SEC & MSRB's Pay-to-Play Rule: "Governing Games - Mocking, Part 2"

This SRO gamesmanship is making a mockery of governing.

The latest is the SEC's position that it didn't take any action on the new MSRB Rules extending pay-to-play prohibitions to municipal advisors, so it can't be sued to stop the implementation of the regulations implemented by the MSRB under the SEC's jurisdiction. Making it only worse, the SEC says that it's because Congress prohibited the Agency from spending any money on this part of the Dodd-Frank mandate Congress required.

Whaaat?!? So hold onto your hat, as we go down the rabbit hole to explain this:

The MSRB: The SEC's Muni-Securities Proxy.

We've looked before at securities-industry self-regulatory organizations ("SROs"). They are the children of the Faustian bargain Joseph Kennedy struck to avoid or minimize direct government regulation and industry codes during the New Deal. "The government doesn't have to regulate us, because we'll regulate ourselves," went the argument. So the Securities Exchange Act of 1934 gave the SEC jurisdiction over registered national securities exchanges ('34 Act § 6, like the NYSE), and over registered national securities associations ('34 Act § 15A, like the NASD, now known as FINRA).

The 1975 Securities Act Amendments added the MSRB to mix ('34 Act § 15B). But it's different: The MSRB didn't exist before Congress created it directly (unlike NYSE or FINRA or other self-regulatory organizations) and directly gave MSRB its regulatory mandate (§ 15Bb(1-2)). And MSRB doesn't enforce its regulations; instead, others do, like FINRA or the SEC.

As we noted before, these SROs claim governmental immunity and wield government power, but disclaim governmental status or obligations (like, say, Due Process): See post here (June 8, 2016).

Securities Industry Pay-to-Play Prohibitions.

"Pay-to-play" is a form of extortion, bribery, palm-greasing, or business practice (depending on one's point of view) in which a public official receives campaign contributions from securities-industry participants who might later be hired in a selection process influenced by the same official.

Good government and transparency argue against the practice. The industry largely supports the prohibition, because it provides a good excuse to avoid having to make campaign contributions. And the public detriment provides reason enough to restrict commercial political speech otherwise protected by the First Amendment.

The MSRB adopted its Rule G-37 pay-to-play prohibitions in 1994. The Rule doesn't prohibit campaign contributions, but a contributor firm can't get hired in a process influenced by the contribution recipient for two years afterwards. Rule G-37 withstood constitutional challenge in Blount v. SEC, 61 F. 3d 938 (D.C. Cir. 1995).

In the Dodd-Frank Act, Congress expressly required the SEC to regulate municipal advisors (Section 975) and even mandated that its former municipal-securities office be elevated to the status of a "division." (Section 978).

Since then, the SEC has championed pay-to-play prohibitions. The Commission directly implemented them as to registered investment advisers. See 17 C.F.R. § 275.206(4)-5. And the Commission has supported the MSRB's extension of Rule G-37 pay-to-play prohibitions to municipal advisors, as well as by FINRA to broker-dealers, see post here (Dec. 19, 2015)(proposed FINRA Rule 2030(a)).

Extending Rule G-37 to Municipal Advisors.

As a result of Dodd-Frank and the general expansion of pay-to-play prohibitions across the industry, the MSRB proposed amendments extending Rule G-37 to municipal advisors. See post here (Dec. 18, 2015).

Dodd-Frank was the single largest delegation of rule-making authority in the nation's history. To streamline that process, Congress also required that the SEC complete its review and action on proposed SRO rules within 45 days after their publication or they are "deemed approved." 15 U.S.C. § 78s(b)(2).

The MSRB filed its G-37 amendments on December 15, 2015. The SEC didn't take formal action on them, so they were "deemed approved" on February 17, 2016. See post here (Feb. 17, 2016).

New Rules Can't Be Challenged?

This past April, the Tennessee Republican Party filed suit to challenge the new MSRB regulation under a provision of the '34 Act that allows direct Court of Appeals review of any "final order" by the Commission. 15 U.S.C. § 78y(a)(1). The Republican Parties of New York and Georgia filed similar suits that were consolidated with the Tennessee Party's litigation. See post here.

(Apr. 22, 2016)(The Parties' challenges to the earlier investment-adviser pay-to-play rule were dismissed on jurisdictional and time bases).

But the SEC recently moved to dismiss these suits, arguing that the new Rules can't face judicial review. The SEC says that it didn't make any order (final or otherwise; approving or disapproving) on the MSRB's rule proposal. In fact, it said it couldn't: A paragraph in the 2015 Appropriations Act prohibited the use of any funds "to finalize, issue, or implement any rule … regarding the disclosure of political contributions…." Pub. L. No. 114-113, Div. O, Tit. VII, § 707, 129 Stat. 2242, 3029-30. That's why the SEC let the Rule proposal become "deemed approved."

So, the SEC has taken the position that a Congressional prohibition on using appropriated funds to implement a campaign-contribution disclosure requirement means that there can't be any judicial review of the implementation of just such a rule.

This sort of regulatory and legislative "hide and seek" seems to be becoming more prevalent. See post here (Apr. 28, 2016)(direct-investment disclosure proposal vis Tower Amendment).

If Congress and the regulatory bureaucracy would spend half the time and effort in genuine debate over these issues as they spend playing governmental "gotcha," it would yield more transparent policy-making, instead of contributing to the public's dismay with its political institutions.


Thomas K. Potter, III ( 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. © 2016 by Thomas K. Potter, III (all rights reserved).

Posted in: MSRB, SEC
Jump to Page
Arrow icon Top

Contact Us

We use cookies to improve your website experience, provide additional security, and remember you when you return to the website. This website does not respond to "Do Not Track" signals. By clicking "Accept," you agree to our use of cookies. To learn more about how we use cookies, please see our Privacy Policy.

Necessary Cookies

Necessary cookies enable core functionality such as security, network management, and accessibility. These cookies may only be disabled by changing your browser settings, but this may affect how the website functions.

Analytical Cookies

Analytical cookies help us improve our website by collecting and reporting information on its usage. We access and process information from these cookies at an aggregate level.