Blount v. S.E.C.

• Citation: 61 F.3d 938
• Decision Date: 04 October 1995
• Docket Number: No. 94-1336,94-1336
• Parties: , 64 USLW 2111, Fed. Sec. L. Rep. P 98,822 William B. BLOUNT, Petitioner, v. SECURITIES AND EXCHANGE COMMISSION, Respondent, Municipal Securities Rulemaking Board, Intervenor.
• Court: United States Courts of Appeals. United States Court of Appeals (District of Columbia)

Page 938

61 F.3d 938

314 U.S.App.D.C. 52, 64 USLW 2111, Fed.

Sec. L. Rep. P 98,822

William B. BLOUNT, Petitioner, v. SECURITIES AND EXCHANGE COMMISSION, Respondent Municipal Securities Rulemaking Board, Intervenor.

No. 94-1336.

United States Court of Appeals District of Columbia Circuit.

Argued Dec. 9, 1994.

Decided Aug. 4, 1995.

Rehearing and Suggestion for Rehearing In Banc Denied Oct. 4, 1995.

Kevin T. Baine, Washington, DC, argued the cause, for petitioner. With him on the briefs, were Robert B. Barnett, Erik S. Jaffe, Lawrence Shore and Kevin M. Downey, Washington, DC.

Simon M. Lorne, Gen. Counsel, S.E.C., Washington, DC, argued the cause, for respondent. With him on the brief, were Jacob H. Stillman, Associate Gen. Counsel, and Eric Summergrad, Principal Asst. Gen. Counsel, S.E.C., Washington, DC. Paul Gonson, Washington, DC, entered an appearance, for respondent.

Harvey L. Pitt, Washington, DC, argued the cause, for intervenor. With him on the brief, was James H. Schropp, Washington, DC.

Before: WILLIAMS, HENDERSON and ROGERS, Circuit Judges.

STEPHEN F. WILLIAMS, Circuit Judge:

In late 1993, regulators of the municipal securities markets began to investigate reports that brokers and dealers were engaging in a variety of ethically questionable practices in order to secure underwriting contracts. These practices, often lumped together under the label "pay to play", include as a paradigmatic example the making of political contributions to state and local officials who may influence the choice of underwriter. Concerned that such practices were becoming more prevalent and were undermining the integrity of the $250 billion municipal securities market, the Municipal Securities Rulemaking Board ("MSRB" or "Board") drafted several new rules, which were then approved by the Securities and Exchange Commission. Among these was Rule G-37, the rule challenged in this case. See SEC Release No. 34-33868 (April 7, 1994) (order approving proposed rule change) ("SEC Approval Order").

The two principal sections of Rule G-37, (b) and (c), together restrict the ability of municipal securities professionals to contribute and to solicit contributions to the political campaigns of state officials from whom they obtain business. Section (d) serves as a loophole-closer, prohibiting indirect violations of the restrictions in (b) or (c). We describe each in turn.

Contributions. Section (b) prohibits any "broker, dealer, or municipal securities dealer" who has contributed "to an official of [an] issuer" from "engag[ing] in municipal securities business with [that] issuer" for a period of two years after the contribution. ¹ Contributions by a "municipal finance professional associated" with the broker or dealer are treated as equivalent to contributions by the broker or dealer itself; as are contributions by a political action committee "controlled" either by the broker or dealer or by "any municipal finance professional" whatsoever. The two-year restriction on business is not triggered, however, by any of these various parties' contribution of up to $250 per official per election to an official for whom that party is entitled to vote.

Solicitations. Section (c) prohibits brokers, dealers, and municipal securities dealers--as well as their associated municipal finance professionals--from soliciting or coordinating contributions to officials of any issuer with whom the broker, etc., is "engaging or is seeking to engage in municipal securities business."

Loophole-closer. Section (d) prohibits brokers, dealers, municipal securities dealers, and municipal finance professionals in general from "directly or indirectly" doing anything that would "result in a violation of sections (b) or (c)...."

The petitioner, William B. Blount, is the chairman of the Alabama Democratic Party and a registered broker and dealer of municipal securities. He challenges the SEC's order approving Rule G-37, claiming that each of the three sections of the rule we have described impermissibly infringes his First Amendment rights; that section (d) is, in addition, unconstitutionally vague; and that the rule as a whole violates the Tenth Amendment. The SEC rebuts each of these claims, and the MSRB, as intervenor, raises two defenses not urged by the SEC: that Blount does not have standing under the Exchange Act to pursue his claim and that the rule is not the product of government action and thus cannot violate either the First or Tenth Amendments. We find that Blount has standing to sue and that Rule G-37 is government action. We therefore meet all of Blount's arguments on the merits, though ultimately we reject them and deny the petition for review.

