After a 2009 scandal, investment firms and employees have avoided making any donations. GOP aims for more Wall St. cash

Republicans eager to challenge campaign spending limits before the Supreme Court have found their next target: a Securities and Exchange Commission rule that limits contributions from Wall Street financiers to governors and other state officials running for federal office.

Aimed at combating bribery or “pay-to-play” schemes when states seek help managing their investment decisions, the SEC restrictions have proven to be irksome to governors with an eye on the White House and state officials seeking a seat in Congress who are cut off from a big pot of campaign cash.


Now opponents of the SEC’s rule say that the Supreme Court’s April decision in McCutcheon v. Federal Election Commission, which scrapped the overall caps on an individual’s campaign contributions, has given them the legal ammunition needed to get courts to reject the SEC restrictions. It also provided the incentive for a plaintiff to step forward and be the face of a legal fight to overturn an anti-bribery rule: state political parties.

Prior to the McCutcheon decision, state political parties were usually passed over by big donors who maxed out on giving through donations to candidates and PACs. With those caps gone, pushing to overturn the SEC rule has become more appealing to state party officials eager to cash in.

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Last week, the state Republican committees of New York and Tennessee filed a lawsuit in the District Court for the District of Columbia seeking to invalidate the SEC rule. They are arguing the agency has no authority to regulate federal campaign contributions and that its restrictions violate the First Amendment right to free speech. On Wednesday, the SEC asked the court to dismiss the case for lack of jurisdiction.

On Wednesday, the SEC asked the court to dismiss the case for lack of jurisdiction and a preliminary hearing was scheduled for Sept. 12.

“Before McCutcheon, the law really choked off the ability of state parties to raise money,” said Jason Torchinsky, a lawyer with Holtzman Vogel Josefiak PLLC, who is representing the Republicans. “With McCutcheon removing one piece of the cap, now the other restraint is this SEC rule. [ McCutcheon] allowed state parties to be plaintiffs.”

Both opponents and supporters of the SEC restrictions said this legal challenge stands a good chance of eventually being heard by the High Court.

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“If the Supreme Court is where this case is going, we will take it all the way,” Torchinsky said. An SEC spokesman declined to comment.

The lawsuit was one of many discussed enthusiastically at the annual seminar of the Republican National Lawyers Association held this week in Las Vegas.

“That suit is ripe and it’s next in the target,” Shaun McCutcheon, the plaintiff in the Supreme Court case, said on Tuesday. “There is a natural sequence of these cases. They have to go through the courts in the right order and at the right rate, and I believe that’s happening.”

Approved unanimously in 2010, the SEC rule said investment advisers cannot work for a state or local government for two years after an employee made a campaign contribution to one of the government’s officials. Government pension funds, for instance, often contract with Wall Street firms for advice and management services.

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The rule was adopted shortly after a major “pay-to-play” scandal was prosecuted in 2009 by then-New York Attorney General Andrew Cuomo, which involved private-equity funds’ role with the state’s pension fund.

In order to ensure they are complying with the restrictions, investment firms and their employees have avoided making any donations that could be questioned, according to lawyers who have followed its impact.

“As a precautionary measure, many private equity firms have implemented a blanket prohibition on all political contributions by firm employees,” said Scott Gluck, a lawyer with Venable LLP. “The rule has had a significant chilling effect on political involvement by fund managers.”

In addition to banning direct contributions to candidates, the SEC’s rule broadly limits what investment advisers can give to third parties, such as a state’s Democrat or Republican committee.

Campaign finance lawyers said they had always expected someone to challenge the SEC’s rule in court, but it was difficult to find either a politician or money manager willing to publicly crusade against an anti-bribery regulation.

“That made it very difficult to find a plaintiff to stick his or her head up over the trenches and engage in battle with the SEC,” said Robert Kelner, a lawyer who has represented the Republican National Committee.

But the Supreme Court’s McCutcheon decision raised the value of political state committees as a destination for money in an election cycle and gave them more of a reason to care about the SEC restrictions.

After McCutcheon, it is easier for donors to give up to $10,000 to state parties, which now no longer compete for those dollars against national PACs and other party committees.

The court’s ruling in McCutcheon also included language that might invalidate the SEC’s restrictions on contributions to third-party groups, lawyers said.

In his opinion, Chief Justice John Roberts wrote: “Spending large sums of money in connection with elections, but not in connection with an effort to control the exercise of an officeholder’s duties, does not give rise to quid pro quo corruption.”

The SEC’s broad rule designed to prevent circumvention might run afoul of Roberts’ opinion, lawyers said.

“All of these things together have created a very hospitable environment for a challenge to the SEC,” said Kelner, who is with Covington & Burling LLP.

Republicans’ strongest argument is that if the SEC wants to ban bribery, there was never a strong link between campaign contributions to a state party committee and government kickbacks to financial firms, said Joseph Birkenstock, who was formerly the chief counsel for the Democratic National Committee and is now with Sandler Reiff Lamb Rosenstein & Birkenstock PC. The quid pro quo corruption gets harder to prove when there is a third-party in between, he said.

“That’s the toughest part for the SEC to defend,” he said. “The party piece was a very minor part of the rule where you don’t really see abuses of raising money in the state. The SEC is not going to have facts to point to in proposing for relief.”

A court win would unlock campaign donations from hedge funds and private equity firms to governors mounting a presidential campaign in 2016, securities and campaign finance lawyers said.

Specifically, Republicans Chris Christie (N.J.) and Rick Perry (Texas) would benefit. The pension systems in both states invest heavily in alternative investments and contract with Wall Street money managers for advice, the lawyers said. Perry, even though he is not running for governor of Texas again, faces the rule’s two-year lock-out period that could hinder his presidential fundraising.

Due to the complex world of campaign finance law, the Republicans demand for relief only applies to state and local officials running for Congress or the presidency. If the Republicans win their case, the SEC’s ban on Wall Street contributions would still apply to state and local officials.

The case could also complicate efforts to regulate the flow of money into politics by agencies, like the Internal Revenue Service and Federal Communications Commission, that advocates have increasingly turned to out of frustration with the gridlocked Federal Election Commission.

Advocates for strong campaign finance laws blasted the Republicans’ lawsuit.

“It’s the same sort of tired argument that all opponents to money in politics use — that any kind of practical regulation is just intended to stifle free speech,” said Lisa Gilbert, a director with the left-leaning advocacy group Public Citizen. “It is even more ludicrous in this area where there is a long-standing precedent of regulating to protect investors.”

But Gilbert admitted the case has a chance of reaching the Supreme Court, where it could be struck down.

“Certainly it’s scary,” she said. “We haven’t had the best of luck with the Roberts court.”

Kenneth P. Vogel contributed to this report.