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Inside Political Law

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

“Market Value” to Events with No Entrance Fee Explained

Posted in Government Ethics

What is the “market value” of a ticket to an event with no entrance fee?  Event sponsors and executive branch employees have long struggled on the best way to estimate the market value of government employees attending free, especially invitation-only, events.  Finally, we have an answer.

The Office of Government Ethics (OGE) issued a legal advisory to explain how federal employees should calculate the “market value” of attending an event with no entrance fee.  The answer is to aggregate the market value of any food, beverages, entertainment, or other tangible benefit offered to attendees in connection with the event.  However, the cost the sponsor incurred to rent the venue does not need to be included.

To ascertain this value, an executive branch employee can estimate the market value by reference to the retail cost of similar items of like quality or rely on a per-person estimate provided by the sponsor of the event — unless the government employee finds the sponsor’s estimate to be implausible or inconsistent with a fair value estimate.

Christie Vetoes Controversial New Jersey Pay-to-Play Provision

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

Earlier this week, New Jersey Governor Chris Christie vetoed key aspects of a bill that would have imposed new restrictions on the ability of national and federal political party committees to raise money from Wall Street and financial executives.  The bill, as we have previously discussed, sought to apply the state’s notoriously stringent pay-to-play rules to contributions from individuals associated with investment management firms with New Jersey state contracts to the national and federal committees of political parties (such as the Democratic Governors Association or Republican National Committee).  The law would have hampered party fundraising in the run-up to the 2016 elections.  Christie’s veto protects party fundraising efforts at a critical juncture, especially given the continued rise of Super PACs and other outside groups.  It also heads off the confusion and potential legal action arising from the state’s attempt to regulate national and federal political activity.  We have noted that the bill could have impermissibly pre-empted federal election laws, a concern Christie also cited in his veto statement.

The bill now returns to the legislature, which can override the veto with a two-thirds supermajority vote of each house, or accept by simple majority Christie’s proposed changes to an unrelated provision of the bill dealing with investment manager fee reporting requirements.  The bill originally passed both houses of the legislature with large majorities, although just shy of the supermajorities that would be necessary to override the veto.  A primary sponsor of the bill says she is considering the options but does not favor accepting the changes Christie proposed.

A Renewed Push Coming for Disclosure of Political Intelligence Gathering?

Posted in Lobbying Compliance

According to a key advocate, Senate Judiciary Committee Chairman Charles Grassley (R-IA)  is preparing to renew his push for legislation aimed at expanding disclosure of political intelligence gathering.  Speaking with BNA, Craig Holman of Public Citizen said yesterday (subscription required) that bipartisan legislation will soon be introduced in both the House and Senate that would require political intelligence consultants to register and disclose their activities on behalf of their clients.

Broadly defined, political intelligence gathering includes efforts to obtain political information to assist in devising investment strategies.  Although far from a new phenomenon, the link between political intelligence and finance rose to prominence following a series of academic and media reports culminating with a 60 Minutes exposé of alleged insider trading by members of Congress in November 2011.  Chairman Grassley has vocally supported lobbyist-style disclosure of political intelligence gathering since soon after that piece aired.

Most notably, during Congressional deliberations regarding the Stop Trading on Congressional Knowledge (STOCK) Act, Sen. Grassley and Rep. Louise Slaughter (D-NY) successfully pushed for the inclusion of disclosure provisions in the original bill approved over a filibuster by the Senate.  As we discussed in our assessment of the Senate bill, the broad registration and reporting requirements included in this initial proposal could have significant effects in both the financial services sector and beyond.  The provision ultimately was removed during conference negotiations and replaced with language requiring the Government Accountability Office (GAO) to study a variety of issues related to regulation of political intelligence gathering.  Read Covington’s client alert on the final STOCK Act’s political intelligence and insider trading provisions here.

GOA released its final report in April 2013.  While emphasizing the inherent difficulty in assessing the extent to which political intelligence influences investment decisions, the report made no recommendations for further legislative action.  Read our assessment of the GAO report here.

Nonetheless, Rep. Slaughter introduced stand-alone legislation late last Congress that would have revived the discarded STOCK Act language.  The Political Intelligence Transparency Act would have required individuals and firms engaged in political intelligence activities to register under the Lobbying Disclosure Act.  Registrable activities would include contacts on behalf of a client with any covered executive branch or Congressional official to derive information for use in analyzing financial markets or informing investment decisions.  Such information could include details regarding proposed legislation and administrative action, as well as the nomination or confirmation of prospective executive branch officials.

