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New York Republican State Committee v. Securities and Exchange Commission

United States Court of Appeals, District of Columbia Circuit

June 18, 2019

New York Republican State Committee and Tennessee Republican Party, Petitioners
Securities and Exchange Commission, Respondent

          Argued November 15, 2018

          On Petition for Review of a Final Order of the Securities & Exchange Commission

          Edmund G. LaCour Jr. argued the cause for petitioners. With him on the briefs were H. Christopher Bartolomucci and Jason B. Torchinsky.

          Jeffrey A. Berger, Senior Litigation Counsel, Securities and Exchange Commission, argued the cause for respondent. With him on the brief was Michael A. Conley, Solicitor.

          Carter G. Phillips, Joseph Guerra, Tobias S. Loss-Eaton, and Michael L. Post were on the brief for amicus curiae Municipal Securities Rulemaking Board in support of respondent.

          Before: Pillard, Circuit Judge, and Ginsburg and Sentelle, Senior Circuit Judges.


          Ginsburg Senior Circuit Judge

         In 2016 the Securities and Exchange Commission adopted Rule 2030, which regulates the political contributions of those members of the Financial Industry Regulatory Authority (FINRA), a self-regulatory association of broker-dealers, who act as "placement agents" - i.e., individuals and firms that investment advisers hire to help them secure contracts advising a government entity. The Rule prohibits a placement agent from accepting compensation for soliciting government business from certain candidates and elected officials within two years of having contributed to such an official's electoral campaign or to the transition or inaugural expenses of a successful candidate. The New York Republican State Committee (NYGOP) and the Tennessee Republican Party petition for review of the SEC's order approving Rule 2030, on the grounds that: (1) the SEC did not have authority to enact the Rule; (2) the order adopting the Rule is arbitrary and capricious because there was insufficient evidence it was needed; and (3) the Rule violates the First Amendment to the Constitution of the United States. The SEC challenges the petitioners' standing to bring the case and defends the Rule against these arguments.

         We hold the NYGOP has standing and deny its petition on the merits. The SEC acted within its authority in adopting Rule 2030; doing so was not arbitrary and capricious because the SEC had sufficient evidence it was needed; and the Rule does not violate the First Amendment in view of our holding in Blount v. SEC, 61 F.3d 938 (1995), in which we upheld a functionally identical rule against the same challenge.

         I. Background

         The SEC adopted the challenged rule in response to longstanding concerns about so-called "pay-to-play" activity in the public pension market. We therefore begin by laying out what prompted the SEC's decision to regulate the contributions of placement agents to candidates and incumbents for elected office.

         A. Pay-to-Play and Public Funds

         In many instances, local and state government officials responsible for holding and managing public funds, such as pension funds and tuition plans, are also responsible for choosing investment advisers to manage plan assets. Political Contributions by Certain Investment Advisers, Investment Advisers Act Release No. IA-3043, 75 Fed. Reg. 41018, 41019/1 (July 14, 2010).[1] By 2010 an increasing number of enforcement actions had revealed that some of these elected officials chose investment advisers based upon whether the would-be adviser had given them money or donated to their campaign. 75 Fed. Reg. at 41019/3-20/3; id. at 41039 n.290. For example, the SEC brought cases against the former Treasurer of the State of Connecticut and other defendants, alleging the Treasurer had allocated pension fund investments to fund managers in exchange for political contributions and other payments made through the Treasurer's "friends and political associates." Id. at 41020/1.

         Concerned that these practices distort the market for investment advisory services, the SEC adopted a rule in 2010 regulating the political contributions of firms and individuals registered under the Investment Advisers Act of 1940, which prohibits any adviser from engaging "in any act, practice, or course of business which is fraudulent, deceptive, or manipulative." 15 U.S.C. § 80b-6(4); see 17 C.F.R. § 275.206(4)-5. This "Advisers Act rule" makes it unlawful for an investment adviser to provide services "for compensation to a government entity within two years after a contribution to an official of the government entity is made by the investment adviser or any covered associate of the investment adviser." 17 C.F.R. § 275.206(4)-5(a)(1). The rule was "modeled on" Rule G-37 of the Municipal Securities Rulemaking Board (MSRB), 75 Fed. Reg. at 41020/3, which the SEC had approved in 1994 and which imposes a similar two-year "time-out" upon a dealer in the municipal securities market who has donated to a covered official. Self-Regulatory Organization - Municipal Securities Rulemaking Board, Exchange Act Release No. 34-33868, 59 Fed. Reg. 17621, 17622/3-25/3 (Apr. 13, 1994). The SEC modeled its rule upon MSRB Rule G-37 in part because we had upheld that rule against a first amendment challenge in Blount, and in part because the SEC believes G-37 was successful in "significantly curb[ing] pay to play practices in the municipal securities market." 75 Fed. Reg. at 41020/3, 41023/3; see also Order Approving a Proposed Rule Change To Adopt FINRA Rule 2030 and FINRA Rule 4580 To Establish "Pay-To-Play" and Related Rules, Exchange Act Release No. 34-78683, 81 Fed. Reg. 60051, 60065/1 (Aug. 31, 2016).

