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From Securities Regulation Daily, October 1, 2014

Court lacked jurisdiction to hear challenge to SEC pay-to-play rule

By Jim Hamilton, J.D., LL.M.

A federal district court lacked jurisdiction to hear a New York Republican State Committee challenge to an SEC rule regulating pay-to-play activity by investment advisers. Section 213 of the Investment Advisers Act stripped the court of jurisdiction and the district judge found that judicial review of the challenged rule lies exclusively in the Court of Appeals. Accordingly, the Commission’s motion to dismiss for lack of subject matter jurisdiction was granted (New York Republican State Committee, et al. v. SEC, September 30, 2014, Howell, B.).

This result meant that the court did not have to reach the alternative issue raised by the Commission about whether the plaintiffs failed to establish standing to bring the present case. The plaintiffs alleged that the SEC promulgated the challenged rule in excess of its statutory jurisdiction and authority, arbitrarily and capriciously, and in violation of the First Amendment.

Pay to play targeted. The challenged rule prohibits a registered investment adviser from providing investment advisory services for compensation to a government entity within two years after making a contribution to officials of the entity. Rule 206(4)-5 targets pay-to-play activities, whereby investment advisers seek to influence government officials’ awards of advisory contracts by making or soliciting political contributions to those officials.

Section 213 of the Advisers Act provides that persons aggrieved by an order issued by the SEC under the Act may obtain a review of such order exclusively in the United States Court of Appeals for the District of Columbia. While Sec. 213 does not expressly address the review of SEC rules, noted the court, binding precedent in the D.C. Circuit indicates that the term "order" in Sec. 213 encompasses an SEC rule.

The case is No. 14-01345.

Attorneys: Jason B. Torchinsky (Holtzman Vogel Josefiak PLLC) for New York Republican State Committee and Tennessee Republican Party. Thomas Jeffrey Karr for the SEC.

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