U.S. appeals court questions challenge to SEC pay-to-play rule

WASHINGTON, March 23 (Reuters) - A U.S. federal appeals court raised doubts on Monday about whether two state Republican parties can legally challenge a federal pay-to-play rule that puts restrictions on investment advisers who make contributions to certain political candidates.

An attorney for the New York and Tennessee Republican parties urged the U.S. Court of Appeals for the District of Columbia to toss out the Securities and Exchange Commission’s rule, saying it tramples on the free speech rights of asset managers.

The judges asked the Republicans’ attorney Jason Torchinsky about legal hurdles, including whether his clients had legal standing to file the lawsuit since no investment advisers have claimed to be harmed.

“Can you address why ... you have standing when nobody that is before the court is a directly regulated party?,” U.S. Circuit Judge Cornelia Pillard asked.

“Your honor, ... this regulation goes directly at the political party’s ability to associate with its own members,” said Torchinsky.

He cited a sworn statement submitted by Tennessee state Senator Jim Tracy, who testified that his campaign was hurt by the SEC’s rule after two advisers were forced to cut back donations.

“It seems like you are still one removed from what the statute is actually regulating,” Pillard responded.

Campaign contributions from the asset management sector have traditionally been an important source of funds for political parties.

The SEC adopted its pay-to-play rule in 2010 in an effort to combat a potential quid pro quo between investment advisers and elected officials in a position to help them win business.

It prohibits advisers from receiving compensation for helping to manage public assets, such as pension plans, for two years after making a campaign contribution to public officials or candidates in a position to award contracts.

The Republicans tried unsuccessfully last year to argue the case in a lower federal court, but the judge ruled that only the appeals court had the authority to hear the case.

SEC attorney Jeffrey Berger told the court on Monday that Republicans could not bring the case because the law only gave parties a 60-day window to challenge a rule after it goes into effect.

After that, he said, people can use other avenues, such as challenging the agency once it tries to enforce the rules against an adviser.

“The petitioners have arrived more than four years too late,” he said. (Reporting by Sarah N. Lynch; Editing by Tom Brown)