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Inside Political Law

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

FEC Provides Some Answers To Candidates and Super PACs

Posted in Campaign Finance

Last week the Federal Election Commission (FEC) took incremental steps toward defining the rules for those considering becoming a candidate and how candidates interact with Super PACs. FEC AO 2015-09 (Senate Majority PAC and House Majority PAC).  As expected, the agency could not reach consensus on most of the legal issues raised, but it did provide some marginally useful guidance, much of it a reaffirmation of its existing regulations and prior decisional law.

Here are the most salient things the agency said.

  • Individuals who are “testing the waters” to decide if they should run for federal office must still comply with the FEC’s rules requiring the use of federally permissible funds. This seems to preclude “testing the waters” Super PACs or 501(c)(4) organizations.
  • You become a “candidate” when you decide that you are going to run. It is this personal decision, and not the formal filing of papers with the FEC, that makes you a “candidate.”
  • There is no limit to how long you can think about running. You can “test the waters” for months or years, so long as you remain truly undecided about whether to run.
  • “I meant what I said and I said what I meant.” D. Seuss, Horton Hatches the Egg. If you publicly tell people you are running, the FEC will assume you mean it.
  • Telling the press the date you will announce your candidacy is good evidence you have decided to run.
  • Individuals who are “agents” of a candidate’s campaign for fundraising purposes can also raise money for multicandidate Super PACs, so long as they don’t do so on behalf of the candidate. The FEC could not agree on whether the same rule would apply to “agents” who fundraise for single candidate Super PACs.
  • Potentially the most significant part of the opinion was a sanctioning of “small room” fundraising events for Super PACs. There is no minimum number of attendees necessary for an event to qualify under the FEC’s rules for when a federal candidate or officeholder can attend an event — including a Super PAC fundraising event — where non-federal funds are raised.

The Commission could not find consensus on the more weighty issues presented, including the role of a potential candidate in setting up a Super PAC that would support her or his campaign, a potential candidate sharing strategic information with a Super PAC, whether there is a dollar threshold for how much a potential candidate can raise while still remaining undecided about whether to run, and whether a potential candidate’s coordination with a Super PAC taints that Super PAC’s spending after the person announces his or her candidacy. On these important questions, the agency could provide no guidance on how the law should apply.

Will President Obama’s New Overtime Regulations Shrink Corporate Restricted Classes?

Posted in Campaign Finance

Corporate PAC managers may soon find that the universe of employees who receive corporate PAC solicitations has unexpectedly shrunk.  In July 2015, the Department of Labor proposed new regulations that would dramatically increase the number of workers entitled to overtime wages.  The Department of Labor estimates that, under the new regulations, approximately 5 million new white collar workers could receive overtime pay.  Currently, salaried employees are not entitled to overtime pay if they perform certain duties and are paid at least $455 per week (the equivalent of $23,600 annually).  Under the proposed regulations, the duties test would remain the same but the salary threshold would increase to $921 per week/$47,892 annually.  This salary threshold would also be adjusted year-to-year, pegged at the 40th percentile of weekly earnings of full-time salaried workers.

In practice, because the FEC regulations and Fair Labor Standards Act regulations overlap to a degree, some companies take a shortcut in their legal analysis and solicit PAC contributions only from employees not entitled to overtime pay and refuse to solicit those entitled to overtime pay.  Thus, when the number of employees entitled to receive overtime pay increases, the universe of employees solicited by these corporate PACs may fall.

Legally, however, these regulations should not require companies to reduce the size of their restricted class.  While the FEC regulations look to Fair Labor Standards Act regulations for guidance in determining whether an individual’s duties place that individual in the restricted class, the FLSA’s salary cut-off on overtime payments is not relevant to this analysis.  Nonetheless, these new rules may present corporate PACs with a good opportunity to conduct a more thorough “restricted class review” to confirm that solicited employees all fall within the restricted class and to determine whether others may also be solicited.

California Approves Strict Rules on Super PAC Coordination

Posted in Campaign Finance, State Law

California has existing regulations that define when expenditures by outside groups, including super PACs, are coordinated with candidates and become illegal contributions to those campaigns.  These rules create a presumption of coordination under certain circumstances.  Yesterday, the Fair Political Practices Commission (“FPPC”) approved revisions to its rules on independent expenditures and coordination that expand the situations where a presumption of coordination exists.