With Grassley now Chairman of the committee of jurisdiction, he is in a position to advance reintroduced disclosure legislation to the floor quickly.  While the details of any future Grassley-Slaughter proposal remain uncertain, any new legislation likely will hew closely to the bill introduced last Congress.  In the near-term, political intelligence consultants should begin to consider the implications of any proposed disclosure regime — and associated compliance requirements — on their work.

Gift Tax Certainty at Last?

Posted in Tax

The U.S. House of Representatives this week passed a bill to provide gift tax certainty to individuals who make gifts to 501(c)(4) social welfare organizations, 501(c)(5) labor unions, and 501(c)(6) trade associations.  The bill, H.R. 1104 (the “Fair Treatment for All Gifts Act”), was approved with bipartisan support on a voice vote.  It now goes to the Senate for consideration.

H.R. 1104, if enacted by the U.S. Senate and not vetoed by the President, would amend the Internal Revenue Code to provide that gifts to social welfare organizations, labor unions, and trade associations would not be subject to the federal gift tax.  The bill effectively adopts, as law, the IRS’s long-standing practice (and formal position since 2011) that transfers to social welfare organizations are not subject to the federal gift tax.  The bill extends the same treatment to gifts to labor unions and trade associations.

In a related move, the House also passed a bill to repeal the federal estate tax (H.R. 1105, the “Death Tax Repeal Act”).  If enacted into law, the ability to make gift- and estate-tax free bequests to social welfare organizations, labor unions, and trade associations could open up new planning possibilities for donors.

Pay-to-Play Law on Gov. Christie’s Desk Poses Potential Threat to National Parties

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

A little-noticed sentence in a bill sitting on New Jersey Governor Chris Christie’s desk could, if it becomes law, threaten to curtail the ability of national party committees to raise money from Wall Street and financial industry executives.  The Republican and Democratic Governors Associations, the Republican National Committee, the Democratic National Committee, and the federal congressional party committees could all be impacted.

New Jersey State Investment Council rules prevent the state pension fund from hiring an investment management firm if, within the two years prior, certain executives and professionals at the investment firm made a covered “political contribution or payment to a political party.”  The term “political party” means “any political party or political committee organized in the State” but does not include “a Federal or national campaign committee or a non-State political committee.”

The bill recently passed by the state legislature, however, would change that.  The bill—which we  flagged when it was making its way through the legislature—provides: “Regulations adopted by the council that address political contributions shall apply equally to contributions to any federal or national committee or a non-State political committee as to any other committee covered thereby.”

This poorly drafted provision could be read to apply only to political parties “organized in the State” such as the federal account of a New Jersey political party.  But it could also be read to apply to all federal or national party committees such as the RGA and the DNC.  Indeed, on passage, a sponsor stated that “the legislation would require the investment council to put in place a rule prohibiting firms it selects to invest pension funds from making contributions to any national political organization.”

The statute could therefore restrict federal and national political contributions in ways that reach further than any other pay-to-play law in the country.  Moreover, earlier this week, the State Investment Council chairman suggested that the state would have to liquidate existing investments if executives from those investment firms made contributions to national party organizations, even if the contributions were permissible at the time.

Governor Christie has not said whether he plans to sign the bill.  If the law passes, the State Investment Council may promulgate regulations interpreting the law more narrowly.  And even if the law is interpreted to bar contributions to federal party committees and groups like the RGA and DGA, it seems highly vulnerable to challenge on First Amendment and federal preemption grounds.  But in the meantime, as we approach a Presidential election, the political contributions of many on Wall Street and in the financial industry could be chilled and fundraising for national party committees may take a hit.

D.C. Circuit Hears Constitutional Challenge to SEC Pay to Play Rule

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

A constitutional challenge to the SEC’s “pay to play” rule moved one step closer to resolution today, even as significant hurdles remain in an effort to strike down the rule.

The U.S. Court of Appeals for the District of Columbia Circuit heard arguments this morning on an appeal brought by two state political parties challenging federal pay-to-play restrictions. Adopted by the SEC in 2010, the challenged rule restricts political contributions and fundraising by certain individuals associated with hedge funds, private equity funds, and other registered investment advisers.

