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Inside Political Law

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

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 

CPA-Zicklin Index for 2015 Expected To Rank Entire S&P 500

Posted in Corporate Political Spending Disclosure

Covington has recently learned that, for the first time ever, the CPA-Zicklin Index, which ranks companies’ political disclosure practices, plans to issue rankings for all 500 companies in the S&P 500 Index.  This is a significant expansion of the Index, which will impact many public companies that have not previously been subject to intense scrutiny by political disclosure activists.

The annual CPA-Zicklin index is a report jointly issued by the Center for Political Accountability—a non-profit group promoting corporate political spending disclosure—and the Zicklin Center for Business Ethics Research at the Wharton School of the University of Pennsylvania.  The report ranks companies based on political spending scores, according to a metric created by CPA and the Zicklin Center.  Companies receive up to 70 “points” for disclosing, on their corporate websites, their political spending practices and itemizing political expenditures, such as payments to trade associations and 501(c)(4) social welfare organizations.  Companies with low scores on the CPA-Zicklin Index have found themselves the targets of shareholder resolutions, lawsuits, and media scrutiny.  The jump from 300 companies surveyed in 2014 to the full S&P 500 will sweep in 200 new companies, many of which may have given little thought to corporate political disclosures that are not mandated by law.

As described in our recent guide for in-house counsel, now updated to account for the expected expansion of the Index, companies should carefully weigh how they respond to these and other disclosure initiatives.  Companies can receive points on the CPA-Zicklin Index scoring indicators in many different ways, and some are less intrusive and less invasive than others.  Covington, which maintains a database cataloguing the different approaches companies have taken to earn points, regularly advises public companies regarding corporate political disclosure issues, including strategies for responding to shareholder groups and other corporate political disclosure activists.

The SEC & Big Data

Posted in Campaign Finance, Enforcement, Pay-to-Play, SEC Pay-to-Play

In our discussion of the Securities & Exchange Commission’s (SEC) actions over the past year, we described how the SEC is ramping up enforcement of its pay-to-play restrictions.  We also pointed out an acknowledgment by an agency enforcement official that the agency is “actively looking” for violations and that the agency does its own “surveillance.”

What kind of surveillance?  We previously noted that data analytics or “big data” are likely being used by Department of Justice and the Federal Bureau of Investigation to identify potential illegal campaign finance activity.

Now the SEC has confirmed that it uses data analytics for its own enforcement purposes.  In an announcement of its 2015 examination priorities, the SEC trumpets its ability to “analyze large amounts of data efficiently and effectively” and promises that big data will be used “to focus on registrants and registered representatives that appear to be engaged in illegal activity.”

It is likely the SEC is using, in one form or another, similar data analytics to identify potential violations of its “pay-to-play” rule, which regulates political contributions and fundraising by registered investment advisers.  We are entering a world in which an errant contribution is increasingly likely to be caught by regulators using big data.

New Campaign Finance, Lobbying, and Ethics Laws Take Effect

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

The New Year brings with it new laws governing campaign finance, lobbying, and ethics. Below we highlight some of the major state and federal laws that took effect on or around January 1. This is not intended to be an exhaustive list, but highlights some of the most significant changes that are new for 2015.  In addition to the new laws outlined below, many state legislative sessions are starting up. Some states prohibit campaign finance activity during the session, so proceed with caution.

