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Inside Political Law

Updates on developments in campaign finance, lobbying & government ethics law

A Pyrrhic Victory? The Impact of Today’s District Court Decision on Electioneering Communications (Van Hollen v. FEC)

Posted in Campaign Finance, Litigation

A U.S. District Court judge today vacated an FEC regulation that limited the degree to which corporations and labor unions must disclose their donors when they pay for an Electioneering Communication.  Van Hollen v. FEC  An Electioneering Communication is a broadcast, cable or satellite communication that features a federal candidate, airs within 30 days of a primary, convention or caucus or 60 days of a general, special or runoff election, and (for ads that don’t involve presidential candidates) is targeted to the relevant electorate.  Electioneering Communications are commonly called “issue ads.” Once a corporation or union spends more than $10,000 a year on Electioneering Communications, it has 24 hours to file a report with the FEC.  At issue in today’s court decision was which donors a corporation or union must identify on that disclosure report.

The regulation struck down today limited disclosure to those donors who gave in excess of $1,000 to the group “for the purpose of furthering electioneering communications.” 11 C.F.R. 104.20(c)(9).  With that rule now vacated, corporations and unions must disclose all donors who gave $1,000 or more to the group in the year the Electioneering Communication was distributed, as well as all donors who gave $1,000 or more in the preceding year, regardless of whether they gave with the intention of furthering the electioneering communication.  There is an exception available for corporations or unions that create a special segregated bank account into which only individuals contribute, and only fund their Electioneering Communications from that account.  Those entities may disclose only the donors to that segregated account.

Immediate Effect

Unless a stay is granted, this decision will have an immediate effect on the Louisiana Senate race, where we are currently within 60 days of the runoff election on December 6th.  Thus, any group that pays for a broadcast, cable or satellite ad in Louisiana that features an identifiable candidate in the Louisiana Senate race, and does not expressly advocate the candidate’s election or defeat, between today and the election must include in its disclosure report all “donors” who “donated” to the group from January 1, 2013 to the present, unless it establishes and funds its issue ads from a segregated Electioneering Communications account.

In truth, however, it is likely that no entity will file such a report unless it unwittingly stumbles into having to comply with today’s decision.  Any corporation or labor organization that wants to influence the Louisiana Senate runoff can return to the same level of disclosure that existed prior to today’s decision simply by editing its ad to include an explicit call to vote for or against the candidate that appears in the ad.  This odd outcome results from a quirk in the law; by statute, sponsors of ads that contain express advocacy (i.e., Independent Expenditures) must disclose the identities of only those who made a contribution “for the purpose of furthering” the independent expenditure, the same lower level of disclosure of the sponsor’s donors imposed by the Electioneering Communications regulation that was just struck down.  While the FEC leveled the playing field by requiring the same level of donor disclosure for Independent Expenditures and Electioneering Communications when it adopted the now-struck regulation, today’s decision leaves us with an upside-down world, where the more explicit you are about trying to influence the election, the less you must disclose about your donors.

Longer Term

Outside of Louisiana, this decision will have less immediate effect.  In the first instance, that is because—aside from a rare special election—we are a year away from being close to 30 days before a primary or 60 days before a general election.  In addition, this decision by a federal trial court in Washington is unlikely to be the last word on the issue, with plenty of time to appeal and raise constitutional challenges before the Electioneering Communications window opens.  Indeed, the D.C. Circuit previously invalidated an earlier opinion striking down the regulation by this same District Court judge.

In addition, this issue could rise to the Supreme Court, and put to the test just how far Justice Kennedy and those who joined in the sections of the McCutcheon and Citizen United decisions that praised disclosure are willing to go.  It is far from clear that a case such as this—where the federal government regulates speech on issues not candidates, by groups that have a primary purpose other than influencing elections, and imposes up to two years of retroactive disclosure of the group’s donors if it speaks out close to an election—would be the best set of facts for reform groups to test how much disclosure the government may impose on election related speech.