As we described in October, the district court ruled that the plaintiffs filed their case in the wrong court, leaving the court without jurisdiction to hear the challenge. In so doing, the district court gestured towards a reconsideration of existing D.C. Circuit precedent limiting jurisdiction to the Court of Appeals. Today’s arguments — before a panel comprised of three judges appointed by Democratic Presidents (Judges Tatel, Edwards, and Pillard) — addressed that preliminary question, as well as the basic question of whether the parties are the proper plaintiffs to challenge the rule.

Turning first to the question of jurisdiction, the panel seemed skeptical that the current appeal is distinguishable from similar challenges that must be brought directly in the Court of Appeals.  The state parties reiterated their view that the Investment Advisers Act allows for initial review in the district court.  But, with the court apparently reluctant to revisit its prior decisions, the parties acknowledged that their current appeal would be foreclosed should the court disagree.

Beyond this initial question, the panel explored the many barriers that may arise in future challenges to the rule.  First, even assuming the court agrees that the case may be brought in the district court, today’s panel appeared to echo the district court’s doubt regarding the parties’ standing to sue. The standing issue stems from the plaintiffs’ apparent inability to identify a registered investment adviser willing to challenge the SEC rule.

Judge Pillard expressed particular interest in the standing question, pressing the state parties to explain why they — as opposed to investment advisers directly regulated by the rule — should be allowed to challenge the rule.  Although the parties pointed to past instances in which political parties have challenged campaign finance regulations, the SEC argued that the parties have failed to demonstrate that their members have been or will be harmed by the rule.

In addition to standing issues, the panel considered other means by which an appropriate plaintiff may challenge the rule.  Because the time for a direct appeal to the Court of Appeals has passed, prospective challengers are now faced with a difficult question — either violate the rule and challenge an SEC enforcement action or navigate the difficult terrain of a pre-enforcement challenge.  With this in mind, the panel seemed to suggest that opponents of the rule are best advised to request a reconsideration of the rule before the SEC before then challenging any resulting SEC decision.  Of course, with the SEC free to withhold final action on such requests, such a challenge may not ripen for months or years.

As we have noted, the constitutionality of the SEC rule is open to question, particularly following recent Supreme Court campaign finance decisions. But depending on the outcome in this case, it may prove difficult to challenge the SEC’s rule unless a registered investment adviser, its covered employees, or a trade association representing them comes forward and is willing to serve as the plaintiff.

The FEC Draws A Clear Line

Posted in Campaign Finance

In a decision certain to receive close scrutiny by those representing potential presidential candidates, the FEC has dismissed the allegations made by Stop Hillary PAC against the Super PAC Ready for Hillary, Friends of Hillary and Senator Clinton herself. FEC MUR 6775. The FEC concluded in one part of that decision, that even if Senator Clinton had reviewed and approved of Ready for Hillary’s mailing and bumper sticker, the Super PAC did not have to say in its disclaimer that the communication was “authorized by” Senator Clinton, for she was not yet a candidate.

This finding—that the rules that govern “candidates” do not yet apply to Senator Clinton or individuals who are “testing the waters”—is more significant when one moves from the question of whether the “authorized by” disclaimer must go on a bumper sticker to the question of whether a discussion with the potential candidate is governed by the FEC’s restrictions on “candidates” coordinating with outside spending groups. It is hard to escape the conclusion from reading the FEC’s decision that until the prospective candidate crosses the statutory line and becomes a “candidate” under the law, the coordination rules do not yet apply to that individual. The FEC’s confirmation of this reading of the plain language of the statute will be seen as very good news by many of the individuals who are currently testing the waters for 2016.

5 Myths about Super PACs

Posted in Campaign Finance

Few subjects in federal campaign finance law are so frequently garbled by commentators, the press and the public as what a Super PAC is and how it operates.  Here is a short list of common mistakes.

1.  Super PACS are “shadowy” “dark money” groups that mask where their money comes from and how its spent. 

Quite simply, nothing could be further from the truth.  A Super PAC is among the most transparent outside spending groups around, disclosing to the public the source of all of its funds (including the name, address, occupation and employer of every person that gives over $200 in a year) and how it spends all those funds (including the name and address of every person or vendor that receives over $200 in a year, including the purpose of the disbursement).  All that information is available on the web at www.fec.gov.  Some complain that the disclosure is not fast enough or frequent enough.  This is a problem mostly for those interested in the horse race aspect of politics.  Super PACs can chose to disclose their activities either monthly or quarterly in election years and either monthly or semi-annually in non-election years.  Others complain that entities such as 501(c)(4) social welfare groups (that do not publicly disclose their donors) can give to Super PACs and hence the source of those funds cannot be known.  This problem arises from the laws that govern 501(c)(4) groups, not Super PACs.