The changes adopted by the FPPC mirror activities that have been the subject of debate and controversy at the federal level.  California, like many states, is moving forward with efforts to tighten the rules on super PAC expenditures.

The following list describes the primary ways that California changed its rules regarding “presumed coordination.”  If the facts show that these situations exist, the candidate and outside groups have the burden of proving that illegal coordination did not occur.

  • Republication.  While republication of campaign materials was already presumed to be coordination in California, the revised rules add “video footage” to the list of campaign materials in this rule.  This may be an attempt to prevent super PACs from using “b-roll” footage filmed by candidates, which has become a common practice.
  • Fundraising.  If a candidate solicits funds for or appears as a speaker at a fundraiser for a super PAC primarily formed to support that candidate, expenditures made by the super PAC are now presumed to be coordinated with the candidate.  At the federal level, the Federal Election Commission has approved candidates appearing at super PAC fundraisers, with certain restrictions on how much they can solicit for the super PAC, without raising coordination concerns.  California now takes a much more restrictive approach on fundraising activities by candidates and super PACs.
  • Former Staff.  There is now a presumption of coordination if the group making an expenditure is “established, run, or staffed in a leadership role” by an individual who previously worked for a candidate in a senior role during the current campaign.  The “current campaign” extends from one year before the primary in which the candidate is running through the general election.
  • Candidate’s Family.  Like former staff, expenditures made by groups “established, run, staffed in a leadership role” by a member of the candidate’s immediate family are presumed to be coordinated with the candidate.  In addition, and somewhat surprisingly, expenditures made by groups that are principally funded by a member of the candidate’s immediate family are presumed to be coordinated expenditures.

It is important to note that this is not the full scope of what amounts to coordination under California’s broad rules, only what the new rules add to the list of presumptions.  Also, this activity does not mean that coordination necessarily exists, but if challenged, the candidate and outside group will need to spend their time and resources to prove that coordination did not occur.

As noted above, state regulators are steadily imposing stricter rules on super PACs than what is found at the federal level.  It is important to know the state rules on coordination before engaging in activities in that state and to avoid the temptation to think that what is commonplace at the federal level will be permissible in state elections.

New Report Adds Pressure For Public Companies to Voluntarily Disclose Political Spending

Posted in Corporate Political Spending Disclosure

A report published today by the Center for Political Accountability will result in more pressure on public companies to voluntarily disclose information about their political spending.

Each year, CPA in collaboration with the Zicklin Center at the University of Pennsylvania issues a detailed report “scoring” companies on their corporate political disclosure practices according to a 70-point metric it has created.  Companies that voluntarily disclose more information about their political spending on their websites—even though such disclosures are not required by law—get higher scores.  For example, companies that disclose information about payments to 501(c)(4) social welfare organizations, so-called “dark money” groups, can receive 6 points.  Similarly, the index places a high value on board involvement in the process.  To receive a perfect score, a company’s board of directors must pre-approve its political spending, even though board pre-approval would seem to have little to do with disclosure.  Some of the scoring factors also suggest that the Index is biased against certain types of speech as compared to others.  For example, the scoring key asks if the company publicly discloses “a list of the amounts and recipients of payments made by trade associations or other tax exempt organizations of which the company is either a member or donor.”  The few companies that receive points on this indicator typically receive them because they prohibit trade associations and tax-exempt organizations from using their funds for political purposes.

Traditionally, campaign finance reform groups and activist shareholders have used the CPA-Zicklin Index as a resource for identifying and targeting low-scoring companies for adverse press, shareholder resolutions, and litigation, all aimed at pressuring them to voluntarily disclose (or outright ban) political spending.

This year’s report will add to that pressure for two reasons.

First, as we previewed earlier this year, for the first time the report surveys the entire S&P 500.  The expanded index now provides information about a greater number of companies, which means that there is now data that may support campaigns against a greater number of companies.  Almost half (220 out of 497) of the companies surveyed in today’s report fall in the bottom of the five tiers, with 57 companies receiving scores of zero.  Within hours of the report’s release, campaign finance reform groups were already singling out some of these companies for “scoring a goose egg.”  And the report itself appears to encourage activist shareholder groups to target these companies with political spending resolutions, noting that companies are more likely to receive higher scores when they have been “engaged” by shareholders.

