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From Securities Regulation Daily, July 28, 2016

Republican groups counter SEC bid to dismiss political donation rule suit

By Mark S. Nelson, J.D.

A trio of state Republican party organizations are trying to stave off the SEC’s recent attempt to persuade a court to dismiss a case the groups brought seeking to vacate a political contribution rule issued by the Municipal Securities Rulemaking Board and allegedly approved by the Commission. The Republican groups say the SEC and MSRB lacked authority to regulate political contributions (Tennessee Republican Party v. SEC, July 27, 2016).

The several cases brought in different federal appeals courts by Republican groups located in Tennessee, Georgia, and New York were consolidated in the Sixth Circuit because the petitioners have the same legal counsel, present the same issues, and the Commission and the MSRB both agreed to that result. But other briefing in the case is on temporary hiatus until the court rules on the SEC’s bid to dismiss the case on jurisdictional grounds. Papers filed by the SEC explained that a Congressional ban on the agency using funds in the current fiscal year to regulate political contribution disclosures may also bar the agency from defending the MSRB in court (See Section 707 of Title VII of the Consolidated Appropriations Act, 2016).

Taking aim at pay-to-play. MSRB Rule G-37, published in February, and operative August 17, 2016, broadens existing Rule G-37 to include municipal advisers. The centerpiece of the amended rule is a two-year ban applicable to municipal securities dealers and municipal advisers who make prohibited political contributions. The rule also includes disclosure requirements, an orderly transition period for banned firms, and a process to apply for exemptive relief. A de minimis contribution exclusion applies to political contributions made by a dealer or municipal adviser who is entitled to vote for the municipal entity official and who contributes no more than $250 per election.

According to the Republican groups’ petitions for review (TennesseeGeorgia/NewYork), the MSRB’s rule is ultra vires because only Congress and the Federal Election Commission have authority in this arena. They also claim the SEC’s and MSRB’s reliance on their broad antifraud powers is unavailing.

Moreover, the Republican groups challenge the MSRB rule on First Amendment grounds. They claim that the MSRB would force their members choose between pursuing advisory and dealer activities or making political contributions to candidates. The groups cite the Supreme Court’s McCutcheon opinion for the proposition that quid pro quo corruption is the government’s only legitimate interest in the regulation of political contributions.

In McCutcheon, four justices, led by the main opinion’s author, Chief Justice Roberts, and bolstered by Justice Thomas’s concurrence, held that statutory aggregate limits on how much a donor could give to all candidates or committees ran afoul of the First Amendment because they did not further the government’s anti-corruption goals as stated in Buckley v. Valeo (that case also features prominently in another set of law suits challenging the SEC’s in-house courts where it is often cited for its definition of inferior officer for purposes of Article II of the U.S. Constitution).

Justice Thomas wrote separately in McCutcheon to advocate the overruling of Buckley v. Valeo. Justice Breyer wrote for the four McCutcheon dissenters and explained that a majority of the court had in essence created a loophole that, in combination with the court’s Citizens United opinion, "eviscerates" existing laws on campaign finance.

Sunrise provision? The SEC argued that the case should be dismissed because there was neither a final order under the Exchange Act nor agency action as contemplated by the Administrative Procedure Act. Instead, the agency points to Dodd-Frank Act Section 916, which amended the SEC’s self-regulatory organization rule review process to allow SRO rules to be approved by operation of law.

Likewise, due to the Congressional funding ban, there was no Commission action because the MSRB’s rule, in part, dealt with the disclosure requirements Congress sought to ban. The SEC also argued that these circumstances did not amount to agency action under the Administrative Procedure Act.

Not so fast, said the Republican groups. According to their brief backing appellate jurisdiction, the SEC seeks to establish a "sunrise" provision via its understanding of "final order" that would exempt SRO rules from Commission approval and judicial review in violation of the non-delegation doctrine, which bars Congress from granting legislative powers to trade groups.

The Republican groups’ main Exchange Act theory is that the Commission’s inaction under the SRO rule review process is akin to approval. The groups further claim that this view is consistent with terminology in the APA defining "order" to mean the "affirmative" or "final disposition" of a matter.

On the policy front, the Republican groups argue that the Dodd-Frank Act revision of the SRO rulemaking process was intended to speed Commission action and that Congress did not intend to preclude judicial review of Commission approvals that might occur by operation of law. The groups also distinguished two cases cited by the SEC that involved the Federal Communications Commission’s forebearance authority and its non-action upon the passing of a statutory sunset date because those cases demonstrated Congress’s intended results.

Moreover, the Republican groups argued that the SEC had to disapprove the MSRB’s rule under the appropriations law. The SEC had argued that it could not act on the MSRB rule proposal because that would violate the funding ban. But the Republican groups counter that the SEC could "act on" the rules to disapprove them without violating the Congressional ban on making the rules final, issued, or implemented.

The case is No. 16-3360.

Attorneys: H. Christopher Bartolomucci (Bancroft PLLC) and Jason Brett Torchinsky (Holtzman Vogel Josefiak Torchinsky PLLC) for Tennessee Republican Party. Jeffrey Alan Berger for the SEC.

Companies: Tennessee Republican Party; Georgia Republican Party; New York Republican State Committee

MainStory: TopStory BrokerDealers ExchangesMarketRegulation InvestmentAdvisers MunicipalSecuritiesNews KentuckyNews MichiganNews OhioNews TennesseeNews

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