Court Upholds SEC's 'Pay to Play' Rule

After losing some high-profile legal challenges in recent weeks, the Securities and Exchange Commission’s “pay to play” rule for investment advisers has survived an attempt by Republican groups to brand the requirements as unconstitutional.

In 2010, the SEC enacted a rule limiting investment advisers’ campaign contributions to government officials. If an investment adviser contributes to the political campaign of a government official with the power to influence their hiring by a government client, the adviser must wait two years before performing compensated services for that client.

In 2014, the New York Republican State Committee and the Tennessee Republican Party sued the SEC to invalidate a four-year-old rule, declaring that, as applied to federal campaign contributions, it exceeds the Commission’s statutory authority, violates the Administrative Procedure Act, and violates the First Amendment. That case, dismissed in district court (suit for lack of subject matter jurisdiction), was appealed and the U.S. Court of Appeals for the District of Columbia was petitioned for a direct review. That court “consolidated and expedited” the appeal and review requests.

The court, in an opinion made public on Tuesday by a three-judge panel, ruled against the plaintiffs, primarily because their August 2014 challenge was well beyond the 60-day statutory time frame to challenge the 2010 rule.

The plaintiffs had argued that the court should disregard the 60-day deadline in the Investment Advisers Act’s review provision because the law governing where and when they were supposed to file was so unclear that they were justified in filing late. It was also argued that the timeframe for mounting a rule challenge was unlawfully short.

“The proper course for the plaintiffs to protect their rights was to file a petition with this court within 60 days of the rule’s issuance, not to wait four years to test their claim,” the court wrote. “There is no basis for excusing the plaintiffs’ failure timely to petition this court for review.”