Second, even high-scorers and middle-of-the-pack companies may feel uneasy with the latest report.  The report cryptically suggests that companies will be scored more rigorously next year: “In order to analyze 500 companies accurately and consistently across 24 indicators, we must adhere closely to our rigorous scoring guidelines.  CPA will score each company based solely on the information that is publicly available on the company’s website and without regard to how the company was scored in previous years.”  How this plays out—and whether it means companies will need to disclose more to keep their same scores—is not clear.

For tips on working with CPA and resolving corporate political disclosure issues, in-house counsel can consult our guide, published earlier this year, on “Responding to Corporate Political Disclosure Initiatives.”


California Penalizes Campaign, Committee for Coordination Violation

Posted in Campaign Finance, Enforcement, State Law

As Super PACs and campaigns continue to edge closer to the legal line between “independence” and “coordination,” it has become common to hear calls for the FEC to take a stricter role in enforcing the law. Yet as recently reported by BNA, the FEC has not found a single violation of its coordination rules in the past five years. A recent case before the California Fair Political Practices Commission (“FPPC”) provides a sharp contrast.

At its August 20 meeting, the FPPC entered into an agreement with state senate candidate Joe Coto, his campaign committee, and Vote Matters, a state political committee in which the three admitted to making and receiving excessive contributions and related reporting violations, and agreed to pay a total of $16,000 in penalties. The FPPC alleged, and the parties agreed, that Vote Matters made an illegal contribution of over $110,000 to the Coto campaign after it hired two individuals who had run the campaign’s field operation and had them provide similar services for the independent expenditure program.

The FPPC concluded that state law created a presumption of coordination when former staffers worked for an independent expenditure program in the same cycle as the campaign, and that Vote Matters had not rebutted that presumption. As a result, both the Vote Matters field operation (which the two former staffers ran) and the group’s direct mail operation (which they were not involved with) were treated as contributions to the campaign that far exceeded the $3,900 contribution limit. Even though the FPPC found no evidence the Coto campaign authorized or was aware of its former staffers’ activities, it concluded that the expenditures were sufficiently large that the campaign “should have been aware” of them and found it had received an excessive contribution. Because Vote Matters reported the costs of its mailers and field operation as an independent expenditure rather than a contribution, and the campaign never reported receiving the excessive contribution, all parties were also assessed penalties for reporting violations.

This case is an important reminder that some state campaign finance agencies are aggressively enforcing the coordination rules, and that coordination can occur without explicit agreement between the parties.

What’s Next for the SEC Pay-to-Play Rule Challenge?

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

Yesterday’s D.C. Circuit opinion upholding the SEC’s burdensome “pay-to-play” rule on procedural grounds is bad news for those questioning the rule’s constitutionality.  Nevertheless, the rule is still far from invincible.

The SEC pay-to-play rule, among other things, effectively prohibits investment firm executives from making certain political contributions to state and local officeholders and candidates.  Last year, two state political parties challenged the rule on constitutional and statutory grounds.  This week’s decision affirmed the D.C. District Court’s conclusion that the parties’ filed their lawsuit in the wrong court.  Under settled precedent, the court held, the plaintiffs should have filed directly in the D.C. Circuit, not in federal district court.  The problem, however, is that it is too late to file directly with the D.C. Circuit.  The court held that the same statute requiring the lawsuit to be filed in the D.C. Circuit also would have required that it be filed within 60 days of the rule’s 2010 promulgation, a period that has long-since run.

Does yesterday’s decision spell the end of challenges to the constitutionally-dubious SEC pay-to-play rule?  Not quite.  The court did not address the merits of the parties’ arguments.  If SEC pay-to-play rule challengers can find a way to get the merits of their arguments before a court, they could still win.  But their options for doing so are now more limited:

  • The parties in this case can seek en banc review before the full D.C. Circuit (an en banc opinion would be required to overturn the 1977 case upon which the D.C. Circuit based its decision) or ask the Supreme Court to take their case.
  • Potential challengers can try to file a lawsuit in a different court where the D.C. Circuit’s decision is not binding.
  • Potential challengers could violate the rule and challenge its constitutionality in an enforcement proceeding.  (Given the serious penalties at issue, this option will be a non-starter for most.)
  • Finally, yesterday’s opinion gives challengers another option.  The opinion makes clear that challengers can petition the SEC to repeal the rule and, if the SEC denies the petition, they can challenge that denial within 60 days by filing a petition for review in the D.C. Circuit.  The problem with this approach is that challengers may have difficulty forcing the SEC to act on their petition for repeal.

