the D.C. Circuit will reverse the Sept. 30 decision of a federal district court that it did not have jurisdiction to hear the case. The Republican Party filed its brief with the appeals court Dec. 22, and the SEC will likely do so later this month. The court will then schedule oral argument for later in the year, said Jason Torchinsky, a lawyer who represents the Republican parties.
The two Republican groups had asked the district 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. Pay-to-play rules adopted in 2010 prohibit investment advisers from receiving compensation for advisory services for two years following a campaign contribution the firm or certain associates make to political candidates or officials in a position to influence the selection or retention of advisers to manage public pension funds or other governmental assets.
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, and that a defeat for the IA rule could potentially spur a new challenge of G-37.
But the district court said 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."
Torchinsky and another lawyer, Christopher Bartolomucci told the appeals court in their brief that the district court was wrong to conclude it couldn't hear the case, and said the case should be either sent back to the lower court for resolution or taken up by the appeals court itself notwithstanding the 60-day timeframe established by the Investment Advisers Act.
"The rule not only prohibits affected individuals from soliciting or coordinating contributions to the state parties themselves, but also precludes their investment adviser members from making contributions and their covered official members from receiving them," the GOP lawyers wrote.
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 a Philadelphia-area firm in June.
