G-37 only minimally restricts free speech rights, SEC brief says.

WASHINGTON -- The SEC told a federal appeals court Friday that the Municipal Securities Rulemaking Board's political contributions rule imposes only a minimal restraint on dealers' right to express themselves and therefore does not violate the First Amendment.

The Securities and Exchange Commission made that and other arguments in a 50-page brief filed with the U.S. Court of Appeals for the District of Columbia that responds to a constitutional challenge filed April 26 by Alabama bond dealer William B. Blount to the MSRB's controversial pay-to-play 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 official and from making contributions indirectly through another person.

Blount, who chairs the Alabama Democratic Party, charged in a 54-page brief filed June 1 that the rule violates his First Amendment rights, that the SEC has failed to cite substantial evidence of abuses in the market, and that the rule is vague and therefore unconstitutional. Blount also charged that the rule lets federal regulators control state campaign activities in violation of the 10th Amendment, which says that powers that are not delegated to the federal government are reserved to the states or to the people.

The rule does not contravene the First Amendment and imposes at most a "minimal restraint" on municipal dealers' right to express themselves, the SEC brief says. Contributions to political candidates are a "marginal form of expression," the SEC said.

The rule is justified by a "compelling interest in combatting the corruption and appearance of corruption that follow when dealers make contributions to persons from whom they are seeking business," the SEC said.

Rule G-37 also is only a minor restraint on expression, because Blount and other dealers are free to express support for candidates as long as they do not specifically solicit contributions for a candidate, the brief says.

"They can seek money from others in aid of their independent efforts on behalf of a candidate. And they can solicit money for candidates where they are not currently doing or seeking to do business with an issuer over whom the candidate has influence or control," the brief says.

The SEC said the rule's provision barring "direct or indirect" solicitation of contributions is not vague. It simply bars a person from evading the rule's restrictions by making a "prohibited solicitation" through someone else, the SEC said.

There is a "substantial factual basis" for the rule, the SEC said. "There is no serious dispute that pay-to-play is widespread. Numerous commentators familiar with the industry pointed to harms which the practice works on the market," the commission said. The agency said it was not required to make findings of specific instances of abuses in order to approve its rule. "Even the appearance of this sort of quid pro quo corruption is sufficient to justify restraints," the SEC said.

Finally, the SEC said the rule does not contravene the 10th Amendment and is within the authority of the MSRB and SEC. The rule applies solely to private persons and does not compel the states to do anything, the SEC said. Also, the SEC does not need direct authorization from Congress to implement the rule. The federal securities laws established the MSRB and directed it to establish rules to ensure the integrity of the market, the SEC said.

Blount won a temporary reprieve from the rule on May 8 when the appeals panel granted an emergency suspension of the provision in the rule that bans dealers from soliciting contributions on behalf of state or local government officials. The ruling has given Blount the green light to continue many of the fund-raising activities for now that he assumed as chairman of the Alabama Democratic Party.

The court, however, only suspended the provision for Blount and only until the appeals panel has ruled on the constitutionality of Rule G-37. Other dealers who object to the provision must file their own requests for temporary stays, the court said.

Also, the appeals panel refused to suspend the centerpiece provision of G-37 that bars dealers from doing business for two years with officials with whom they do bond business.

SEC principal assistant general counsel Eric Summergrad said yesterday that no other dealers have sought emergency stays.

Blount said in a telephone interview Friday that the ruling has freed him to begin raising money for the new Democratic ticket for Alabama governor, lieutenant governor, secretary of state, and attorney general that emerged from the state's recent primary.

"We have our ticket together. I'll start raising money. If there were no stay I would not be able to do it. I felt very restricted before. [Now I can do] all that I've always done to help raise money," he said.

Blount said many dealers have pledged to help with his legal fees. "We have gotten a tremendous response from the regional dealer community," he said, noting that he already has collected $35,000 and has commitments for another $50,000.

"Blount's situation presents a particularly striking illustration of the need for the rule," the SEC's brief says. "As chairman of the Alabama Democratic Party, Blount contributes to and engages in large-scale fund-raising for state and local officials.

"He is at the same time seeking business for his municipal securities firm from those same officials," the brief says. "This situation presents at the very least the appearance of inappropriate influence being brought to bear on who gets municipal securities business in the state, and is precisely the sort of conduct that proves the need for the rule."

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

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