Academic journal article Columbia Journal of Law and Social Problems

The Constitutionality of the SEC Pay to Play Rule: Why 206(4)-5 Survives the Deregulatory Trend in Campaign Finance

Academic journal article Columbia Journal of Law and Social Problems

The Constitutionality of the SEC Pay to Play Rule: Why 206(4)-5 Survives the Deregulatory Trend in Campaign Finance

Article excerpt

I. Introduction

Private investment advisers in the United States are entrusted with the responsible financial management of millions of dollars in public funds comprised of taxpayer and retiree contributions.1 Most significantly, advisers realize important gains from the large asset base of government pension plans,2 whose proper investment and stable growth is essential to the future economic sustainability of many Americans.3 Under contracts with the government, advisers reap sizable profits from both flat fees and marginal returns.4 In view of eye-catching profit-making opportunities, the interest in securing such contracts is compelling. Formally, such contracts are awarded on the merits of investment adviser proposals in competitive bidding processes.5 In practice, the winning bid is selected by public officials who may secretly promise to select a particular adviser in return for money or other inducements.6 In so-called "pay to play" arrangements, investment advisers contribute to the election campaign of a public official who has or will likely have influence over investment adviser selection in exchange for a promise to be awarded or considered for a public fund management contract.7 Courts have long recognized that such quid pro quo arrangements, in which dollars exchange for a political favor, are a clear form of corruption.8

In 2010, the Securities and Exchange Commission (SEC or Commission) adopted Rule 206(4)-5 to restrain pervasive pay to play activity in the investment adviser industry.9 A prophylactic measure, Rule 206(4)-5 limits the ability of investment advisers and their employees to make campaign contributions to a public official who has legal control over an entity to which the investment adviser may provide services within the following two years.10 The SEC adopted the rule pursuant to its authority under the Investment Advisers Act to prevent fraudulent and manipulative conduct.11 Despite the SEC's anti-fraud motivations, however, the rule effectively acts as a campaign finance restriction. In the 2016 presidential election, for instance, at least four candidates could not raise substantial funds from investment advisers or their employees because of Rule 206(4)-5.12

Rule 206(4)-5 must be capable of withstanding constitutional scrutiny, because campaign contributions are protected under the First Amendment rights to engage in political speech and association.13 Under a long-established test articulated in Buckley v. Valeo, restrictions on campaign contributions are only permissible if they serve a "sufficiently important government interest" and employ means "closely drawn" to avoid unnecessary abridgment of first amendment freedoms.14 The appropriate level of scrutiny and courts' tolerance of contribution restrictions have varied across time and jurisdictions.15 Supreme Court decisions under the Roberts Court have exhibited a clear doctrinal shift toward campaign finance deregulation.16 Recently, the Court struck down federal aggregate contribution limits in McCutcheon v. FEC,17 and the plurality opinion hinted that the Court may have tightened the standard of review. Citing McCutcheon in support, dozens of challenges to campaign contribution limits across the country have been filed in anticipation that the courts will act to further deregulate campaign finance.18

Amidst the cases brought was a challenge to Rule 206(4)-5 in New York Republican State Committee v. SEC.19 The plaintiffs, the New York Republican State Committee and the Tennessee Republican Party, alleged that the SEC rule harms their ability to fundraise, impairs their members' ability to make political contributions, and disadvantages party members who are or who may become candidates for elected office.20 Relying on McCutcheon, plaintiffs argued that Rule 206(4)-5 impermissibly targets the "general influence" of investment adviser contributions on electoral outcomes,21 and favors incumbents by debilitating challengers in their fundraising abilities. …

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