  • Federal:
    • The FEC will increase the federal individual contribution limits to candidates and party committees for the 2015-2016 election cycle, but has not yet set those new limits.
    • In December, Congress created new accounts controlled by party committees that may accept large contributions from individual and PAC donors.
  • Arkansas: In November, Arkansas banned corporate and union contributions to candidates and prohibited most lobbyist gifts to officials, among other changes.
  • Arizona: On December 5, 2014, a federal court ruled Arizona’s definition of “political committee” unconstitutional.  The state is seeking to stay this ruling pending appeal.  If the court does not stay its ruling, the state’s campaign finance laws will be thrown into disarray.
  • California:
    • Holding fundraisers at the home of a lobbyist is prohibited if the lobbyist is registered to lobby the candidate or office the candidate seeks.  Cal. Gov’t Code §§ 82015, 85702.
    • Contribution and gift limits are increased for inflation.  2 Cal. Code Regs. §§ 18545(a), 18940.2.  Corporations, PACs, and individuals may now contribute up to $4,200 per election to legislative candidates, $28,200 per election to gubernatorial candidates, and $7,000 per election to other statewide candidates.
    • A committee that pays a spokesperson $5,000 or more to appear in advertising regarding a ballot measure, or makes any payment to a spokesperson if that person is held up as having a specialized occupation, must file special disclosures with the state.  Cal. Gov’t Code § 84511.
  • Delaware:
    • Corporations and other entities that give more than $100 in the aggregate per election period to a political committee must disclose the name of a “responsible party.”  Del. Code Ann. tit. 115, § 8012(e).  This includes an officer, director, partner, or other individual with control over the donor’s activities.  Id.
    • Lobbyists who file their financial reports late now must pay a fine of $25 plus $10 for each additional day late, up to $100 maximum.  Id. tit. 29, § 5838.
  • DC:  Effective January 31, many new changes take effect.
    • Disclosure by PACs and independent expenditure committees is increased, and must include the identity of significant “bundlers.”
    • Persons making independent expenditures must make new disclosures.
    • Committee treasurers must take a training course.
    • Affiliated entities will be treated as a single unit under the contribution limits, closing the so-called “LLC loophole.”
  • Florida:
    • Online lobbyist registration is now available.
    • Lobbyists before water management districts must follow new, specialized rules.  Fla. Stat. § 112.3261.
  • Illinois:
    • Contribution limits are increased for inflation.  An individual may now contribute $5,400, a corporation $10,800, and a PAC $53,900 per candidate per election cycle.
    • A new executive order, which we blogged about here, makes changes to the state’s gift and lobbying laws.
  • Louisiana: Candidate and political committees must make more detailed explanations of their expenditures.  La. Rev. Stat. Ann. §§ 18:1491.7, :1495.5.
  • Maine:  Beginning with this legislature, legislators must wait for a one year “cooling-off period” after the end of their term before registering as a lobbyist.  Me. Rev. Stat. tit. 1, § 1024.
  • Maryland:
    • “Contribution” now explicitly includes coordinated expenditures.  Md. Code Ann., Elec. Law § 1-101.
    • Contribution limits to a campaign finance entity from individuals and most other entities are increased from $4,000 to $6,000 per election cycle.  Id. § 13-226.
    • Contributions from affiliated entities are aggregated for the purpose of the contribution limits, closing the “LLC loophole.”  Id.
    • PACs organized in states other than Maryland must follow special registration and reporting requirements if they transfer $6,000 or more into state campaign finance entities.  Id. § 13-301.
    • Persons making independent expenditures or electioneering communications of $5,000 or more in an election cycle must file special registrations and reports of their activities.  Id. § 13-306, -307, -309.1.
    • An IRS § 501(c)(4) and (c)(6) organization that makes contributions or donations  of $6,000 or more in an election cycle with the express purpose of causing the recipient to make a disbursement in Maryland must register and make reports  of the five donors who gave it the most money to influence an election in the one year period before the report.  Id. § 13-309.2.
  • Massachusetts:
    • Contribution limits for individuals are increased to $1,000 per candidate per year.  Mass. Gen. Laws Ann. ch. 55 § 7A.
    • The state Office of Campaign & Political Finance now has jurisdiction over all municipal campaign finance activity in the state.  Id. § 18.
    • PACs must adhere to a new, stricter filing system that requires more frequent and more detailed reporting.  Id. § 19.
    • Committee treasurers must take an online training course within 30 days of accepting the position and every two years thereafter.  Id. § 5C.
  • New York State: Lobbyist training mandated in 2011 is now available and must be completed by all lobbyists once every three years according to this schedule.
  • North CarolinaContribution limits from individuals, political committees, and other entities to candidates or other committees are increased for inflation to $5,100 for the 2015-2016 cycle.
  • Oklahoma:
    • Oklahoma significantly revised both its lobbying and campaign finance rules, with highlights below.
    • Federal PACs making contributions to candidates in Oklahoma do not need to register.  Okla. Ethics Comm’n r. 2.98.  They may meet their obligations by listing contributions on FEC reports.  Id.
    • There are now three new types of PACs:
      • Unlimited committees, which are somewhat similar to Super PACs and which support independent expenditures, electioneering communications, or ballot measures;
      • limited committees, which is what the standard PAC is now called; and
      • new or small limited committees, which have lower contribution limits than regular committees.  Okla. Stat. tit. 21, § 187.
    • Defines private sector lobbyists as an “executive” lobbyist, a “legislative” lobbyist, or both, depending on who they lobby.  Okla. Stat. tit. 74, § 4249.
    • Lobbyists and lobbyist principals may generally provide state officials nothing of value.  Okla. Ethics Comm’n r. 5.6.  There are some exceptions, but fewer than before, and most permissible gifts must be reported.  Id. rr. 5.7-5.18.
  • Vermont: Contribution limits are increased.  Vt. Stat. Ann. tit. 17, § 2941.
    • Limits to candidates for State Representative are increased to $1,000 per individual, entity, or political committee per election cycle.
    • Limits to candidates for State Senator are increased to $1,500 per individual, entity, or political committee per election cycle.
    • Limits to candidates for statewide office are increased to $4,000 per individual, entity, or political committee per election cycle.
    • Limits to political committees are increased to $4,000 per individual, entity, or political committee per election cycle.
    • Limits to political parties are increased to $10,000 per individual, entity, or political committee per election cycle.
  • Wyoming:
    • Contribution limits  from individuals to statewide candidates increased to $2,500 per election and for non-statewide candidates to $1,500 per election.  Wyo. Stat. Ann. § 22-25-102.
    • PACs may not contribute more than $7,500 per statewide candidate per election or $3,000 per non-statewide candidate per election.  Id.
    • Contributions to a PAC that are earmarked for a particular candidate are treated as a contribution to that candidate and subject to the candidate limits.  Id.
    • Contributions for the general election may not be given or received before the primary.  Id.
    • Donors making automatic contributions, such as via payroll deduction, no longer need to reauthorize the deduction ever year.  Id.
  • Washington:  Legislators may only accept 12 meals from lobbyists per year that do not fall within some other exception to the gift rules.  Wash. Leg. Ethics Bd. r. 5.

