Republicans Sue to End SEC Limit on State Donations

The Securities and Exchange Commission rule limiting some campaign contributions from investment firms violates free speech, two state Republican parties said in a lawsuit seeking to overturn the regulation.

The rule, which governs donations to political candidates with influence over state government business, forces investment advisers to make “an impermissible choice” between “exercising a First Amendment right and retaining the ability to engage in professional activities,” the New York and Tennessee Republican parties wrote, according to a complaint filed today in Washington federal court.

The rule bars an investment firm from managing a state’s assets for two years if the company, or certain of its executives, make more than a nominal campaign donation to a state official with power over state contracts with investment advisors.

The SEC rule took effect in 2011 after disclosures that investment advisers were raising money for politicians who in turn helped them win business from state pension funds. In one of the largest of the so-called pay-to-play scandals, former New York State Comptroller Alan Hevesi served 20 months in prison after admitting he steered $250 million in pension funds to an investment firm in exchange for travel, gifts and more than $500,000 in donations.

The Rule

The rule covers current officeholders and candidates in state election races, as well as officials running for federal office. It effectively bars governors and other state officials from raising money from Wall Street for state or federal elections. John Nester, a spokesman for the SEC, declined to comment on the lawsuit.

The rule illegally attempts to regulate activity that is exclusively the responsibility of the Federal Election Commission, according to the complaint.

“As an institution, the SEC has no specialized knowledge of, or insight into, campaign finance and elections,” lawyers for the Republicans wrote.

The two state parties argued that the pay-to-play conduct the SEC seeks to thwart already is covered by federal and state criminal law.

They accuse the agency of overreaching by attempting “to shoe-horn the political contribution rule into SEC’s statutory authority” and conflating “’payments to state officials as a quid pro quo for obtaining advisory business’ with campaign contributions,” according to the complaint.

Alleged harms purportedly addressed by the rule, such as possible payments of higher fees by states and lack of arm’s length contract negotiations, “are vague and similarly beyond the SEC’s delegated authority,” according to the filing.

The case is New York State Republican Committee v. SEC, 14-cv-1345, U.S. District Court, District of Columbia (Washington).