California Poised to Adopt Campaign Contribution Limits for City and County Elections

By Andrew Garrahan on Posted in Campaign Finance, State Law

The California legislature passed a new law this week that, if signed by the Governor, would impose campaign contribution limits on city and county elections in the state.  Under current law, cities and counties may adopt their own contribution limits, but most have not.  According to the legislature, this has led to a situation where some local candidates raise 40% or more of their funds from a single contributor.

The new law sets the default contribution limit for city and county offices at the same amount as the limit for contributions to state legislative races, currently $4,700 per election (the limit is adjusted for inflation in odd-numbered years).  However, cities and counties may adopt different limits from this default.  The limits in cities and counties that have already adopted separate limits will not change.

The law also changes some of the rules applicable to all state and local candidates related to accepting contributions after the election, and the limits on contributions to and totals raised for officeholder accounts.

If signed by the Governor, the changes take effect January 1, 2021.

IRS Issues Notice of Proposed Rulemaking on Donor Disclosure Rules in Response to Court Ruling

By Matthew Shapanka and Susan Leahy on Posted in Tax

The Internal Revenue Service today announced proposed regulations to eliminate donor information disclosure requirements for certain nonprofits.  The proposed regulations provide “relief from requirements to report contributor names and addresses on annual returns filed by certain tax-exempt organizations, previously provided in Revenue Procedure 2018-38.”  Once the notice is published in the Federal Register, the IRS will accept comments on the proposal before finalizing the regulations.  The comments will be due 90 days after the date of publication, which is expected to be September 10, 2019.

The new proposed regulations respond to a Montana federal court ruling we reported on this summer that the IRS violated the Administrative Procedure Act when it issued Revenue Ruling 2018-38 without providing a notice-and-comment rulemaking procedure.  The Revenue Ruling had provided that tax-exempt organizations, other than Internal Revenue Code Section 501(c)(3) charities and Section 527 political organizations, were no longer required to report the names and addresses of contributors  to the IRS on Schedule B of the annual information return (Form 990).

Under the proposed regulations, tax-exempt organizations must continue to file Schedule B with an annual return but organizations, other than Section 501(c)(3) charities and Section 527 political organizations, would not include the names and addresses of contributors.  That information must be kept by the organization, in the event of an IRS request.  The proposed regulations would allow tax-exempt organizations to apply the regulations to any annual returns filed after today.

The IRS also issued Notice 2019-47, which exempts any tax-exempt organizations that failed to report donor names and addresses with their 2018 Form 990, based on Revenue Ruling 2018-38, from incurring penalties for following the IRS guidance.

Montana Federal Court Halts IRS Policy that Eliminated Reporting of Donor Information

By Matthew Shapanka and Susan Leahy on Posted in Tax

The Internal Revenue Service (IRS) must adhere to public notice-and-comment procedures before it can relieve certain tax-exempt organizations of the burden of reporting the names and addresses of their donors to the IRS, a Montana federal court ruled this week.  Last year’s Revenue Procedure 2018-38 provided that tax-exempt organizations, other than 501(c)(3) charities, were no longer required to report donor information to the IRS on the annual information return, Form 990.  The U.S. District Court for the District of Montana held that the revenue procedure violated the Administrative Procedure Act (APA) because the IRS promulgated the new rule without adhering to the notice-and-comment procedures required for “legislative rules.”

As we reported last summer the IRS policy change was a significant shift in donor disclosure rules for 501(c)(4) social welfare organizations, trade associations, and other tax-exempts.  For over 50 years, the IRS had required that these tax-exempt organizations report the names and addresses of certain donors on Form 990, Schedule B, but the change in policy eliminated that requirement, even though the information was previously redacted by the IRS and tax-exempt organizations before making a Form 990 public.  In announcing Revenue Procedure 2018-38, the IRS stated that the new policy did not prevent it from demanding donor information from tax-exempt organizations, which was still required to be collected and maintained by the organizations.

