D.C. Circuit Tosses State Republicans’ Challenge of SEC Political Contributions Rule for FINRA Broker-Dealers

(CN) – The Court of Appeals for the D.C. Circuit denied the New York Republican State Committee’s bid to challenge the Securities Exchange Commission’s rule prohibiting broker-dealers acting as “placement agents” from accepting compensation for soliciting government business from candidates and elected officials.

The SEC adopted Rule 2030 in 2016 to regulate the political contributions of members of the Financial Industry Regulatory Authority (FINRA) whose broker-dealers act as “placement agents.”

A placement agent is an “individual or firm that investment advisers hire to help them secure contracts advising a government entity,” according to the 28-page opinion.

The rule was adopted in response to a growing concern of “pay-to-play activity” in the public pension market, Senior Circuit Judge Donald Ginsburg wrote in the ruling.

The court found that Rule 2030 stops a placement agent from accepting compensation from candidates and elected officials within two years of having contributed to the official’s electoral campaign.

The state republican committee was joined by The Tennessee Republican Party on the petition for review of the SEC’s approval of Rule 2030, claiming the SEC lacked the authority to enact 2030 and that the rule violated the First Amendment.

Ginsburg cited a 1995 case, Blount v. SEC, in which the same court upheld a virtually identical ruling. The 1995 ruling involved a similar rule, Municipal Securities Rulemaking Board Rule G-37, where the court found that “preventing corruption or the appearance of corruption are the only legitimate and compelling government interests thus far identified for restricting campaign finances,’” the opinion cited.        

“We hold the NYGOP has standing and deny its petition on the merits,” Judge Ginsburg wrote. “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.”

Senior Circuit Judge David Sentelle, however, dissented with the majority, concluding that the state Republicans lacked standing to challenge the rule, in which case the petition should be dismissed rather than denied.

“As the majority acknowledges, neither petitioner’s conduct is regulated by the respondent’s action, Rule 2030, and therefore they do not claim the near-automatic standing of a regulated entity. Petitioners assert instead that NYGOP has established standing on the theory that an organization is ‘harmed if its contributors cease giving it money,” Sentelle’s dissent states. “Neither of petitioners has shown that any contributor has stopped contributing because of the action of the Securities and Exchange Commission.”

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