Jamie Dimon, CEO of JPMorgan Chase, recently said out loud what many in his industry have believed privately for years but, concerned about retribution from regulators, have been unwilling to say in public. “I can’t speak up, and I can’t fight for what I believe” in local and state politics, Mr. Dimon said. “Doesn’t that violate my First Amendment rights?”

Mr. Dimon is referring to the Securities and Exchange Commission’s so-called pay-to-play rule. This regulation, promulgated in 2010, effectively prohibits many working in the financial sector from making contributions exceeding $350—and in many cases as little as $150—to any candidate for state or local office who “is directly or indirectly responsible for, or can influence the outcome of, the hiring of an investment adviser by a government entity.”

As a practical matter, that means almost any state or municipal elected official is off limits for donations from everyday workers in the financial-services industry, not only moguls like Mr. Dimon. If a “covered associate” at a financial institution—which includes middle managers and employees (along with their direct and indirect supervisors) who solicit government for investment advisory contracts—makes such a contribution, the entire firm is barred from receiving compensation from the government client for two years.

A contribution of $151 by a single employee could disqualify an entire firm from being an investment adviser to a government pension fund, costing the firm millions in revenue and the government the services of its preferred adviser.

The SEC says the rule is an anticorruption measure needed to ensure that government investment adviser contracts are awarded solely on merit, not the influence of campaign contributors. But this rule goes far beyond anything that might be needed to combat corruption. It violates the Supreme Court’s long-established precedents on the freedom of citizens to donate reasonable amounts to political candidates, and it restricts the liberty of thousands of employees in a particular disfavored industry.

Though the Supreme Court has upheld limits on the size of contributions, government doesn’t have carte blanche to stifle political donations. As Justice Stephen Breyer noted in Randall v. Sorrell (2006), a ruling that struck down a $400 limit on individual contributions in Vermont’s statewide races, the government can’t “impose burdens upon First Amendment interests that (when viewed in light of the statute’s legitimate objectives) are disproportionately severe.”

The SEC rule presumes that thousands of workers in this single industry must be motivated by a corrupt intent in their political giving, and that even small contributions will swing government contracts. Those employees therefore lose their freedom to support nearly any municipal or statewide candidates on issues ranging from abortion and gerrymandering to taxation, no matter how attenuated those elected offices may be from doling out investment-advisory largess. In New York this year, it means that many participants in a vital city industry can’t support the candidate of their choice for mayor.

Large firms such as JPMorgan aren’t the only ones that compete for government advisory business—smaller banks, investment partnerships and family-owned businesses are also covered. As Mr. Dimon pointed out, there are no such pay-to-play federal rules affecting unions or people in real estate and other industries that provide services to the government. In an era when selective application of law has been of heightened concern across the political spectrum, this regulation illustrates the danger: Another federal agency could target a different disfavored industry or union to keep its workers from giving to the candidates of their choice.

The SEC’s rule is an unconstitutional intrusion on free speech. It also allows the SEC bureaucracy to usurp the judgments of Congress and state legislatures on campaign contributions. The Federal Election Campaign Act allows contributions from an individual of up to $7,000 per candidate cycle (adding up the limits from the primary and general election) for federal officials, and most states allow contributions far greater than $350 for state and local races. In New York, for example, limits range from $6,000 for state Assembly to $18,000 for statewide office.

The SEC rule skews our political discussion by disqualifying many workers in an important economic sector from a core element of political debate. That should trouble all Americans whether or not they’re affected directly.

It’s time for the SEC to revoke this inappropriate and overwrought rule. If it won’t, Mr. Dimon should sue, and the courts should order the SEC to do so.

Mr. Shuchman is a board member and Mr. Smith chairman of the Institute for Free Speech. Mr. Smith served as a member of the Federal Election Commission, 2000-05, and chairman in 2004.