The federal court ruling invalidated Revenue Procedure 2018-38, effectively reinstating the requirement that tax-exempt organizations report their donors’ names and addresses to the IRS on Form 990, Schedule B.  After finding that the plaintiffs—Montana Governor Steve Bullock, the Montana Department of Revenue, and the state of New Jersey—had standing to challenge the policy change, the judge held that the policy was invalid.  Current Treasury regulations require tax-exempt organizations to “file an annual information return” that includes “[t]he total of the contributions, gifts, grants, and similar amounts received . . . and the names and addresses of all persons who contributed, bequeathed, or devised $5,000 or more . . .”  26 C.F.R. § 1.6033-2(a)(ii)(f).  The court concluded that the IRS abolished the requirement to report donor names and addresses, which “effectively amended” the regulation, without adhering to notice-and-comment procedures.

The IRS had argued in the case that Revenue Procedure 2018-38 merely concerned a matter of agency practice or procedure and was therefore an “interpretive rule” that does not require notice and comment.  However, the court rejected this contention, on the basis that an interpretive rule must be “consistent with the regulation that it seeks to interpret.”  Here, the court found, the new policy conflicted with the existing regulation, which affirmatively requires tax-exempts to report donor information.  Accordingly, the court found that the new procedure was a “legislative rule” that would have the force of law, not an interpretive rule, and must therefore undergo the public notice-and-comment procedure.

The court made clear that the plaintiffs did not challenge “the substance of the IRS’s decision or whether substantial-contributor information must be disclosed,” but rather that the IRS failed to follow the required notice-and-comment procedure.  Nothing in the court’s order would prevent the IRS from eliminating the requirement that tax-exempts report their donors.  If the ruling stands, then, per the court’s order, the “IRS must follow the proper notice and comment procedures pursuant to the APA if it seeks to adopt a similar rule,” and may not, as the court put it, “attempt to evade the time-consuming procedures of the APA.”

We will monitor closely whether the IRS will attempt to repeal the donor reporting requirement for certain tax-exempts through a public notice-and-comment procedure, or whether the agency will appeal.

New Jersey, Colorado Join Growing List of States Regulating “Dark Money”

By Andrew Garrahan on Posted in Campaign Finance, Corporate Political Spending Disclosure, Political Law, State Law

So-called “dark money” — political contributions and spending by groups that do not have to disclose their donors — continues to draw the attention of state legislators, with Colorado and New Jersey recently adopting laws that attempt to force some donor disclosure from the groups.  They join other states, including Washington and California, that have passed similar laws.  We expect this trend to continue.

Colorado

In Colorado, the “Clean Campaign Act of 2019” requires disclosure by corporations (including nonprofits), labor organizations, and groups making independent expenditures that contribute, donate, or transfer $10,000 or more per year that is earmarked for either:

  • making independent expenditures or electioneering communications or
  • for the recipient to make a contribution, donation, or transfer to pay for an independent expenditure or electioneering communication.

Nonprofits covered by the law must disclose the name of any person giving the organization $5,000 or more earmarked for making independent expenditures or electioneering communications in the 12 months before either the independent expenditure or electioneering communication is transmitted or the funds are transferred, whichever is earlier.  If, in turn, a disclosed donor meets the above criteria, then the disclosure must include the same information about the donor.  For-profit companies must disclose ownership and control information.

The law becomes effective August 2, 2019, unless a referendum petition is filed before then.  New regulations will likely clarify the meaning and impact of this law.  The law also makes changes to political advertisement disclosures; laws against foreign interference in state elections; independent expenditures; and the state’s “small-scale issue committee” rules.

New Jersey

Two law changes in New Jersey increase the disclosure required of some nonprofit organizations operating in the state.

First, a new campaign finance and lobbying disclosure law creates an expansive new category of political committee under state campaign finance law called an “independent expenditure committee,” and then requires disclosure by such committees.  An independent expenditure committee is defined as an entity:

  • organized under federal tax law as a 527 political organization or § 501(c)(4) social welfare organization;
  • that is not otherwise a political committee in the state; and
  • that raises or spends $3,000 or more in an attempt to influence an election or the passage or defeat of a public question, legislation, or regulation, without coordinating those activities with a candidate or party. “Coordinating” is defined in great detail.

An independent expenditure committee must file quarterly disclosures of all contributions it receives in excess of $10,000 and all expenditures it makes in excess of $3,000 for influencing elections or influencing a public question, legislation, or regulation.  The committee also must file a registration disclosing, among other information, the names of the individuals who control it.  Candidates and public officials may not establish or control an independent expenditure committee.

