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1401Suit Brought To Challenge SEC's Pay-to-Play Rule

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  • Baker, John
    Aug 10, 2014
      Two Republican state party organizations have brought suit in federal court to overturn the Securities and Exchange Commission's pay-to-play rule for investment advisers, Rule 206(4)-5 under the Investment Advisers Act of 1940. No. 1:14-cv-01345 (D.D.C. filed Aug. 7, 2014). The plaintiffs, the New York Republican State Committee and the Tennessee Republican Party, have also moved for a preliminary injunction against enforcement of the rule. Although Rule 206(4)-5 was adopted over four years ago, in July 2010, the timing of the challenge may have been influenced by the first enforcement action under the rule, which was instituted and settled in June of this year. Release No. IA-3859 (June 20, 2014).

      The plaintiffs argue that the pay-to-play rule exceeds the SEC's statutory authority and jurisdiction. In making this argument the plaintiffs rely heavily on the exclusive power of the Federal Election Commission to enforce the restrictions of the Federal Election Campaign Act of 1971 on political contributions to political parties and candidates for federal offices. The SEC's pay-to-play rule does not apply generally to federal elections, but it does apply to contributions to state or local government officials when they run for federal offices, and it also applies to contributions to state political parties, such as the plaintiffs in this case. The plaintiffs also argue that the pay-to-play rule violates the First Amendment, arguing that the government may only regulate campaign contributions in order to combat quid pro quo corruption. The pay-to-play rule is a prophylactic rule, potentially restricting all but de minimis contributions, and is not limited to quid pro quo or even to pay-to-play arrangements (i.e., arrangements in which political contributions must be made in order to be considered for government business, but the receipt of such business is not assured).

      The case has been assigned to Federal Judge Beryl Howell in the District of Columbia. This is probably not the assignment that the plaintiffs were hoping for. Judge Howell was appointed by President Obama, and she is best known to the securities bar for her decision rejecting a challenge to the Commodity Futures Trading Commission's rule changes that required some investment advisers to registered investment companies to register as commodity pool operators.

      I have placed the complaint in New York Republican State Committee v. SEC on the FundLaw website (free registration with Yahoo Groups may be required), and it is available at


      The plaintiffs' brief in support of their motion for a preliminary injunction has also been placed on the FundLaw website, and it is at


      For the initial enforcement action under the pay-to-play rule, see


      John M. Baker, Esquire
      Stradley Ronon Stevens & Young, LLP
      1250 Connecticut Avenue, N.W., Suite 500
      Washington, DC 20036-2652
      p: 202.419.8413
      f: 202.822.0140
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