On September 30, the D.C. District Court rejected two GOP state committees’ challenge to the SEC’s regulation prohibiting pay-to-play among investment advisors. Bowing to “curious” precedent in which words don’t mean what they say and produce inconsistent results, the Court held the challenge must be filed in the U.S. Court of Appeals, not the District Court.
The New York and Tennessee GOP Committees sought declaratory and injunctive relief to prevent the SEC from enforcing its four-year-old investment adviser pay-to-play prohibitions. 17 C.F.R. § 275.206(4)-5. The Court noted difficulties with standing (Op. at 9-10, n. 6), but avoided the issue.
Instead, the Court held it lacked jurisdiction to hear the dispute, because review of SEC “orders” lies directly to the D.C. Circuit under Section 213 of the Advisers Act, 15 U.S.C. § 80b-13(a). The Court based its ruling on binding 37-year-old precedent holding that “order” under Bank Holding Act includes “rules,”Investment Co. Institute v. Board of Governors of the Federal Reserve System,551 F. 2d 1270, 1278 (D.C. Cir. 1977). The D.C. Circuit has conducted direct review of SEC Rules on many occasions since, without question.
Even so, the Court noted that “under black letter administrative law an ‘order’ is plainly not a ‘rule.’” Op. at 14. The Court went on to describe difficulties caused by bending the language to suit the ends. First, it ignores the plain distinction under the APA between orders (usually adjudicative) and rules. Op. at 14.Second, ignoring that plain distinction would render whole clauses within the Advisers Act superfluous (where the IAA itself distinguishes them, e.g. “such rules and regulations and such orders” in § 80b-11). Op. at 15. Third, it appears to preclude any court from hearing pre-enforcement constitutional challenges to SEC rules except during the short 60-day window after they are first issued. Op. at 15-16. Fourth, it ignores the D.C. Circuit’s more recent instructions to look to the APA. Op. at 16-18.
The District Court acknowledged that the Investment Co. Institute precedent “produces curious results,” but felt bound to follow it. Though Judge Howell (like Alice) questioned whether you can make words mean so many different things,” Circuit precedent (like Humpty Dumpty) appears to be that “The question is, which is to be master – that’s all.” L. Carroll, Through the Looking Glass at 72 (1872). See Liversidge v. Anderson,  A.C. 206 (House of Lords)(Lord Atkin, dissenting). But both courts are in Washington, after all.
The SEC “explicitly modeled the Challenged Rule on Rule G-37” adopted by the MSRB in 1994, and upheld in Blount v. SEC, 61 F. 3d 938 (D.C.Cir. 1995). I discussed the MSRB’s pending proposal to extend its Rule G-37 to Municipal Advisors in my August 22 blog post, here.
The Opinion, New York Republican State Committee v. SEC, No. 14-01345 (D.D.C. Sept. 30, 2014), is here.