The law is scheduled to take effect October 15, 2019, but this may not be its final form — the governor and legislature have indicated a desire to refine the law, particularly the portions related to influencing legislation or regulations.  The law also makes other adjustments to political committee registration and other campaign finance rules.

Second, a rule change by the New Jersey Department of Consumer Affairs will affect IRC § 501(c)(4) organizations and other groups that must register as charitable organizations under the state’s charitable solicitation law.  Such groups are now required to disclose to the state every contributor who gave the organization $5,000 or more in the tax year.  While the information is not supposed to become public, unintended public disclosure due to lawsuits, leaks, and errors have occurred in other states with similar laws.  The U.S. Treasury Department eliminated a similar federal disclosure requirement, with respect to the names of donors, for 501(c)(4)s and some other organizations last year.

In Major Blow To Its Opponents, SEC Pay-to-Play Rule Survives D.C. Circuit Challenge

By Zachary G. Parks on Posted in Litigation, SEC Pay-to-Play

The U.S. Court of Appeals for the D.C. Circuit yesterday issued a long-awaited opinion upholding, on the merits, a recent update to the SEC’s pay-to-play rule.  While the case involved only a narrow piece of the rule, the decision’s logic is worded more broadly and could apply to the SEC rule as a whole, making future challenges to the rule much more difficult, at least in the D.C. Circuit.

For years, opponents of the SEC pay-to-play rule have tried to obtain a court ruling declaring the rule unlawful or unconstitutional.  Until now, those challenges had been stymied on procedural grounds.  Yesterday, these opponents to the rule narrowly overcame these procedural obstacles only to be a dealt a substantive, precedent-setting defeat.

Background: 25 Years of Challenges To Pay-to-Play Rules

To understand the significance of yesterday’s opinion, we need to travel back to 1994, when the Municipal Securities Rulemaking Board (“MSRB”) adopted a “pay-to-play” rule to reduce the role of political contributions in the awarding of municipal securities business.  The rule effectively restricted broker-dealers and those affiliated with them from making certain political contributions.  The rule was challenged shortly thereafter but, in an important case called Blount v. MRSB, the D.C. Circuit rejected a constitutional challenge to this rule on the merits.

Having survived a constitutional challenge, the MSRB rule became the predicate for the well-known pay-to-play rule for investment advisers, adopted by the Securities & Exchange Commission (“SEC”) in 2010.  That rule, among other things, prohibits investment advisers from providing paid investment advisory services to a government entity within two years of a political contribution to certain government officials by the adviser and certain “covered associates” of the adviser.

In 2015, the Financial Industry Regulatory Authority (“FINRA”) adopted a similar pay-to-play rule for FINRA members.  Pursuant to the rule, FINRA members may not “engage in distribution or solicitation activities for compensation with a government entity on behalf of an investment adviser that provides or is seeking to provide investment advisory services to such government entity within two years after a contribution to an official of the government entity is made by a covered member or a covered associate” of the FINRA member.  The rule also prohibits FINRA members and their covered associates from “solicit[ing] or coordinat[ing] any person or political action committee” to make any contributions to a covered official or certain political parties.  As a result of the rule, certain individuals affiliated with FINRA members are effectively barred from making or soliciting certain political contributions, even if their motive for making the contribution or solicitation was purely ideological and unrelated to their work for FINRA members.

The SEC approved the FINRA rule in 2016 and two state Republican parties then challenged that SEC order in the 11th Circuit.  The 11th Circuit transferred the case to the D.C. Circuit.  In a consequential decision, instead of dropping the case, the parties decided to pursue the challenge in the D.C. Circuit, notwithstanding the bad, on-point precedent in Blount.

The D.C. Circuit’s Decision

Yesterday’s decision, authored by Judge Ginsburg, reached the merits of the challenge for the first time.  The court found that the political parties had standing because they had submitted an affidavit from a regulated placement agent stating that he would have solicited friends and family to donate to the parties but for the rule.  This possible loss of future contributions was sufficient to establish injury-in-fact and standing, in the court’s view.  (Judge Sentelle dissented, arguing that any such injury was too speculative and that parties had therefore not established standing.)

