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Inside Political Law

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

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.

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.