(But the SEC Provides Some Helpful Guidance Anyway)
In a ruling that did not get to the merits of the substantive arguments, a federal court has ruled that it lacks jurisdiction to consider whether the SEC contravened either the US Constitution or the Federal Election Commission’s exclusive turf when it adopted its pay-to-play rule governing investment advisors. Several weeks ago, we noted the filing of this case and observed that five Justices of the US Supreme Court might be inclined to agree that First Amendment concerns warranted the overturn of the rule were they to reach the merits of that question. For now, such questions are purely academic in light of the court’s ruling that “[t]he plaintiffs have failed to meet their burden in establishing subject matter jurisdiction because this Court is not the proper forum for their challenge.” (Order. p.2) The complaint should have been brought originally, in the opinion of the trial court, directly to the US Court of Appeals for the District of Columbia under a provision of the Investment Advisers Act which calls for all challenges of an “order” of the SEC to be brought before that court.
(In an interesting window into the byzantine, Through the Looking Glass logic that infects the minds of lawyers everywhere, the trial court then goes on to reject the parties’ argument that that “Rule 206(4)-5 isn’t an ‘order’, Your Honor, its, ummm, a ‘rule'” on the ground that standing precedent allows the court to interchange the terms as needed and that “[w]hat appears to be an affirmative grant of appellate jurisdiction to review agency rules becomes, in reality, an affirmative revocation of jurisdiction to review all agency rules not otherwise enumerated in the direct review statute.” (Op. p. 18). Huh?)
Logical gymnastics aside, one kernel of helpful guidance has arisen from this judicial leg wrestling match. The SEC has conceded that state legislators are not necessarily “covered officials” for purposes of application of the pay-to-play rules.
Rule 206(4)-5 prohibits 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 “covered officials” who have the ability to influence the award of public investment advisory contracts. The complaint filed by the parties noted that New York State Senator Lee Zeldin is a member of the New York State Senate and arguably a “covered public official” because he is “charged with confirming members of the New York Board of Regents, which sets guidelines and standards for managing certain state endowments.” (Complaint, para. 44). Similarly, the plaintiffs alleged, “[t]he Tennessee Republican Party has state officials currently seeking federal office who are covered by this rule, which restricts Plaintiff Tennessee Republican Party’s ability to fundraise.” (Id. para. 44).
In an important concession, the SEC has confirmed that merely having the power to confirm members of the board which selects investment advisors is not akin to “the ability to influence the award of public investment advisory contracts”. The Commission expressly admitted as such in oral argument and that position in writing here at pages 6-9 and here on page 17. The court’s order references that concession/clarification in footnote 6 of its opinion (or should I say, the court’s “rule”, the two terms are interchangeable these days, you know).