Turning to the merits, the court dismissed the parties’ legal arguments one-by-one.  First, the court concluded that the rule fell “within the authority of the SEC to reduce distortion in financial markets.”  It concluded that, notwithstanding Congress’s choice to set contribution limits directly in the Federal Election Campaign Act (“FECA”), Congress did not “reserve[] to itself the authority to determine when a political contribution poses a risk of corruption”: “In our view, that the Congress has increased the contribution limits to keep pace with inflation and that it has prohibited certain groups from making contributions is not evidence of a ‘clear congressional intention’ to preclude the SEC from limiting campaign contributions that distort financial markets.” The court also held that FECA and the SEC pay-to-play rules “can peacefully coexist” notwithstanding an earlier (and arguably later-superseded) D.C. Circuit opinion invalidating a postal regulation that imposed political mail disclosure requirements beyond those imposed by FECA.

The court next rejected the claim that the pay-to-play rule was arbitrary and capricious in violation of the Administrative Procedure Act because the rule was a reasonably-drawn “prophylactic” attempt to reduce corruption or its appearance.  Further, because the court concluded that the rule was “closely drawn to serve a sufficiently important governmental interest” — preventing corruption and its appearance — the parties’ First Amendment arguments also failed.  In reaching this constitutional decision, the Court relied heavily on Blount, which, as noted above, upheld the very-similar MSRB rule against constitutional challenge.

 

Recognizing that the pay-to-play rules impose another federal limit on contributions to candidates on top of the per-candidate limits, the parties argued that the Supreme Court undermined Blount in the McCutcheon case, a case in which the Court struck down aggregate contribution limits, criticizing the then-existing overlap between per candidate and aggregate limits as a “prophylaxis-upon-prophylaxis approach” to reducing corruption and its appearance.  The D.C. Circuit rejected this argument, concluding that Blount was still good law.

It also rejected perhaps the best argument of petitioners — that the pay-to-play rule has a “disparate impact … on candidates running for the same seat,” “where one candidate is a covered official and the incumbent (or another candidate) is not.”  The court simply concluded that, even though there is a disparate impact, it is justified by the interest in preventing corruption and its appearance.  Curiously, the court described this “disparate effect” “as a feature, not a flaw” of the rule.

What Comes Next?

So, what’s next for pay-to-play rule challenges?  While opponents of the pay-to-play rule have faced a string of defeats, this merits decision is the worst loss yet for the rule’s opponents as it rejects their substantive arguments and sets a precedent from a highly-regarded appellate court, in an opinion supported by judges appointed by Presidents from both parties.

As next steps, the political party committees may seek en banc review or petition the Supreme Court to take the case, but the absence of a circuit split and the composition of the D.C. Circuit panel may make both options difficult.  A challenge to the rule could be pursued in another circuit, although the likelihood of success for such a challenge has decreased with yesterday’s D.C. Circuit opinion.  Opponents might instead try a more targeted attack on the rule.  Instead of seeking the wholesale abandonment of the rule, opponents might decide to bring a tailored challenge to the most constitutionality vulnerable parts of the rule, such as the extremely broad definitions of covered “officials” and “covered associates,” the low de minimis thresholds, or the ban on solicitations, which restricts direct political speech.

Regardless of what happens next, for opponents of the SEC rule, the hill got much steeper yesterday.

Florida FARA Case Leaves Troubling Precedent

By Brian D. Smith and Robert Kelner on Posted in Foreign Agents Registration Act, Litigation

On May 7, 2019, a federal District Court in the Southern District of Florida ruled that an American company, RM Broadcasting, must register as a foreign agent under the Foreign Agents Registration Act (“FARA”) for its agreement to broadcast radio programming from Rossiya Segodnya (meaning “Russia Today”), a Russian state-owned news agency.  Although the decision has received some attention because it is the latest victory in the Department of Justice’s efforts to force Russian state-owned media organizations and their agents to register under FARA, it has much broader implications.  The FARA legal analysis underpinning the Court’s decision has significant shortcomings, reflecting RM Broadcasting’s failure to assert and brief perhaps its strongest legal defenses.

