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U.S. Supreme Court Denies Bid to Review Dismissal of Challenge to Pay-To-Play Rule

On January 13, 2020, the United States Supreme Court denied certiorari to an appeal of a June 2019 order from the United States Court of Appeals for the D.C. Circuit that dismissed an action seeking to invalidate certain under the First Amendment, among other arguments. This denial leaves in place a ruling in favor of the U.S. Securities and Exchange Commission’s (SEC) authority to prohibit pay-to-play practices in the investment management industry.The complaint, filed by the New York Republican State Committee and the Tennessee Republican Party, sought to undo the agency’s August 2016 adoption of FINRA Rule 2030. Rule 2030 prohibits a FINRA-member broker-dealer acting as a placement agent for an investment adviser from accepting compensation for soliciting government business from certain candidates and elected officials. Namely, within two years of contributing to an official of a government entity, a broker-dealer is prohibited from receiving compensation for soliciting investments from a government entity on behalf of an investment adviser if the official receiving the contribution is directly or indirectly responsible for, or can influence the outcome of, the hiring or retention of an investment adviser by a government entity. Rule 2030 is nearly identical to both Rule 206(4)-5 under the Investment Advisers Act of 1940, and Municipal Securities Rulemaking Board (MSRB) Rule G-37.

The complaint asserted that: (i) the SEC did not have the authority to enact Rule 2030; (ii) the order adopting Rule 2030 was arbitrary and capricious because there was insufficient evidence it was needed; and (iii) Rule 2030 violated the First Amendment to the Constitution of the United States. However, the three-judge appellate panel at the D.C. Circuit concluded that the SEC (i) had the authority to adopt Rule 2030; (ii) had justified doing so based upon both specific instances of quid pro quo corruption and upon the inherent tendency toward an appearance of corruption arising from the targeted contributions of placement agents; and (iii) had shown Rule 2030 does not violate the First Amendment because it was closely drawn to advance a sufficiently important governmental interest.

The denial of certiorari by the Supreme Court continues the SEC’s winning streak defending rules prohibiting pay-to-play practices. MSRB Rule G-37 itself previously survived a challenge on similar First Amendment grounds. See Blount v. SEC, 61 F.3d 938 (D.C. Cir. 1995), cert. denied, 517 U.S. 1119 (1996). Indeed, the court in that case held that Rule G-37 passed strict scrutiny, an exacting standard under which few government actions are able to pass muster. A more recent challenge to Rule 206(4)-5 by the same plaintiffs was turned down for procedural reasons. New York Republican State Comm. et al. v. SEC, 799 F.3d 1126 (D.C. Cir. 2015) (dismissing challenge as time-barred).

While the Supreme Court’s denial of review does not necessarily signal endorsement of the case’s substantive outcome, it allows FINRA Rule 2030 to remain in effect and leaves in place further judicial authority supporting the SEC’s power to regulate in this space. The SEC’s continued success in this area makes the possibility of an effective judicial challenge to regulators’ authority to promulgate pay-to-play rules increasingly remote. With pay-to-play regulations unlikely to go away anytime soon and U.S. elections again on the horizon, advisers with current or prospective state or local government entity investors may want to review pay-to-play compliance measures and regulatory requirements.

© 2020 Proskauer Rose LLP.


About this Author


Adam Deming is an associate in the Litigation Department.

Anthony M. Drenzek, Special regulatory Counsel, Proskauer Rose, Attorney, Finance Policy Lawyer
Special Regulatory Counsel

Tony is special regulatory counsel in the Corporate Department and a member of the Private Funds Group and the Private Equity & Hedge Fund Litigation team. His practice focuses on advising U.S. and offshore private fund managers on all aspects of federal, state and SRO organizational and operational compliance, with a specific emphasis on the Investment Advisers Act of 1940.

Tony assists U.S. and offshore private fund clients in registering with the SEC as investment advisers, or reporting as exempt reporting advisers, and complying with CFTC and various U.S. state registration and notice-filing requirements. He also assists on structuring fundraising transactions to comply with the U.S. offering exemptions available under Regulation D and Regulation S.


Tony proactively monitors the evolving regulatory landscape and counsels clients on practical industry approaches to compliance and how anticipated trends in agency rulemaking and staff expectations may affect their operations. He counsels clients on the establishment, implementation and evaluation of regulatory programs required under the Investment Advisers Act of 1940. In addition to compliance manuals and codes of ethics, Tony assists on the creation and maintenance of various operational-level compliance policies and procedures in areas such as investment and expense allocation policies, investment valuation procedures, cybersecurity policies, and business continuity and transition plans.

As clients’ investment management practices mature, Tony advises on the regulatory aspects of transactions involving divestments, mergers and acquisitions of investment managers and fund complexes. This includes coordinating and amending applicable regulatory filings and assuring that client consent requirements are evaluated and compliant.

As a member of the Private Equity & Hedge Fund Litigation team, Tony has advised clients on responses to inquiries and investigations from federal and state regulatory agencies on various regulatory matters, including the Investment Advisers Act’s pay-to-play and custody rule requirements.

Tony has authored and co-authored numerous articles on various regulatory matters affecting private fund sponsors, including several published in the Hedge Fund Law ReportPrivate Funds ManagementCompliance WeekVC Experts and Law360.

Prior to joining Proskauer, Tony served as an associate director of the Massachusetts Securities Division and was appointed as a Special Assistant Attorney General in the Commonwealth of Massachusetts. Between 2008 and 2013, Tony was an adjunct professor in the Law, Taxation and Financial Planning Department at Bentley University in Waltham, where he developed and taught a course focusing on application of the Securities Act of 1933 and the Securities Exchange Act of 1934.

Michael R. Hackett, Litigation Attorney, Proskauer Law Firm

Michael R. Hackett is an associate in the Litigation Department and a member of the Asset Management Litigation practice. His practice focuses on disputes and regulation involving private funds, including private equity, venture capital, hedge, real estate and private credit funds, as well as other limited partnerships, where he regularly advises funds, fund sponsors, investment advisers and institutional and individual investors.

Mike’s experience representing private fund clients runs the gamut, from control contests within advisers, to...

Joshua Newville, Proskauer Rose, regulatory enforcement attorney, industry compliance legal counsel, securities exchange commission lawyer

Joshua M. Newville is a partner in the Litigation Department in New York. His practice focuses on commercial litigation and regulatory investigations. Mr. Newville advises companies and individuals in securities litigation and compliance matters. He also focuses on internal investigations and enforcement matters. Prior to joining Proskauer, Josh was senior counsel in the U.S. Securities and Exchange Commission’s Division of Enforcement, where he investigated and prosecuted violations of the federal securities laws. Josh served in the Enforcement Division’s Asset...

Robert Plaze, Investment Manager Attorney, Regulatory and Compliance

Robert E. Plaze is a partner and a member of the Investment Management team. He advises investment advisers and investment companies on an array of matters, with a particular focus on regulatory and compliance matters arising under the federal securities laws.

Bob previously served as Deputy Director of the Division of Investment Management of the U.S. Securities and Exchange Commission. During his nearly 30 years of service with the Commission, he was responsible for policy development and management of many of the key regulatory initiatives during that period affecting investment...