Illinois Governor Signs Executive Order on Ethics

Posted in Government Ethics, State Law

Companies and individuals doing business in Illinois should be aware of an executive order – Executive Order 15-09 – signed this week by Governor Bruce Rauner that, among other things, imposes new limitations on the acceptance of gifts by state employees.  Illinois state employees are generally prohibited by statute from accepting any gift from a “prohibited source.”  5 Ill. Comp. Stat. Ann. 430/10-10.

“Prohibited sources” include entities that or individuals who are seeking official action from the applicable state agency, are conducting or seeking to do business with the applicable state agency, are regulated by the applicable state agency, are Illinois lobbyists, or who are immediate family members of any individuals falling into the preceding categories.  Id. 430/1-5.   The statute, however, contains exemptions that allow prohibited sources to provide state employees with $75 worth of food and refreshments, per day, that are catered or consumed where they were purchased or prepared, gifts worth less than $100 in the aggregate per year, and travel for certain educational purposes and to discuss state business.   Id. 430/10-15.  Governor Rauner’s executive order provides that state employees may not rely on these exceptions to accept gifts.

Executive Order 15-09 also imposes restrictions on the ability of state employees to become lobbyists after leaving state employments, expands financial disclosure requirements for certain state employees, and adds new procedures for the review of state employment contracts.