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Tennessee Republican Party (16-3360) v. Securities and Exchange Commission

United States Court of Appeals, Sixth Circuit

July 13, 2017

Tennessee Republican Party (16-3360); Georgia Republican Party and New York Republican State Committee (16-3732), Petitioners,
v.
Securities and Exchange Commission; Municipal Securities Rulemaking Board, Respondents.

          Argued: May 4, 2017

         On Petition for Review to the Securities and Exchange Commission; No. MSRB-2016-06.

         ARGUED:

          Jason Torchinsky, HOLTZMAN VOGEL JOSEFIAK TORCHINSKY, Warrenton, Virginia, for Petitioners.

          Daniel Staroselsky, SECURITIES AND EXCHANGE COMMISSION, Washington, D.C., for Respondent Securities and Exchange Commission.

          Carter G. Phillips, SIDLEY AUSTIN LLP, Washington, D.C., for Respondent Municipal Securities Rulemaking Board.

         ON BRIEF:

          Jason Torchinsky, HOLTZMAN VOGEL JOSEFIAK TORCHINSKY, Warrenton, Virginia, H. Christopher Bartolomucci, Edmund G. LaCour Jr., KIRKLAND & ELLIS LLP, Washington, D.C., for Petitioners.

          Daniel Staroselsky, Jeffrey A. Berger, SECURITIES AND EXCHANGE COMMISSION, Washington, D.C., for Respondent Securities and Exchange Commission.

          Joseph R. Guerra, Eric D. McArthur, SIDLEY AUSTIN LLP, Washington, D.C., Michael L. Post, MUNICIPAL SECURITIES RULEMAKING BOARD, Washington, D.C., for Respondent Municipal Securities Rulemaking Board.

          Allen Dickerson, CENTER FOR COMPETITIVE POLITICS, Alexandria, Virginia, Tara Malloy, THE CAMPAIGN LEGAL CENTER, Washington, D.C., for Amici Curiae.

          Before: DAUGHTREY, MOORE, and KETHLEDGE, Circuit Judges.

          OPINION

          KAREN NELSON MOORE, Circuit Judge.

         Petitioners, the Tennessee Republican Party, the Georgia Republican Party, and the New York Republican State Committee, have challenged the legality of amendments to rules ("2016 Amendments") proposed by Respondent Municipal Securities Rulemaking Board ("MSRB") and that are "deemed to have been approved by [Respondent Securities and Exchange] Commission" ("SEC"). 15 U.S.C. § 78s(b)(2)(D) (2012). The amendments limit the campaign activities of persons who advise city and state governments on issuing municipal securities. Ultimately, however, we do not reach the merits of this case because Petitioners have failed to establish that they have standing to challenge these amendments. Therefore, we DISMISS the petitions for review of the final rule for lack of jurisdiction. We DENY AS MOOT the SEC's motion to dismiss and DENY AS MOOT the MSRB's motion to be designated as an intervenor.

         I. BACKGROUND

         A. Municipal Securities Terminology

         Because key terms in this case tend to be arcane, we begin with a brief primer on municipal securities markets and their participants. Put simply, a municipal security is "[a] bond issued by a nonfederal government or governmental unit, such as a state bond to finance local improvements." Municipal Security & Municipal Bond, Black's Law Dictionary (10th ed. 2014); see also 15 U.S.C. § 78c(a)(29) (similarly defining municipal security under the Exchange Act). On either end of the creation of securities are issuers and dealers. An issuer is "any person who issues or proposes to issue any security."[1] 15 U.S.C. § 78c(a)(8); MSRB Rule Book Rule G-37(g)(vii), at 271 (Apr. 1, 2017). Those who are "engaged in the business of buying and selling securities" for their "own account[s] through a broker or otherwise" are called dealers, 15 U.S.C. § 78c(a)(5); municipal securities dealers are those "engaged in the business of buying and selling municipal securities for [their] own account[s], " 15 U.S.C. § 78c(a)(30). Dealers do not always buy and sell securities on their own, however. They often operate through brokers, persons who "engage[] in the business of effecting transactions in securities for the account[s] of others." 15 U.S.C. § 78c(a)(4). Brokers and dealers often operate with the assistance of municipal finance professionals, a catchall category of persons loosely defined as being associated with brokers and dealers.[2] MSRB Rule Book Rule G-37(g)(ii), at 269-70 (Apr. 1, 2017); see also Blount v. SEC, 61 F.3d 938, 939-40 (D.C. Cir. 1995).