RM Broadcasting buys and sells radio airtime, including from WZHF 1390 AM in Washington, D.C.  In late 2017, RM entered into a services agreement to provide for the broadcasting and transmission of Rossiya Segodnya’s radio programs over WZHF.  Notably, RM agreed to sell essentially the entire broadcast schedule on WZHF, except for hourly station identifications, and to transmit Rossiya Segodnya’s programming in whole and unaltered.  In June 2018, the FARA Unit informed RM that the government concluded the company was required to register under FARA.  RM disagreed and brought an action for a declaratory judgment that it was not required to register.

RM raised a number of arguments that the Court found inapplicable or unpersuasive.  For example, RM argued that its services agreement did not give rise to an agency relationship under common law principal-agent theories.  Unfortunately, there is very clear precedent that FARA’s “agent of a foreign principal” is a statutory test that is wholly distinct from common law agency.  RM also argued that it was not broadcasting radio programs because the FCC licensee – from which RM bought airtime – did the actual broadcasting.  FARA, however, covers actions of an agent taken “directly or indirectly,” and the agreement required RM to provide broadcasting services to Rossiya Segodnya, which it did.

From a FARA perspective, RM failed to raise directly perhaps its strongest argument: the commercial exemptions to FARA.  Although RM made arguments that alluded to the commercial exemptions, such as stating that it simply buys and sells radio airtime in “an arms-length commercial business transaction,” it raised these issues in the context of its alleged agency relationship with Rossiya Segodnya, rather than as an exemption to registration.  RM never specifically cited and explained the commercial exemptions to FARA, their history and purpose, or the reasons that the exemptions could preclude registration.  The Department of Justice, which had no incentive to help RM strengthen its case, also failed to address the commercial exemptions in its briefs.  As a result, the Court’s opinion did not address these critically important issues.

FARA legal analysis requires consideration of three aspects of the law.  First, whether there is a relationship between a purported agent in the United States and a foreign principal outside the United States.  Second, whether the activities of the agent are within four categories of activities covered by the statute.  Finally, third, whether the activities are covered by an exemption that eliminates the registration requirement.  It is essential to consider all three components.  Additionally, because the triggering language of FARA is particularly broad, it is critical to consider the exemptions.

Unfortunately, because neither RM nor the government addressed the commercial exemptions to FARA, neither did the Court.  The Court’s analysis in the May 7 decision covers only whether RM has a relationship with Rossiya Segodnya and whether its activities are covered by one of the four statutory triggering activities that implicate FARA.  On these points, the Court concluded that the services agreement made RM an agent of a foreign principal, and concluded that RM’s activities were within the literal scope of the statutory term “publicity agent” under FARA.  But the Court’s analysis stopped there and did not consider whether the activities were exempt under a commercial exemption.

There are two commercial exemptions to FARA.  First, the statutory commercial exemption provides that private commercial transactions “in furtherance of the bona fide trade or commerce” of the foreign entity are exempt from FARA.  Trade or commerce, in turn, is defined to include the purchase or sale of “services . . . of any kind.”  This exemption applies to the “publicity agent” trigger, but it generally does not apply to political activities, such as those intended to influence the U.S. government or public on a matter of policy.  Second, the regulatory commercial exemption, which does apply to political activities, exempts activities that are “directly in furtherance of the bona fide commercial . . . operations of the foreign corporation.”

There seems very little doubt that Rossiya Segodnya’s purchase of RM’s airtime falls squarely within the scope of purchasing “services . . . of any kind,” and Rossiya Segodnya’s decision to purchase airtime and extend its broadcast reach seems, at least in part, to serve the company’s commercial operations.  To be sure, there are limitations on the commercial exemptions that may have been relevant in this case, including limitations when the commercial activities are directed by a foreign government or “directly promote” a foreign government’s political interests.  These issues, however, were entirely unexamined by the Court, and the Department was not required to show that Russian state interests or control were behind Rossiya Segodnya’s commercial activities.

As a result, the Court’s decision stands as a troubling precedent because it held, without qualification, that entering into a contract to sell services that fell within the FARA triggers required registration.  The FARA triggers are exceedingly broad and, particularly when applied without the accompanying exemptions, could require registration for a very wide range of activities.  The Court itself seems to have recognized these implications, noting that it “must apply the statutory language as written; it is not for the Court to rewrite the statute.”