2.  Super PACs cannot talk to the candidates they support.

Wrong again.  Federal law prohibits Super PACs from making expenditures in cooperation, consultation, or concert with, or at the request or suggestion of, a candidate, but that is a far cry from a total ban on communications.  In fact, the FEC has specifically blessed candidates appearing at Super PAC fundraising events.  Candidates must comply with restrictions on raising non-federal funds and cannot communicate with the Super PAC about its expenditures in a way that violates the coordination rules.  So while Super PACs and candidates can talk about some things, like fundraising, they cannot talk about other things, like how the Super PAC is going to spend its money.

3.  Super PACs can contribute to candidates.

One thing that Super PACs cannot do is make contributions directly to federal candidates.  They can spend all they have explaining to citizens why they should vote for (or against) a particular candidate, but they cannot give a federal candidate (or her opponent) even a nickel as a contribution.

4.  Corporations use Super PACs to funnel money into politics.  

While corporations are permitted to give to Super PACs, very few do.  Those that do are often small or privately-held corporations.  The truth is that only on rare occasions have well-known, publicly-traded corporations given to a Super PAC.

5.  If we amend the Constitution, we can do away with Citizens United and the Super PACs it created. 

Well maybe, but Citizens United isn’t the problem.  The idea of “independent expenditures” having a higher level of constitutional protection dates back to at least the 1976 Supreme Court decision in Buckley v. Valeo (practically the age of the dinosaurs in campaign finance law) and in some ways, even earlier than that.  So a constitutional amendment that merely overturns Citizens United and bars corporations from making contributions or expenditures in federal elections will have very little practical effect on the Super PAC activity we have today. 

Covington Issues Client Advisory on Bank Loans and Transactions with Candidates and Political Groups

Posted in Campaign Finance

Covington recently issued an advisory to its bank and financial institution clients explaining the rules governing their business dealings with candidates and political groups. The advisory, which is available here, deals with loans and other transactions that sometimes cause banks to run afoul of Federal Election Commission regulations or government ethics rules. While banks are often very familiar with the rules governing their own government affairs activities, they are not always as focused on how routine commercial dealings with campaigns and political committees are regulated. There have been multiple FEC cases over the years involving bank loans and even overdrawn checks drawn on campaigns’ checking accounts.

As we head into a new election cycle, this is a good time for banks, candidates, and PACs to get up to speed on these rules.

FEC Increases Contribution Limits, Permitting Individuals to Contribute over $800K to National Party Committees

Posted in Campaign Finance

The Federal Election Commission has increased the limits on the amount an individual can contribute to a candidate or national political party for the 2015-2016 election cycle.  An individual can now give up to $2,700 per election to a candidate for federal office, up from $2,600.  Because the primary and general count as separate elections, individuals may now give $5,400 per candidate per cycle and couples may give $10,800.

This cycle’s adjustments are especially significant, however, because they are the first that will apply to a series of national political party accounts created by the omnibus spending legislation Congress passed in December.  As we noted at the time, that legislation allows national party committees to create up to three additional specialized “accounts,” each of which can receive contributions from individuals and PACs that are triple the amount that can be given to the main party account, which has increased from $32,400 to $33,400.  These accounts can be used to pay for expenses related to presidential nominating conventions, headquarters buildings of the party, and election recounts, contests, and other legal proceedings.  Effectively, this means that individuals can now give up to $801,600 to a party’s various accounts each year.  And a couple can give up to $3,206,400 to a party in the 2015-2016 election cycle.

The following chart shows more details on the limits for individuals in 2015 and 2016:

An individual may contribute to …
Federal Candidates $2,700 per election
National party committees — main account $33,400 per year
National party committees — convention account (RNC and DNC only) $100,200 per year
National party committees — party building account $100,200 per year
National party committees — legal fund account $100,200 per year
State or local party committees’ federal accounts $10,000 per year
Federal PACs $5,000 per year