FEC Issues Zero Tolerance Decision on Foreign National Contributions

Posted in Campaign Finance, Enforcement

In a little noticed decision earlier this month, the FEC announced the settlement of an enforcement case that sets a compliance standard that few companies may currently meet.  FEC ADR Case 708 (Marsh & McLennan Companies, Inc. PAC).  The outcome is even more surprising because the case involved a single errant donor the company brought to the FEC’s attention via a sua sponte submission.  In a global economy where American corporations are increasingly building an executive class made up of talented individuals from around the world, the standard set in this decision will present a complicated and expensive compliance problem for many companies.

In January, an employee in insurance company Marsh & McLennan’s New York office raised a concern that his L-1A visa (for intracompany transferees of executive or management level employees) might not be the same as being a lawful permanent resident alien under the FEC’s rules.  He had given the company PAC the maximum permissible contribution in 2010 – 2014.  Marsh had limited its solicitations to U.S. residents working in its U.S. facilities.  The company also confirmed the immigration status of donors when questions arose.  In 2012, the company adopted a policy of having all PAC donors certify that they were a U.S. Citizen or lawful permanent resident alien.  The donor in question signed that certification in 2012.  In 2013, he failed to check the box on the certification, but his contribution was processed anyway.  In total, he gave the PAC $20,000 over those four years.

Within thirty days of learning of the donor’s concern, the company refunded all of his contributions.  It then reviewed the immigration status of everyone who contributed to the PAC during the prior six years.  This confirmed that there was only a single instance of an ineligible donor.  The company reviewed its compliance program and tightened controls, including (but not limited to):

  • Screening potential PAC donors;
  • Confirming the immigration status of all donors prior to accepting a contribution;
  • Having at least two people review all PAC contribution forms to confirm self-certification;
  • Revamping the contribution form to emphasize the self-certification of eligibility; and
  • Conducting a compliance audit of the PAC’s activities each election cycle.

The company then self-reported the violation to the FEC and the steps it had taken to correct its practices.

Despite the inadvertent nature of accepting impermissible contributions; the absence of any outward indication the donor was ineligible;  the fact it involved only a single donor in six years; the remedial steps including the disgorgement of all improper funds; and the use of a sua sponte submission to bring the matter to the FEC’s attention, the agency found this was not enough.  In a negotiated settlement, the FEC also insisted:

  • The PAC admit it violated the law;
  • Pay a $3,000 civil penalty;
  • Designate a compliance specialist;
  • Circulate a policy on eligibility and limitations on contributions to the PAC; and
  • Attend an FEC conference.

In the past, the FEC has aggressively enforced the ban on foreign national contributions when there was evidence of an intent to violate the law, or where the respondent disregarded facts that would lead a reasonable person to question the validity of a contribution.  See, e.g., MURs 4530/4531/ 4547/4642/4909 (International Buddhist Progress Society, Inc., DNC Services Corporation/ Democratic National Committee, John Huang, et. al.) (multiple violations including foreign national contributions led to $719,500 in civil penalties); MUR 4398/PM 307 (Thomas Kramer et. al.) (foreign national contributions and contributions in the name of another led to $426,000 in civil penalties); and MUR 6129 (American Resort Development Association Resort Owners Coalition PAC) (multiple violations including foreign national contributions from off-shore addresses led to $300,000 in civil penalties).

But here, in an area where the FEC offers no regulatory guidance, no requirement of a disclaimer or self-certification, and there was no evidence that would prompt inquiry as to the donor’s eligibility, the assessment of a civil penalty in a matter the FEC was unlikely to detect absent a self-reporting of the violation may signal a shift in how the agency addresses these cases.  The adoption of a “zero tolerance” policy on contributions by foreign nationals will be one that many PACs (and other types of political committees) may have difficulty meeting.

FINRA Likely to Adopt Pay-to-Play Rule

Posted in Pay-to-Play

On November 14, the Financial Industry Regulatory Authority (FINRA) issued a notice asking for comment (by December 15) on its proposal to establish three rules designed to restrict pay-to-play practices.  The three rules include a pay-to-play prohibition (Rule 2390), a disclosure requirement (Rule 2271), and a recordkeeping requirement (Rule 4580).  The rules largely track the pay-to-play rule of the industry’s federal regulator, the Securities and Exchange Commission (SEC).

