WASHINGTON - Lawyers for Alabama bond dealer William B. Blount charged yesterday that the Municipal Securities Rulemaking Board's political contributions rule allows federal regulators to control state campaign activities in violation of the 10th Amendment to the Constitution.

The 10th Amendment says that powers that are not delegated to the federal government are reserved to the states or to the people.

The lawyers also charged that the rule is unconstitutional because it sends "vague and conflicting signals" to market participants about the extent to which they can solicit political contributions.

The arguments, leveled for the first time in the case, were made by Blount's lawyers from Williams & Connolly, as the firm filed the first brief in Bount v. SEC, the lawsuit the dealer filed April 26 in the U.S. Court of Appeals for the District of Columbia against the MSRB's Rule G-37.

The rule, which was enacted April 25, bars dealers that make contributions to issuer clients from doing business for two years with those governments. It also bars dealers from soliciting contributions on behalf of a state or local government officials and from making contributions indirectly through another person.

"Rule G-37 represents an attempt by a federal agency to regulate states' sovereign functions without congressional authorization," Blount's brief says. "Control of state elections has long been considered a traditional and essential function of state governments."

Both the MSRB and the SEC have broad authority to prevent fraudulent practices, the brief says. "But these general grants of authority do not even hint at conferring authority to preempt state sovereignty regarding state election practices," the brief says.

Blount's brief also charges that the rule's restriction on "direct or indirect" contributions is so unclear that dealers have to guess at what the rule means. "No one can possibly know what is prohibited, and what is permitted, by a ban on the ~direct or indirect' solicitation of a contribution."

Regulations affecting First Amendment rights must be held to a "strict standard of clarity" because uncertainty will "chill" the exercise of free speech, the brief says.

The brief repeats three allegations that Blount made on April 29 when his lawyers asked the Appeals Court to block key provisions of the rule until G-37's constitutionality is decided. The appeals panel refused on May 6 to temporarily suspend the two-year ban on contributions, but did suspend the solicitation ban for now. The suspension only applies to Blount, however.

The new brief repeats the charges that Ruel G-37 restricts political speech, which is at the core of the First Amendment, and that the ban on solicitation is unprecedented and impermissible regulation of political speech. The brief also charges that the SEC has shown no compelling reasons to enact a ban. For instance, the rule will not eliminate abuses in the awarding of municipal bond business, and there are less harsh measures that the SEC can take to protect the public, the brief says.

The SEC is scheduled to file its brief in the case on July 1 and the MSRB on July 18. Blount is scheduled to file his response to the briefs on Aug. 1.

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