         To aid municipal entities and those "committed by contract or other arrangement to support the payment of all or part of the obligations on the municipal securities, " 15 U.S.C. § 78o-4(e)(10), in participating in municipal securities markets, municipal advisors "provide[] advice . . . with respect to municipal financial products or the issuance of municipal securities, including advice with respect to the structure, timing, terms, and other similar matters concerning such financial products or issues." 15 U.S.C. § 78o-4(e)(4)(A)(i). Municipal advisors also solicit business from municipal entities "on behalf of a broker, dealer, municipal securities dealer, municipal advisor, or investment adviser . . . that does not control, is not controlled by, or is not under common control with the person undertaking such solicitation." Id. § 78o-4(e)(4)(A)(ii), (9). It is possible for an entity to be registered as both a dealer and a municipal advisor; these entities are called dealer-municipal advisors. MSRB Rule Book Rule G-37(b)(i)(D), at 266 (Apr. 1, 2017). Certain persons associated with municipal advisors, analogous to municipal financial professionals, are called municipal advisor professionals.[3] Id. Rule G-37(g)(iii), at 270.

         B. The Original Rules

         The municipal securities market is large. As of 1993, around the time when the rules that the 2016 Amendments modify first came into effect, the total value of the market was $1.2 trillion. Jon B. Jordan, The Regulation of 'Pay-to-Play' and the Influence of Political Contributions in the Municipal Securities Industry, 1999 Colum. Bus. L. Rev. 489, 493. Concerned "that brokers and dealers were engaging in a variety of ethically questionable practices in order to secure underwriting contracts, " the MSRB drafted, and the SEC approved, several new rules that regulated pay-to-play practices in the municipal securities markets. Blount, 61 F.3d at 939; Jordan, supra, at 496-501 (observing that "[t]he initial movement against pay-to-play came from the private sector, which was incurring its own expenses, in the form of political contributions, to play under the system"). Chief among these regulations was Rule G-37.

         Just before the 2016 Amendments came into effect, Rule G-37 was "composed of several separate and mutually reinforcing requirements for dealers" and brokers. See Notice of Filing of a Proposed Rule Change Consisting of Proposed Amendments to Rule G-37, on Political Contributions and Prohibitions on Municipal Securities Business, Rule G-8, on Books and Records, Rule G-9, on Preservation of Records, and Forms G-37 and G-37x ("2015 SEC Notice"), 80 Fed. Reg. 81710, 81711 (Dec. 23, 2015) (Pet'rs' App'x at 54) (emphasis added). The rule imposed "[l]imitations on business activities that are triggered by the making of certain political contributions; limitations on solicitation and coordination of political contributions; and disclosure and recordkeeping regarding political contributions and municipal securities business." Id.

         Specifically, Rule G-37 prohibited brokers, dealers, and municipal securities dealers from "engag[ing] in municipal securities business with an issuer within two years after any contribution to an official of such issuer made by . . . the broker, dealer or municipal securities dealer; . . . any municipal finance professional associated with such broker, dealer or municipal securities dealer; or . . . any political action committee controlled by the broker, dealer or municipal securities dealer or by any municipal finance professional." MSRB Rule Book Rule G-37(b)(i), at 269 (July 1, 2016). There was one exception to this prohibition: municipal finance professionals could contribute up to $250 per election to an official of an issuer for whom they were entitled to vote without triggering the above prohibition. Id. For instance, a municipal finance professional associated with a dealer could contribute a maximum of $250 to a gubernatorial candidate in their state without affecting the dealer's ability to engage in municipal securities business with that state.

         In addition to prohibiting contributions, Rule G-37 also prohibited the solicitation of other persons for contributions and payments.[4] Brokers, dealers, municipal securities dealers, and their municipal finance professionals were prohibited from "solicit[ing] any person . . . to make any contribution, or [to] coordinate any contributions, to an official of an issuer with which the broker, dealer or municipal securities dealer is engaging or is seeking to engage in municipal securities business." Id. Rule G-37(c)(i), at 269 (emphasis added). They were also prohibited from "solicit[ing] any person . . . to make any payment, or . . . coordinate any payments, to a political party of a state or locality where the broker, dealer or municipal securities dealer is engaging or is seeking to engage in municipal securities business." Id. Rule G-37(c)(ii), at 269 (emphasis added).

         Finally, Rule G-37 imposed disclosure requirements for brokers, dealers, and municipal securities dealers. Id. Rule G-37(e), at 269-71. Rules G-8 and G-9 and Forms G-37 and G-37x complemented these disclosure requirements: Rules G-8 and G-9 "specify the books and records that must be made and kept current by dealers, " MSRB Reg. Notice 2016-06, at 24 (Feb. 17, 2016) (Pet'rs' App'x at 24), and regulated entities submit Forms G-37 and G-37x to comply with disclosure requirements, id. at 25 (Pet'rs' App'x at 25).

         C. The 2016 Amendments

         Although Rule G-37 had historically been limited to dealers and brokers, the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 expanded the MSRB's regulatory authority to include municipal advisors in addition to brokers and dealers. 2015 SEC Notice, 80 Fed. Reg. at 81710 (Pet'rs' App'x at 53); see also 15 U.S.C. §§ 78o-4(a)(5), (b)(2). Granted this new authority, the MSRB proposed amendments to Rules G-8, G-9, and G-37 and Forms G-37 and G-37x (the 2016 Amendments), which were "deemed to have been approved by the [Securities and Exchange] Commission." See MSRB Reg. Notice 2016-06, at ...


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