If the SEC already has a rule, why is FINRA proposing one, and why now?  In short, because if it does not adopt a rule that satisfies the SEC, its members may not be allowed to be hired by investment advisers to solicit government business.

A little background is in order.  The part of the SEC rule that typically receives the most attention is the rule’s restrictions on providing investment advisory services following a contribution to a government official with responsibility for awarding contracts.  However, the SEC also recognized that there could be a pay-to-play concern if an investment adviser were to hire a third-party to solicit government business on its behalf if the third-party solicitor made political contributions to government officials.  To address this concern, the SEC provided that only certain persons were allowed to act as third party solicitors, including FINRA member broker-dealers—but only if FINRA were to adopt its own pay-to-play prohibition for its members.  The SEC has delayed compliance with this portion of the rule, allowing FINRA time to adopt a pay-to-play prohibition. Which FINRA is now seeking to do.

Like the SEC rule, FINRA’s pay-to-play prohibition would impose a two-year “time out” on compensated services following a non-de minimis political contribution by a “covered member” (any member, with some exceptions) and includes a similar prohibition on bundling contributions to candidates and parties.  Contributions of up to $350 per official per election (if the contributor is entitled to vote for the candidate) or up to $150 (if not) are considered de minimis and are allowable.  Primary and general elections are considered separate elections for the purpose of this rule.  FINRA’s rule would also include a “look back” of up to two years, requiring FINRA members to screen the political contributions of new hires.

The penalty provisions in the proposed rule would require a covered member to disgorge compensation if it violates the two-year restriction, potentially in addition to other sanctions.

The other two rules, to summarize, require the covered member to make certain disclosures to the government entities they solicit, and to maintain records that will allow FINRA to verify that covered members are complying with the new pay-to-play and disclosure rules.

New Arkansas Campaign Finance, Lobbying, and Ethics Laws Take Immediate Effect

Posted in Campaign Finance, Government Ethics, Lobbying Compliance, State Law

Amid the thrill of victory and agony of defeat this Election Day, Arkansas voters approved a constitutional amendment that will have a major impact on those involved in the political and legislative process there.  While enacting legislation and regulations may bring some additional clarity to the issues, the amendment is effective immediately and brings the following changes:

  • Corporations and labor unions may not make candidate contributions (but may still give to state-registered PACs).
  • Lobbyists are prohibited from giving gifts to lawmakers under a new “no cup of coffee rule”—so named because there is no allowance for gifts of nominal value, so even a cup of coffee would be a prohibited gift.  The amendment prohibits all gifts from lobbyists and lobbyist employers to the Governor, other statewide elected officials, and members of the General Assembly.
    • Note, however, that certain items are not gifts and are not subject to this ban.  Exceptions include informational material, gifts from family members, planned events open to all members of a specific government body, travel to some conferences, campaign contributions, and inheritances.
  • Former members of the General Assembly may not become lobbyists until they have been out of office for a two year “cooling off” period.
  • A new “independent citizens commission” will set the salaries for statewide elected officials, General Assembly members, and judges.
  • Term limits for legislators are extended to sixteen years.

We can already anticipate a few effects of this amendment.  PACs will become a much more important feature of the Arkansas campaign finance landscape.  Corporations and unions may decide to make more independent expenditures to support candidates, or to direct more of their spending to groups that are not subject to the contribution ban.  Arkansas could also see a rise in “unlobbyists” who legally avoid registration and thus could give gifts or evade the cooling off period.  We will continue to monitor developments in the General Assembly and Arkansas Ethics Commission to see how these laws develop over time.

MSRB Advances Expanded Pay-to-Play Rule Covering Municipal Advisors

Posted in Pay-to-Play

For two decades, municipal securities dealers have been subject to Municipal Securities Rulemaking Board (“MSRB”) rule G-37 which bars them from receiving state and local business for two years after certain political contributions are made by the dealers and individuals affiliated with them.  Earlier this week, the MSRB advanced amendments to rule G-37 that would expand its reach beyond dealers to include municipal advisors and those associated with municipal advisors.

