WASHINGTON -- Federal judges may be inclined to "duck" constitutional challenges raised to the political contributions rule approved by the Securities and Exchange Commission and instead focus on whether the agency had authority to act, a noted administrative law attorney said last week.

Ernest Gellhorn, a partner with Jones, Day, Reavis & Pogue here, said that from an administrative law standpoint, the main question in the ongoing litigation is: "Where did the SEC get its authority?"

On April 7, the commission approved the contributions rule, which was proposed by the Municipal Securities Rulemaking Board. The self-regulatory organization's rules must be approved by the SEC before they go into effect. The SEC said it has the authority to approve the rule under the 1975 statute creating the MSRB and to enforce aspects of it under the Securities Exchange Act of 1934.

The MSRB rule, which went into effect on April 25, bars municipal bond dealers that make contributions to issuer clients from doing business for two years with those governments. But the MSRB is a third party, not a defendant, in the lawsuit because it is the SEC's authority, not the MSRB's, that is called into question.

Alabama bond dealer William Blount challenged the SEC's approval of the rule in the U.S. Court of Appeals here on the constitutional grounds that it violates First Amendment rights to free political speech and state sovereignty rights under the 10th Amendment.

An attorney for Blount said the MSRB cannot issue its own rules independently, but an SEC attorney said that once the SEC approves an MSRB rule, only then does the board issue the rule.

In the past, "courts have deferred very broadly to the SEC in terms of its authority," because of the "tremendous expertise" needed to regulate financial markets to maintain confidence and avoid manipulative acts, Gellhorn said at a news briefing last Thursday.

The briefing was sponsored by the Washington Legal Foundation, a nonprofit, pro-free enterprise law and policy center. Gellhorn chairs the rulemaking committee of the Administrative Conference of the United States and has held numerous senior positions with the government, the American Bar Association, and other entities. Gellhorn is not involved in the case, Blount v. SEC.

"On the other hand, when the agency goes beyond its traditional area of regulating -- and it seems to me it goes beyond its traditional area [in this case! -- and particularly when you start to raise constitutional questions, the courts will often seek to duck the constitutional questions, saying the agency didn't have any authority at all," Gellhorn said.

The court may tell the SEC, "if you want that authority, go to Congress and get it," he said.

Another high-profile attorney, Jay Stephens, said the case may raise legitimate First Amendment issues regarding whether companies' constitutional rights to free speech have been curtailed.

But the municipal market is "an area potentially ripe for abuse. You are likely to see patterns of conduct where significant political contributions have been made to inside players" to secure bond business, Stephens said at the briefing.

In overseeing the rule, the SEC may focus only on whether egregious conduct has occurred, Stephens said. "The broader question will be whether they ban [contributions] altogether," he said. Stephens is a partner with Pillsbury, Madison & Sutro in Washington and former U.S. attorney for the District of Columbia and deputy counsel to President Reagan.

Blount and the SEC have filed briefs in the case, and oral argument is scheduled for Dec. 9, 1994.

The main issue in administrative law now is, "how closely ... should the courts review government action," Gellhorn said.

Judicial review of government action was narrowed under the Reagan and Bush administrations through greater restrictions on access to the courts, Gellhorn said. The Supreme Court, for example, narrowed standards governing what parties may bring legal challenges.

The appointments to the high court of Justice Ruth Bader Ginsburg and Justice Stephen Breyer, who are "somewhat more conservative than their predecessors," should have a major effect on how courts interpret statutes authorizing agency action, Gellhorn said.

There is a "fight between textualists" led by Justice Antonin Scalia, who looks to the "plain meaning" of the law, and those who look to legislative history, including Chief Justice William Rehnquist, Justice John Paul Stevens, and Justice David Souter, Gellhorn said.

Breyer has spoken "forcefully" in favor of considering legislative history and promises to be a "major force" in leading a response to Scalia, who is joined by Justice Anthony Kennedy and sometimes by Justice Clarence Thomas, he said.

"Scalia in particular has declined to join opinions that have relied upon the use of legislative history, even when he agreed with the result," and so he has forced the court to rely less on the intent behind legislation, Gellhorn said.

Gellhorn said he expects Breyer to develop a theory of the appropriate use of legislative history that would lead to more predictable decisions by the high court.

Breyer also is likely to question the context of agency interpretations of statutory authority, which could lead to weakening of the court's practice of deferring to agency interpretations in cases where Congress has not been explicit and the interpretations are not unreasonable, Gellhorn said.

Another potential trend in the federal judiciary may spring from the crime bill just passed by Congress, Stephens said. The issue of federalism "has pervaded the criminal justice system," and the crime bill may accelerate a trend of moving offenses traditionally prosecuted in state jurisdictions into the federal code, he said.

However, other emerging trends such as the increasing targeting by prosecutors of white-collar wrong-doing for criminal prosecution probably will not affect securities law as much as other areas involving the public welfare, Stephens said. "In the securities area ... the law is a little more traditional" and the drive to impose strict liability on defendants is not as strong as in other regulatory areas, he said.

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