And so it begins…
On Friday, the New York and Tennessee state Republican parties, led by the very able Jason Torchinsky, filed a complaint in District of Columbia federal court challenging both the constitutionality and administrative propriety of the SEC’s pay-to-play rule governing investment advisors; Rule 206(4)-5. This is a serious challenge that we all will be well served to follow carefully.
First, the basics: SEC Rule 206(4)-5 regulates the political activities of investment advisors in a way that others are not regulated. Specifically, SEC regulations prohibit investment advisors from receiving compensation for providing their services to government pension plan clients when those advisors (or certain covered executives) have made campaign contributions above minimal thresholds to candidates (or parties) and when those politicians have the ability to influence the award of public investment advisory contracts. (The SEC rule doesn’t prevent the advisor from being forced to honor its contractual obligations, mind you, just from getting paid to do the work!)
The Rule has gotten a great deal of attention and has caused considerable consternation for candidates trying to raise money from a favorite contribution target: bankers. (Remember the famous line attributed to noted bank robber Willie Sutton when asked why he robbed banks? “Because that’s where the money is!” The same holds true for politicians and bankers.)
Recently, this blog noted the SEC’s first-ever enforcement action against TL Ventures for violation of this rule. We noted with alarm both the breadth of the regulatory landscape staked out by the SEC as well as the apparent constitutional hurdles to such regulation in light of the United States Supreme Court’s First Amendment analysis underlying McCutcheon v. FEC. Now, it appears, we are going to get a chance to see this analysis tested.
Enter the Tennessee and New York Republican parties, which see Rule 206(4)-5 as a challenge to the ability of its members to raise or make campaign contributions. Interestingly, the New York and Tennessee complaint highlights the plight of New York State Senator Lee Zeldin, who is the New York Republican Party’s nominee to represent the Empire State’s First Congressional District. As a State Senator, Mr. Zeldin confirms members of the New York Board of Regents and is thus potentially a “covered official” not permitted to accept funds from investment advisors or permit the party to fundraise for him (Complaint, ¶ 44).
The complaint challenges the SEC on several grounds. First, the plaintiffs allege that the power to regulate federal campaign activity lies exclusively with the Federal Election Commission. (Those guffaws you hear right now are coming from the many folks trying in vain to convince the hopelessly partisan and deadlocked Commission to “regulate” ANYTHING these days). Second, the complaint alleges that the Rule, singling out as it does a lone class of donors to limit contribution activity, is both arbitrary and capricious. (Ah, were it that easy to overturn government regulation!). Third, and most interesting, is the First Amendment challenge predicated on McCutcheon for the reasons discussed here at length. The Supreme Court clearly regards campaign activity as “speech”, restricted only to the extent absolutely necessary to prevent direct, quid pro quo corruption. The SEC clearly believes it has the power to regulate contributions by companies like TL Ventures without a need to show intent or quid pro quo corruption.
The plaintiffs are represented by capable and tenacious counsel. With respect to the Constitutional challenges, a strong case can be made that five Justices of the current Supreme Court will agree. Pull up a chair, grab some popcorn, and let’s settle in to watch a good old fashioned tussle.