When Congress passed the Dodd-Frank Act in 2010, it granted the MSRB broad authority to regulate “municipal advisors,” individuals and companies that provide advice to municipalities regarding municipal securities and products.  In connection with that authority, the MSRB this spring proposed, and submitted for comment in August, new regulations that would extend its pay-to-play laws to include municipal advisors.  The proposed regulations, which the MSRB has now advanced to the SEC for approval, make municipal advisors and individuals associated with them subject to the same pay-to-play restrictions applicable to municipal securities dealers.  Under the proposed amendments to G-37, municipal advisors may not engage in municipal advisory business with a municipality within two years after a political contribution to certain municipal officials is made by the municipal advisor, certain employees and individuals associated with the municipal advisor, or their political action committees.  Similar provisions restrict the ability of these individuals and entities to solicit others to make political contributions to municipal candidates and state or local party committees.

The proposed rule now goes to the SEC, where the SEC will decide whether to publish the proposal for additional public comment.  In the meantime, municipal advisors would be well-advised to begin the process of preparing pay-to-play compliance policies consistent with these proposed rules.

FCC Issues “Enforcement Advisory” Warning Political Campaigns and Promoters Against Robocall Abuse

Posted in Enforcement

Yesterday, the Federal Communications Commission’s Enforcement Bureau issued an advisory reminding political campaigns about the restrictions placed on the use of autodialed calls, prerecorded calls, and text messages by the Telephone Consumer Protection Act (“TCPA”) and the FCC’s corresponding rules.  The Enforcement Bureau warns that it is “closely monitoring this space” and will “rigorously enforce the important consumer protections in the TCPA and [the FCC’s] corresponding rules.”

The advisory summarizes four key restrictions on political calls:

1.  Political prerecorded calls or autodialed calls to cell phones and other mobile services are prohibited unless made with the “prior express consent” of the recipient. 

  • This restriction applies to autodialed live voice calls, prerecorded calls, and text messages.
  • Callers contending that they have the “prior express consent” to make such calls have the burden of proof to show that they obtained the requisite form of consent.

2.  Political prerecorded calls or autodialed calls to certain types of landline phones are prohibited unless made with the “prior express consent” of the recipient.  

These restrictions apply to the following types of landline phones:

  • emergency telephone lines, including any 911 line and any emergency line of a hospital, medical physician or service office, health care facility, poison control center, or fire protection or law enforcement agency;
  • telephone lines in guest or patient rooms at a hospital, nursing home, or similar establishment; or
  • any service for which the recipient is charged for the call, such as a toll-free line.

3.  Political prerecorded calls must include certain identification information about the caller. 

All prerecorded calls must include the following:

  • At the beginning of the message:  the identity of the business, individual, or other entity that is responsible for initiating the call.  If a business or other corporate entity is responsible for the call, the recording must contain that entity’s official business name (meaning the name registered with a state corporate commission or other regulatory authority).  
  • During or after the message:  the telephone number of such business, individual, or other entity.  The telephone number may not be for (1) the autodialer or prerecorded message player that placed the call, (2) a 900 number, or (3) any other number for which charges exceed local or long distance transmission charges.

4.  Automatic telephone dialing systems that deliver prerecorded calls must release the recipient’s telephone line within five seconds after the recipient has hung up.  

  • In addition, an automatic telephone dialing system may not be used in a way that simultaneously engages two or more telephone lines of a multi-line business. 

The Enforcement Bureau issued a similar advisory in September 2012, which we described here.