I. Standing and Exhaustion

Neither the Board nor the SEC claims that Blount lacks constitutional or prudential standing, and given his roles as a state party chair and municipal securities dealer, any such claim would be meritless. Instead, the Board points to Sec. 25(c)(1) of the Securities Exchange Act, 15 U.S.C. Sec. 78y(c)(1), which requires that the objections in a petition for review have been "urged before the Commission", and argues that because Blount did not himself raise the present objections before the Commission, he is not a "person aggrieved" by the Commission's order within the meaning of Sec. 25(a)(1) of the Securities Exchange Act, 15 U.S.C. Sec. 78y(a)(1) (1988). We see nothing in either Sec. 25(c)(1) or Sec. 25(a)(1) that purports to link the two subsections together as the Board suggests. In addition, Sec. 25(c)(1) conspicuously uses the passive voice, saying only that an objection may not be considered by a reviewing court unless it was "urged before the Commission"; it shows no interest in who urged the objection, and is presumably aimed only at assuring that the Commission have had a chance to address claims before being challenged on them in court. Cf. NRDC v. EPA, 824 F.2d 1146, 1150-51 (D.C.Cir.1987) (en banc).

The Commission indisputably had the necessary chance. The Board concedes that others raised and the SEC considered the "general constitutional objections to the Rule" that Blount now makes before us. See SEC Approval Order at 31-37 (considering constitutional objections). This quite accurate concession reduces the Board to the alternative argument that the SEC did not consider the "specific concerns identified by the Petitioner ... which arise from his particular status and duties as Chairman of the Alabama Democratic Party." While petitioner's activities may represent an unusually good example of the conduct the rule seeks to restrict, the Board does not explain, and we cannot see, how any of the issues the petitioner raises are in any salient way different from the concerns raised and considered during the rulemaking. Blount's claim is therefore not barred by the exhaustion requirement of Sec. 25(c)(1).

II. Government Action

The Board maintains that it is a private organization and that Rule G-37 is a private rule. As such, the Board asserts, the rule cannot be found to violate the First or Tenth Amendments, since the Constitution is "a restraint on government action, not that of private persons", CBS v. Democratic Nat'l Comm., 412 U.S. 94, 114, 93 S.Ct. 2080, 2092, 36 L.Ed.2d 772 (1973) (plurality opinion).

We put to one side the Board's questionable assertion that it is a purely private organization even though it was created by an act of Congress and directed by Congress to "propose and adopt rules to effect the purposes of [the Exchange Act]" within specified constraints, Sec. 78o-4(b)(2). Cf. Lebron v. National R.R. Passenger Corp., --- U.S. ----, ----, 115 S.Ct. 961, 973, 130 L.Ed.2d 902 (1995) (fact that Amtrak was created by federal law to accomplish federal governmental objectives points toward classification as federal actor). What is critical here is that MSRB Rule G-37 operates not as a private compact among brokers and dealers but as federal law. Under Sec. 15B of the Exchange Act, a broker or dealer may not engage in interstate trade in municipal securities unless he registers under Sec. 15B itself or under Sec. 15 of the Exchange Act. See 15 U.S.C. Sec. 78o-4(a)(1) (forbidding dealers to use "instrumentality of interstate commerce" to effect or solicit transactions in municipal securities unless registered as a broker or dealer in accordance with Sec. 15 or Sec. 15B, 15 U.S.C. Sec. 78o or Sec. 78o-4). If he violates an MSRB rule, he may be sanctioned by revocation or suspension of his license to deal in municipal securities. See id. Sec. 78o-4(c)(1) (forbidding brokers and dealers from contravening the rules of the MSRB in effecting or soliciting interstate transactions in municipal securities); Sec. 78o(b)(4)(D) (authorizing the Commission to suspend or revoke the registration of any broker or dealer who "has willfully violated" or "is unable to comply with" any of the applicable rules, including those of the MSRB); Sec. 78o-4(c)(2) (similar authority as to municipal securities dealers). Dealers who violate Rule G-37 and who persist in securities dealing after any resulting Commission suspension or revocation of their licenses are subject to federal criminal penalties. 15 U.S.C. Sec. 78ff(a) (providing for criminal penalties up to $1,000,000 and 10-year imprisonment for natural persons who willfully violate rules). As a government-enforced condition to any participation in a municipal securities career, Rule G-37 constitutes government action of the purest sort.

III. First Amendment Challenge

We turn now to the central issue in this case, petitioner's claim that Rule G-37 violates his First Amendment rights to free speech and free association.

A. Rule G-37 as a restriction of speech

All three sections of Rule G-37 at issue here infringe speech. Giving money is one method of indicating one's devotion to a cause; hence the familiar challenge, "Put your money where your mouth is." The Supreme Court has characterized the campaign...