Court Dismisses Challenge to SEC’s Pay-to-Play Rules Covering State Investment Funds

Last night, in New York Republican State Committee v. SEC, the U.S. District Court for the District of Columbia dismissed a challenge to an SEC pay-to-pay rule.  The regulation bars investment firms from managing state assets for two years after a firm or its associates make more than de minimis contributions to officeholders or candidates in a position to award investment contracts.   The lawsuit was brought by the state Republican parties of New York and Tennessee, both of which argued that the rule indirectly affected their fundraising, and burdened their members and candidates.

The district court dismissed the case for lack of subject matter jurisdiction, agreeing with the SEC that the D.C. Circuit Court of Appeals was vested with jurisdiction to hear the challenge to the play-to-play rule.

The district court, however, also expressed grave doubts as to whether plaintiffs had demonstrated standing to challenge the SEC rule, noting that plaintiffs, as political parties, were not the target of the rule and that “plaintiffs’ standing relied entirely upon the independent actions of third parties not before the Court —i.e., investment advisers.”   It further noted that even in light of plaintiffs’ supplemental filings, “whether the plaintiffs have standing to bring this case remains in doubt.”

On August 29, 2014, the Campaign Legal Center filed an amici brief arguing that the challenged rule was consistent with the First Amendment and that the plaintiffs lacked standing to bring the case.

“While we fully expect this case will be refiled, we find this ruling dismissing the case and questioning plaintiffs’ standing encouraging,” said Tara Malloy, Campaign Legal Center Senior Counsel.  “But even without the question of standing, the courts have long recognized the vital public interest in such pay-to-play restrictions, as well as their role in safeguarding the public’s faith in government.” 

The rule was implemented after SEC and state investigations uncovered extensive evidence of fraud in the award of state investment contracts.  One such scheme involved former New York State Comptroller Alan Hevesi, who was ultimately convicted of steering $250 million in pension funds to an investment firm in exchange for gifts and more than $500,000 in contributions.

To read the court's memorandum opinion and order dismissing the case, click here and here.

To read the brief filed by the Campaign Legal Center and Democracy 21, click here.