In short, while the path became more challenging yesterday, the rule could still fall.

Highlights from Wagner; D.C. Circuit Upholds Contributions Restrictions But Limits Ruling

Posted in Campaign Finance, City Pay-to-Play, Enforcement, Litigation, Pay-to-Play, SEC Pay-to-Play, State Law, State Pay-to-Play

The Wagner case, decided today by the D.C. Circuit, is important because of its analysis of the constitutionality of federal campaign contribution restrictions and, by extension, of pay-to-play laws generally. Covington has been monitoring this case since the district court decision in 2012, to the argument before the D.C. Circuit in 2013, and the decision by the appellate court to vacate the opinion in the same year.

Part of the procedural wrangling in the case was due to tricky jurisdictional issues. But the substantive issues strike at the heart of modern campaign finance. No doubt this latter inquiry is at least part of the reason it took the D.C. Circuit Court about nine months from the argument on September 30, 2014, to issue today’s opinion.

Strictly speaking, the decision focuses on the federal ban on contributions by contractors to federal candidates and parties. The opinion might have been broader, covering contributions to political action committees that make contributions to candidates. That broader question would have been interesting because, in the absence of control or earmarking by the donor, the concern about corruption is arguably lessened when an intermediary, such as any one of a wide variety of PACs, makes independent determinations about how to use its money. However, the two plaintiffs whose challenge included desired contributions to political committees and PACs were no longer federal contractors by the time the Court issued its opinion. So the Court declined to address the broader question as to contributions to PACs.

Many aspects of this case are interesting, but the following are a few highlights:

  • The Court recognized not only a governmental interest in protecting against quid pro quo corruption and its appearance—which is the interest that has recently been the focus of the Supreme Court—but also the “protection against interference with merit-based public administration.” In some respects, this is a broader principle that could justify a broader set of restrictions than the concern about quid pro quo corruption alone, though it is arguably more relevant to restrictions applied to individual contractors (as here) in the context of federal government as an employer.
  • Although the Court acknowledges that political parties cannot award contracts, it favorably cites a district court for the proposition that “federal officeholders and candidates may value contributions to their national parties. . . in much the same way they value contributions to their own campaigns.” This is an expansive rationale and leads to all manner of questions.
  • The Court specifically identifies the enactment of pay-to-play laws by states and municipalities as evidence that restrictions on contributions are thought necessary to prevent corruption and to provide for merit-based administration. The Court’s assembly of a list of corruption scandals leading to contribution restrictions will no doubt be cited by other courts and may provide comfort to jurisdictions concerned about the constitutionality of their restrictions.
  • The Court rejected an argument that a higher level of scrutiny should apply. One result of the Court’s analysis is that we may continue to see a distinction between laws restricting independent expenditures (even to support a particular government official) and contributions made directly to the campaign of that same official.
  • Finally, this opinion does not bode well for recent challenges by the New York and Tennessee Republican parties to the Securities and Exchange Commission’s pay-to-play law, a challenge which, as we noted, has faced procedural challenges of its own. That suit is also before the D.C. Circuit.

Covington will be monitoring the fallout of the Wagner case and its implications for the future of campaign finance.

New Insights on FARA Enforcement Emerge from DOJ Letter to Sen. Grassley

Posted in Foreign Agents Registration Act

In a recent letter to Sen. Chuck Grassley (R-Iowa), the Department of Justice offered a rare public glimpse into the enforcement activities of the small unit in the Department that enforces the Foreign Agents Registration Act.  Some of the details highlighted in the letter are consistent with observations that we have shared in this blog; others complement and confirm our experiences in practice.

The Department’s letter was prompted by an inquiry from Sen. Grassley regarding press reports indicating that Sidney Blumenthal conveyed a letter from Bidzina Ivanishvili, leader of the Georgian Dream political coalition, to Hillary Clinton when she served as Secretary of State.  The Department had very little to say on this particular issue, except to note that it was aware of the press reports and was taking “appropriate steps” to determine whether any actions were warranted.

The Department’s comments about FARA enforcement were more interesting and confirmed our observations that the FARA Unit has been considerably more active in recent years.

