Sixth Circuit Weighs Challenge to its Jurisdiction in Lawsuit Brought by GOP Committees against the SEC

The Republican parties of three states—Tennessee, Georgia, and New York—recently brought a lawsuit in the Sixth Circuit Court of Appeals against the Securities and Exchange Commission to challenge revised Rule G-37, which the Municipal Securities Rulemaking Board (“MSRB”) published earlier this year to limit pay-to-play practices in the municipal securities area. The revision extended Rule G-37 to cover not only brokers and dealers of municipal securities but also municipal advisers. It prohibits those advisers from engaging in municipal advisory business with a municipal entity for two years if the adviser, its staff, or its political action committee made a significant contribution to an official who could influence the award of municipal securities business. The rule also requires certain covered entities, such as municipal advisers, to publicly disclose contributions to government officials. The plaintiffs claim this new extension of the rule infringes upon the constitutionally protected First Amendment right of municipal advisers to make political contributions.

This lawsuit is not the first time these plaintiffs have attempted to challenge the constitutionality of regulations that limit the political contributions of certain financial players. In 2014, the New York and Tennessee Republican Parties filed a similar complaint in federal court in the District of Columbia that challenged, among other things, the constitutionality of SEC Rule 206(4)-5, which prohibited investment advisers from receiving compensation for services to government pension plan clients when those advisers made campaign contributions to parties or candidates who had the ability to influence awards of public investment advisory contracts. The district court dismissed the complaint on a technicality because the Securities Exchange Act of 1934 gives the courts of appeals exclusive jurisdiction to hear challenges to final orders promulgated by the SEC and then only if such challenges are brought within sixty days of promulgation of the rule. The D.C. Circuit Court affirmed.

Back in the Sixth Circuit, the plaintiffs learned their lesson from the D.C. Circuit and timely filed this complaint with the court of appeals. However, last week the SEC filed a motion to dismiss for lack of jurisdiction and the Sixth Circuit issued a halt to the briefing schedule to decide the potentially dispositive motion. In its motion to dismiss, the SEC argued that the Sixth Circuit did not have jurisdiction over this controversy because the SEC did not issue a final order or perform any action that would provide the Court with jurisdiction over the MSRB’s amendment to Rule G-37. In fact, the SEC claims Congress precluded it from using any funds to finalize, issue, or implement an order regarding the disclosure of political contributions, which the recently revised Rule G-37 requires municipal advisers to do. The SEC contends this same prohibition may in fact prohibit it from using funds to defend the MSRB rule on its merits. In their opposition filed yesterday, the plaintiffs strongly disagreed with these contentions. With Citizens United as backdrop, a challenge to these types of rules, which curtail political contributions, may have some teeth if a court ever actually gets to the substantive merits. The SEC has handed the Sixth Circuit a procedural “out” with its motion to dismiss, and it will be interesting to see if the court decides to take it.

SEC Resolves First Case Under New Municipalities Continuing Disclosure Cooperation Initiative

On July 8, 2014, the SEC announced that it had settled charges that a school district in California misled bond investors about its failure to comply with its continuing disclosure obligations under Rule 15c2-12 of the Exchange Act. Pursuant to the Municipalities Continuing Disclosure Cooperation (“MCDC”) Initiative, Kings Canyon Joint Unified School District, without admitting or denying the SEC’s findings, agreed to entry of an Order (1) finding that it was in violation of Section 17(a)(2) of the Securities Act, (2) requiring it to cease and desist from violating Section 17(a)(2), (3) requiring it to establish written policies and procedures and to conduct periodic training regarding continuing disclosure obligations, and (4) requiring it to cooperate with the Enforcement Division in any subsequent investigation and to disclose the settlement in future bond offering materials. The SEC did not order any disgorgement or civil penalty.

Rule 15c2-12 requires that an underwriter obtain a written agreement from an issuer, for the benefit of bondholders, in which the issuer promises to submit certain financial information on an annual basis. This financial information is usually submitted to appropriate national and state repositories where it is available to the investing public. Notably, a broker-dealer must consider an issuer’s failure to disclose such financial information in determining whether to recommend a security and must disclose the failure to provide such financial information to customers. Rule 15c2-12 undertakings must be described in final Official Statements.

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