New Jersey Considering Aggressive Expansion of Pay-to-Play Legislation

Posted in Pay-to-Play, State Pay-to-Play

New Jersey, already home to some of the most complex and restrictive pay-to-play laws in the nation, is considering an aggressive new expansion of those laws.  A bill under consideration that recently passed through a senate committee would prohibit certain individuals and entities involved in managing state employee retirement funds from making contributions to national, federal, or other out-of-state political parties and committees to the same extent it currently prohibits them for in-state committees.  If adopted into law, this could restrict politically active individuals and entities concerned about New Jersey’s pay-to-play law from making contributions to the DNC, RNC, the national congressional committees, and the Democratic and Republican Governors’ Associations.  It is even possible, depending on the final language and how it is implemented, that this new law could affect contributions to other federal and non-New Jersey political committees.

This legislation appears to stem from two sources.  First, New Jersey Governor Chris Christie is the current chairman of the RGA, and both the RGA and RNC supported his re-election campaign.  State labor officials have cried foul on contributions from investment managers to those committees, saying their contributions benefitted Christie’s election and political influence.  Second, the State Investment Council amended its regulations in March 2014 to explicitly exclude national party committees from the contribution ban.  This bill seeks to repeal those exclusions and affirmatively include the federal, national, and out-of-state entities in the ban.

An identical bill, A3772, is in committee in the General Assembly.  We will be closely monitoring the progress of these bills.

New, Strict “Reverse” Revolving Door Restrictions in Pennsylvania?

Posted in Government Ethics, State Law

On October 15, Pennsylvania’s legislature sent House Bill 201 to Governor Tom Corbett for signature.  The legislation would prohibit a government employee from evaluating bids for state contracts submitted by his or her former employer for two years.

This legislation is interesting for a few reasons.  First, it is a twist on what are commonly known as “revolving door” restrictions.  Typically, revolving door restrictions limit the activities of former governmental officials.  For example, former government officials often may not advocate on behalf of their new employer in front of their former agencies or regarding matters in which they participated as a government official.  Many jurisdictions also impose restrictions based on financial interests.

Pennsylvania’s legislation is different in that it applies to new government employees who left the private sector, because it focuses specifically on state contracts, and because it is a straightforward ban on participation in evaluating proposals regardless of financial interest.

The restriction would also be harsher and would last twice as long as similar restrictions at the federal level that may require the recusal of a government employee from a matter involving a company at which the employee worked within the prior year.

Employers should keep an eye out for “reverse revolving door” rules of this kind, which are likely to sprout up in other states and localities.  When a company official leaves for public service, the company often seeks to determine whether the former employee’s new government position will impact operations.  Sometimes, compensation packages can be reconfigured or declined in order to avoid conflicts of interest down the road (for example, the federal executive branch has complex restrictions regarding government employees who have continuing financial interests in their former employers).  Pennsylvania’s law would effectively make that impossible.  The mere fact that an employee-employer relationship used to exist would be enough to mandate recusal.

Court Dismisses Challenge to SEC Pay to Play Rule (For Now)

Posted in Litigation, Pay-to-Play, SEC Pay-to-Play

In an important decision, the US District Court for the District of Columbia yesterday dismissed a constitutional challenge to the SEC’s “pay to play” rule, which restricts contributions and fundraising by some individuals who are associated with hedge funds, private equity funds, and other registered investment advisers. The Court ruled that the case had been filed in the wrong court, and that the district court in which it was filed lacked subject-matter jurisdiction.

Significantly, in dicta, the Court also expressed some doubt as to whether the state political parties challenging the SEC rule even had standing to bring the suit. The standing issue, which has been apparent since the filing of the suit, turns on the fact that plaintiffs were not able to identify a registered investment adviser, or an individual associated with one, to participate in the suit as a plaintiff. There is a material question, which the court did not ultimately reach, as to whether the state party plaintiffs could possibly have standing.

After the Court expressed concerns about standing early in the suit, the plaintiffs submitted an affidavit, filed after briefing had been completed, by a state legislator who asserted harm under the SEC rule. It is not clear that this will be sufficient to resolve the standing issues that have dogged the case from the outset, though the Court appeared to leave open that possibility.

