Securities Litigation

The Sixth Circuit Court of Appeals today dismissed a suit by the Tennessee, Georgia and New York Republican parties challenging the constitutionality of an MSRB extending pay-to-play prohibition to municipal advisors. The Court held the GOP lacked standing to challenge the rules.

MSRB Rule G-37 prohibits pay-to-play practices in connection with the issuance of municipal securities. It's been in place since 1994 and survived prior court challenges.

In Dodd-Frank, Congress mandated a municipal-advisor registration and regulatory regime to reach those advisers in the municipal-securities realm that had escaped regulation because they weren't underwriters or broker-dealers of municipal securities.

So the MSRB promulgated the Rule extending G-37 to municipal advisers. Then the silliness started. A Congressional budget rider prevented the SEC from spending money to regulate political speech (really directed at another pending SEC rule). So under arcane SEC rules, its lack of action on the MSRB proposal meant it was "deemed approved."

That's how the SEC came to argue before the Sixth Circuit that the Rule couldn't be challenged, because the SEC didn't really adopt it, since Congress had passed a temporary budget rider prohibiting the SEC from doing what Congress had required it to do in Dodd-Frank. There it is: Your government at "work."

So the Rule's in place, as it has been, and now extends long-standing pay-to-play prohibitions to municipal advisers in addition to municipal securities dealers and their affiliates.

The decision is Tennessee Republican Party, et al. v. SEC, Nos. 16-3360/3732 (6^th Cir. July 13, 2017).

Thomas K. Potter, III (tpotter@burr.com) is a partner in the Securities Litigation Practice Group at Burr & Forman, LLP. Tom is licensed in Tennessee, Texas and Louisiana. He has over 30 years' experience representing financial institutions in litigation, regulatory and compliance matters. See attorney profile. © 2017 by Thomas K. Potter, III (all rights reserved).