Supreme Court Refuses to Consider Unsuccessful Pay-To-Play Challenge

Earlier this week, the U.S. Supreme Court declined to take up a lower court ruling upholding the SEC’s authority to adopt and enforce FINRA’s Pay-to-Play rule, Rule 2030. That rule, which became effective in 2017, followed and was patterned after Rule 206(4)-5 under the Investment Advisers Act of 1940.  Adopted in 2010, the Advisers Act Pay-to-Play rule prohibits investment adviser firms and certain of its executives and employees, including representatives, from providing advisory services to government clients within two years after the firm or those covered employees make contributions to elected officials relating to the client.  Additionally, the rule prevents an adviser from directly or indirectly paying any third party to solicit advisory business from any government entity, with certain exceptions.  Finally, the rule prevents an adviser from coordinating or soliciting contributions for certain government officials or candidates in situations where the adviser is either seeking the business of the government entity or providing advisory services.

In 2016 FINRA adopted Rule 2030, which is substantially similar to the Advisers Act rule.  One of the chief motives for the adoption of the FINRA rule was to foreclose the possibility that registered representatives or FINRA member firms could circumvent the Advisers Act Rule, where the firms were dual registrants. Both rules have de minimis exceptions of $350.00 per election in contributions to any one official or candidate if the contributing associate was entitled to vote for the candidate, and $150.00 per official per election, to candidates for whom the associate is not entitled to vote.  Both rules also have recordkeeping requirements.

Both the SEC and FINRA have enforced their respective rules through administrative enforcement actions.

The Republican Party of Georgia originally filed a suit against the SEC, alleging that the FINRA Pay-to-Play rule violated brokers’ First Amendment rights by unreasonably chilling the brokers’ ability to make campaign contributions.  The New York Republican State Committee and the Tennessee Republican Party joined the suit, which at the time was pending in a district court in Georgia.  The Georgia party was dismissed from the case earlier because, the court ruled, the Georgia Republican Party had not demonstrated any injury to the party or any of its candidates.  The case was transferred to federal court in the District of Columbia as a more appropriate venue to consider the issues raised by the New York and Tennessee parties, the only remaining plaintiffs in the case.

The SEC defended the action by contending that the regulation was designed exclusively to prevent corrupt pay-to-play schemes, and was not intended, directly or indirectly, to affect applicable campaign finance laws or to unreasonably restrict brokers’ rights to make contributions.  In June of 2019, a majority of the U.S. Circuit Court for the District of Columbia rejected the state parties’ contentions, holding that the rule’s purpose of preventing corrupt schemes was sufficiently important to warrant the SEC’s regulation.  The circuit judges also focused on the absence of any evidence that broker-agents had withheld political contributions out of concern with violating the FINRA rule.

Earlier this week, the U.S. Supreme Court denied the state parties’ Petition for Certiorari, declining to consider the Circuit Court’s decision and effectively leaving the FINRA rule in place.