         The SEC understood the Advisers Act rule would not address all instances of pay-to-play corruption. In particular, it was aware of several cases in which an investment adviser did not contribute directly to a candidate or incumbent but instead acted through a placement agent. See 75 Fed. Reg. at 41037/3-38/1; Notice of Filing of a Proposed Rule Change To Adopt FINRA Rule 2030 and FINRA Rule 4580 To Establish "Pay-to-Play" and Related Rules, Exchange Act Release No. 34-76767, 80 Fed. Reg. 81650, 81651/1 (Dec. 30, 2015). For example, a placement agent who funneled contributions to the New York State Comptroller secured contracts for its client to advise $250 million worth of pension fund investments. 81 Fed. Reg. at 60065/3; 75 Fed. Reg. at 41019/3-20/3. The SEC was therefore "concerned that a rule that failed to address the use of [placement agents] would be ineffective were advisers simply to begin using ... placement agents" to get government clients. 75 Fed. Reg. at 41037/3.

         Instead of barring investment advisers from hiring placement agents, however, the SEC allowed an adviser to retain a placement agent who is a member of the FINRA, 17 C.F.R. § 275.206(4)-5(a)(2)(i)(A); 15 U.S.C. § 78c(a)(26), if the FINRA would impose restrictions upon its members that were "substantially equivalent [to] or more stringent" than the SEC's parallel rule for investment advisers. 17 C.F.R. § 275.206(4)-5(f)(9)(ii); see Ga. Republican Party v. SEC, 888 F.3d 1198, 1200 (11th Cir. 2018); 81 Fed. Reg. at 60063/3 (noting the FINRA had agreed to "prepare rules for [the SEC's] consideration that would prohibit its [placement agent] members" from engaging in pay-to-play activity).

         B. FINRA Rule 2030

         In 2015 the FINRA proposed Rule 2030, which is modeled after the Advisers Act rule and MSRB Rule G-37. 81 Fed. Reg. at 60053/1, 60057/2. Rule 2030(a), subject to some exceptions, prohibits a FINRA member from

Engag[ing] in distribution or solicitation activities for compensation with a government entity on behalf of an investment adviser that provides or is seeking to provide investment advisory services to such government entity within two years after a contribution to an official of the government entity is made by the covered member or a covered associate.

         In other words, if a placement agent makes a contribution to a government official who can influence a government entity's choice of an investment adviser, see Rule 2030(g)(8) (defining "official"), then the placement agent must wait two years before he or his firm can accept payment for soliciting that government entity on behalf of a client. The "two-year time-out" is intended to serve as a "cooling-off period during which the effects of a political contribution on the selection process can be expected to dissipate." 81 Fed. Reg. at 60053/1.

         Rule 2030(b) prevents circumvention of this primary prohibition by forbidding a covered member or a "covered associate" of a member from "solicit[ing] or coordinat[ing] any person or political action committee" to make any contributions to a covered official. See also Rule 2030(g)(2) (defining "covered associate"). The covered member or associate is also forbidden from "soliciting or coordinating any person or political action committee to make any payment to a political party of a state or locality of a government entity with which the covered member is engaging in, or seeking to engage in, distribution or solicitation activities on behalf of an investment adviser." Rule 2030(b)(2) (cleaned up). Put another way, a placement agent may not solicit contributions for a political party and later be paid to serve as a placement agent for the state or locality of that party.

         Rule 2030(c)(1) sets forth an exception to the Rule for de minimis contributions, allowing an associate of a FINRA member firm to contribute up to $350 to a candidate or incumbent if he or she is eligible to vote for that person; otherwise the limit is $150.

         When the SEC approved FINRA Rule 2030 in 2016, the NYGOP, along with the Tennessee and Georgia Republican Parties, filed a joint petition in the Eleventh Circuit for review of the SEC order. 81 Fed. Reg. at 60051; Ga. Republican Party, 888 F.3d at 1201. The Eleventh Circuit held the Georgia party did not have standing to challenge the order and transferred the case to this court based upon the applicable venue statute. Id. at 1205 (citing 15 U.S.C. § 78y(a)(1)).

         II. ...

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