Increased Enforcement

First, the letter demonstrated that the Department is increasingly focused on uncovering apparent failures to register under FARA by conducting outreach to unregistered individuals and organizations that may have an obligation to register.  The letter noted that the FARA Unit had issued about 130 letters of inquiry over the past 10 years.  These letters typically reference press reports and ask whether the recipient has an obligation to register.  The Department noted that these inquiries resulted in 38 new registrations under the statute.  The letter publicly confirmed our understanding that the FARA Unit personnel rely primarily on “open-source information” including “online and print media” to identify these potentially unregistered agents.  DOJ stressed that this monitoring occurs “each day.”

Notably, the Department disclosed (for the first time, we believe) the frequency of the inquiry letters:

2015 6     (partial year)
2014 20
2013 15
2012 17
2011 16
2010 11
2009 1
2008 6
2007 17
2006 14
2005 4


Increased Audits

We previously disclosed that the FARA Unit had settled into a pattern of conducting about 15 audits of existing FARA registrants each year.  In these audits, the Department examines the books and records required by the statute to be maintained, and ensures that the entity’s public disclosures accurately reflect its activities.  The pattern of 15 audits a year has been sustained since 2008, following no reported audits from 2004 through 2007.  The letter to Sen. Grassley noted that the Department has conducted 101 audits since 2005.

Challenges to Enforcement

The letter noted that the FARA Unit focuses on promoting voluntary compliance with the law, rather than pursuing more aggressive enforcement proceedings.  First, the Department noted that “the FARA Unit does not possess Civil Investigative Demand authority,” despite submitting legislation twice to Congress that would have provided such authority to the Unit.  Additionally, even though the FARA statute offers civil injunctive authority and stiff criminal penalties, the Department has difficulty accessing these procedures “because of challenges in proving ‘direction and control’ by a foreign principal, broadly worded language in exemptions available under the statute, and the heavy burden of proving willfulness to impose a criminal penalty.”  The Department stated that it “would welcome the opportunity to work with Congress” to increase the enforcement tools related to FARA.

Inquiry Letters are Rebuttable

It is interesting to note the limited number of inquiry letters that resulted in new registrations.  The Department stated that 130 inquiry letters (over the past decade) resulted in 38 new registrations.  In the remainder of the cases, the recipients had no obligation to register or were subject to a continuing review by the Department.  Because the FARA Unit relies on open-source information and media reports to identify those who have potentially failed to register, we have found it common for inquiry letters to be based on incomplete or inaccurate information contained in press reports.  As indicated by the data released in the letter, targets of inquiry letters are often able to allay the Department’s concerns and demonstrate that they do not, in fact, have a registration obligation.  Individuals and organizations that operate close to the line with respect to FARA should take note and consider whether they are well positioned to answer questions from the Department, should they receive an inquiry letter.

Hawaii Pay-To-Play Law Survives Legal Challenge

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

Despite potential vulnerabilities, Hawaii’s pay-to-play law survived a significant challenge in the Ninth Circuit last week.  The matter involved an electrical-construction company, its CEO and a second individual who challenged several sections of Hawaii’s campaign finance law, including a requirement that the company register and report its activities once it crossed a $1,000 threshold, and the ban on government contractors making contributions to any candidate, candidate committee, non-candidate committee, or to “any other person for any political purpose or use.”  Yamada v. A-1 A-Lectrician, Inc. (No. 12-17845) (quoting HRS 11-335(a)).

The plaintiffs wisely chose not to challenge the pay-to-play provision as a whole.  Instead, they focused on the bar on contractors giving to lawmakers or legislative candidates who did not award or oversee contracts.  Despite this narrow assault on the part of the law with the weakest link to quid pro quo corruption, the three judge panel, consisting of Judges Kozinski, Fisher and Watford, unanimously upheld this part of the law, citing the fact it restricted contributions directly to candidates, the legislature’s interest in addressing a history of pay-to-play corruption in Hawaii, and the fact that even legislators who do not directly award or oversee contracts still play a role in appropriating funds for those contracts.  The opinion noted pointedly that it did not address the bar on state contractors giving to county and municipal officials.

While restrictions on independent political spending continue to fare poorly in post-Citizens United legal challenges, courts have been much more reluctant to strike down restrictions on government contractors giving to candidates and political committees.  Last week’s decision continues that trend, even when applied to contributions that many would see as on the outer edges of quid pro quo corruption.

“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.