In the last week of June 2019, the D.C. Circuit upheld “on the merits” FINRA’s long-standing but frequently criticized pay-to-play, “2-year time out” rule adopted to lessen the impact of political contributions in awarding business in the securities field, finding it constitutional. Click here for the opinion. Under the rule (2030), FINRA members are prohibited from soliciting investment advisory business from government entities for compensation within two years of a political contribution.
Background.
In 2010, the SEC adopted its pay-to-play rule to prohibit investment advisers from providing paid services to a government entity within two years of a political contribution to related government officials. Six years later (2016), the SEC approved FINRA Rule 2030 for its members, providing that its members may not “engage 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 a covered member or a covered associate” of the FINRA member. Specifically, the rule prevents a broker-dealer from acting as a “placement agent” hired by an investment advisor to secure a contract with a government entity for 2 years after a contribution is made. A challenge led by 2 state Republican parties including New York’s, on political “free speech”/First Amendment grounds ensued, and the appeal was transferred to the D.C. Circuit.
The D.C. Circuit’s Decision.
Judge Ginsburg for the Court first found that the political parties had standing, before turning to the merits of the case. The Court dismissed the opponent’s fundamental challenge to the SEC’s rule- making authority, finding that the pay-to-play rule fell squarely within the SEC’s authority to “reduce distortion in financial markets,” and finding that the rule-making was not “arbitrary and capricious.” The Court also found that Congress had not intended to reserve jurisdiction and authority only in the Federal Election Commission (FEC) when the specific political contribution involved “could” impact the financial markets, observing instead that the SEC and FEC can “coexist” in this political arena. The Court also acknowledged that while the pay-to-pay rules impose another limit contributions to federal candidates for office in addition to the dollar limits, it was not inconsistent with recent U.S. Supreme Court precedent (Blount) concerning barriers to campaign contributions under the First Amendment.
Future Predictions.
Political opponents of the pay-or-play prohibitions had found in it difficult in the past to obtain a successful court ruling in their favor finding the Rule to be unconstitutional, because they often failed to overcome procedural hurdles, including standing. But under the category of “be careful what you ask for,” these litigants for the first time cleared the procedural hurdle
— and obtained the substantive ruing they long coveted — but the strategy backfired. Instead, they have established an adverse precedent by arguably the most powerful court outside of the Supreme Court, finding the Rule constitutional. And without a split in the circuits, there is a narrow path to Supreme Court review to change the law. Court-watchers instead predict that opponents of the Rule will seek to test its “soft underbelly” by challenging the more constitutionally-vulnerable parts of the rule.
For more information, please do not hesitate to contact Michael S. Popok, Managing Partner of Zumpano Patricios & Popok at mpopok@zplaw.com.