It is fairly clear that the SEC rule suffers significant constitutional infirmities, especially in light of US Supreme Court campaign finance decisions that post-dated enactment of the SEC’s pay to play rule. What the world needs now is an employee of a registered investment adviser, who is herself covered by the SEC rule, and who is willing to serve as a plaintiff. But many such people, and their employers, fear that challenging the SEC in court could provoke retaliation from the powerful agency. The difficulty in identifying a willing plaintiff with clear standing only highlights the chilling effect of SEC regulation when the agency strays beyond its core mission and attempts to regulate political speech.

The next stop for this case will be the US Court of Appeals for the DC Circuit. The district court hinted broadly that the DC Circuit might want to revisit some of its own case law to clear a path for this case to be heard. There are thorny issues of subject-matter jurisdiction and timeliness to be worked through, even before a court would be ready to consider the standing issue. In the meantime, the possibility remains that another suit, filed with other plaintiffs, could be filed in another circuit, which may present both procedural and substantive advantages.

FARA Again in the Spotlight: New York Times Examines Foreign Funding and Think Tanks

Posted in Foreign Agents Registration Act

This weekend, the New York Times ran a lengthy investigative report on foreign government donations to U.S. think tanks.  The story alleged that the foreign governments bought influence and paid for advocacy by some of the nation’s most respected research institutions.  The article outlined contributions from Norway, UAE, Qatar, Japan, and others to think tanks including the Brookings Institution, the Center for Strategic and International Studies, the Atlantic Council, and the Center for Global Development.

For a few years, we have noted – and been tracking for many clients – the growing enforcement and interest in the Foreign Agents Registration Act.  This weekend’s Times story focused on think tanks, but the FARA issues it highlighted are equally relevant to universities, social welfare organizations, and others that accept foreign government funding.  We have also seen PR and consulting firms confront FARA issues related to their clients outside the United States.  FARA is an important consideration for any advocacy organization that is closely aligned with a foreign government, country, or ethnicity.  (One of the leading FARA cases, for example, involved an Irish newspaper and advocacy organization.)  Even corporations have run into FARA.  Companies with foreign affiliates or U.S. subsidiaries of a foreign parent with close ties to the home country government can easily trigger FARA inadvertently.

Notably, the Times article alleged that the think tanks’ arrangements with foreign governments may have violated the law:

[T]he tightening relationships between United States think tanks and their overseas sponsors could violate the Foreign Agents Registration Act….  The law requires groups that are paid by foreign governments with the intention of influencing public policy to register as “foreign agents” with the Justice Department.

Unfortunately (or fortunately, for the think tanks), that’s not quite a fair paraphrasing of the law.  FARA is a complicated and arcane statute – its application can swing quickly between very different outcomes, depending on the specific factual situation involved.  Applying the law requires examining the relationship between the U.S. entity and the foreign government, the specific activities undertaken, and even the physical location of the activities, among other considerations.

In our experience – from working with think tanks and foreign donors – most organizations seek to avoid triggering FARA by specifying that the think tank is independent and not acting on behalf of the foreign donor.  These legal considerations are usually specified clearly in the grant documents.  This posture is natural for respectable think tanks – independence is central to their reputations and credibility.

Because FARA is targeted at “agents” of foreign entities, the registration requirement is generally only triggered when the agent operates at the “direction or control” of a foreign entity.  But the language of FARA is very sweeping and the statute encompasses those who act at the “request” of a foreign principal or those whose activities are “financed, or subsidized in whole or in major part,” by a foreign entity.

As a result, it is very easy to trigger the statute unintentionally unless FARA considerations are taken into account when negotiating the grant and drafting the contracts or grant documents.  Even then, the parties must remain vigilant throughout the relationship to avoid crossing the line and triggering the statute, notwithstanding any legal language in a carefully drafted document.

Although FARA is relatively esoteric, Covington’s experience in this area spans more than 50 years.  (One of the leading FARA cases is Attorney General v. Covington & Burling, where we established that the attorney-client privilege applies to FARA.)  We also defended a consulting firm targeted in the Department of Justice’s largest FARA investigation of recent memory.  We have advised a number of think tanks and other organizations regarding grant agreements with foreign governments, as well as foreign government instrumentalities considering grants to think tanks.