Facing freedom-of-speech issues, the SEC is taking a closer look at a pay-to-play proposal from the Financial Industry Regulatory Authority that would regulate political contributions.

On Tuesday, the commission said it would begin formal rulemaking proceedings for the proposal, including a comment and rebuttal process.

The Finra plan would prohibit the solicitation of, or sales to, a government entity by covered individuals (such as registered reps and placement agents) who have made political contributions to government officials within the past two years. De minimus contributions of $350 are allowed if covered persons are able to vote for the official, or $150 if not.

The proposal generally follows an existing SEC rule covering investment advisors who do, or seek to do, business with government entities.

Pay-to-play rules are designed to prevent fraud in the awarding of state pension contracts. They can cover a broad array of advisors, including retail reps who may work with defined benefit or defined contribution plans such as 403(b) and 457 plans.

But the political-giving restrictions are being challenged by opponents who say recent Supreme Court rulings raise doubts about the constitutionality of such limits.

Republican state parties in New York and Tennessee and the Center for Competitive Politics, a group that advocates for removing political spending limits, have objected to Finra’s proposal on constitutional grounds.

The Financial Services Institute also raised First Amendment concerns in a comment letter last January.

“Institution of proceedings appears appropriate at this time in view of the legal and policy issues raised by the [Finra] proposal,” the SEC said in its order Tuesday.

Erin Stattel, an SEC spokesperson, declined further comment.

“Finra looks forward to continuing to work with the SEC during its review of the pay-to-play proposal,” said Finra spokesman Ray Pellecchia in an email.

The SEC’s order is “big news because I believe that Finra expected [the rule] to be approved by the SEC” on Tuesday,  said Jason Torchinsky, a partner at Holtzman Vogel Josefiak Torchinsky PLLC in Warrenton, Va., who represents the Republican state parties.

Separately in January, the parties filed a petition with the SEC seeking to overturn the play-to-pay rule for investment advisors. That action followed an unsuccessful court challenge thrown out on procedural grounds.

The state parties and the Center for Competitive Politics argue that a 1995 D.C. Circuit Court of Appeals decision, which upheld the first federal pay-to-play rule--MSRB Rule G-37—is no longer valid given subsequent Supreme Court decisions that have weakened limits on political spending. Those decisions include the 2010 Citizens United v. FEC ruling and McCutcheon v. FEC from 2014.

Both Finra and the SEC have cited the 1995 appeals court decision, Blount v. SEC, in proposing their pay-to-play rules.

In a December filing with the SEC, Finra argued that its rule would “not impose any restrictions on making independent expenditures, ban political contributions, or attempt to regulate state and local elections.”

But industry observers and critics say the expansiveness of the SEC’s rule has put a chill on political giving.

Lack of clarity over whom the SEC rule covers “has led some firms to adopt aggressive compliance programs that prohibit political contributions” by advisors and employees, the FSI said in its comment letter.