The “publicity agent” trigger at issue in the RM case covers anyone who engages in the “publication [of] matter of any kind,” including books, periodicals, newspapers, broadcasts, movies, and more.  Without the commercial exemptions, this trigger could incorrectly appear to require registration for a wide variety of commercial activities that are completely outside the scope of the statute.  Everyday examples include a local movie theater contracting to show a foreign film, a publishing house contracting with a foreign author to publish the author’s novel, and a Madison Avenue advertising agency creating an ad campaign for a foreign car manufacturer.  Congress never intended for those activities to be captured by FARA, and that is made clear in the commercial exemptions and various other aspects of the legislative and regulatory history of the law.  The Florida Court’s FARA analysis unfortunately, and incorrectly, suggests otherwise.

As the Department of Justice pursues its new enforcement strategy for FARA, which Assistant Attorney General John Demers announced at a recent American Bar Association meeting, the specific scope and application of the statute will become even more important.  It might be easy to suggest that the Department would not pursue registration against the movie theater, publishing house, or advertising agency described above.  But there was also a time when the Department did not pursue registration of U.S. radio broadcasters doing business with foreign, state-owned media organizations.  Businesses contemplating commercial transactions with foreign companies should not have to rely on prosecutorial discretion when determining whether a given transaction would make a company an agent of a foreign principal under FARA.

RM, which did not receive support in the District Court from any interveners or amici, has publicly indicated that it does not have the resources to pursue an appeal.  That’s regrettable.  There is little case law on FARA, and the RM decision is a flawed and problematic addition to the very limited precedents.

Appropriations Committee Directs New FARA Guidance on Commercial Exemption

By Brian D. Smith on Posted in Foreign Agents Registration Act

The House Appropriations Committee has quietly directed the Department of Justice to issue new guidance on the commercial exemption to the Foreign Agents Registration Act (“FARA”) with respect to state-owned companies.  The directive came in a Committee report accompanying legislation that provides funding for the Department for fiscal year 2020.  The report was approved by the Committee on May 22, 2019.

In the report, the Committee said it is “concerned,” that “the Department’s current guidance regarding the FARA commercial exception” has permitted state-owned companies “to dodge FARA requirements” even when the companies “take actions that directly promote the political and policy interests of their government owners.”

The Committee therefore “direct[ed]” the Department to issue updated commercial exemption guidance that would “requir[e] U.S. agents of wholly state-owned enterprises to register under FARA in those circumstances where the lobbying and public-relations efforts of such foreign firms promote not only the commercial interest of the entity, but also the foreign government’s stated political and policy interests.”

It is not clear which current FARA guidance the Committee found deficient.  Both commercial exemptions—one statutory and one regulatory—contain limitations that appear to go directly to the issues cited by the Committee.  The regulations implementing both exemptions specifically provide that the exemptions can only be used if the “activities do not directly promote the public or political interests” of a foreign government.

The regulations have additional provisions related to state-owned enterprises, including provisions that explicitly permit such companies to use the exemptions.  The regulation for the statutory commercial exemption goes further and permits its application to companies “controlled” by a foreign government.  The regulatory commercial exemption, in contrast, specifically excludes application to activities directed by a foreign government.

It will be interesting to see whether the Department’s FARA Unit issues informal guidance in response to the Committee’s requirement, or whether it pursues formal rulemaking to revise the provisions noted above (or, perhaps, it does nothing because the directive is contained in report language, rather than a statute).  Additionally, although the new guidance is required to address only wholly state-owned companies, this action opens the commercial exemption to potentially broader action by the Department.  We will watch closely for developments.

Congressional Investigations and the Rules of the 116th Congress

By Robert Kelner, Brian D. Smith and Muftiah M. McCartin on Posted in Congressional Investigations

With Congress heavily engaged in launching and pursuing new congressional investigations, particularly since the Democratic takeover of the House of Representatives, many of our clients have questions regarding the rules that govern congressional investigations. While many aspects of congressional investigations are not subject to any rules at all, the House, Senate, and their respective committees do have some rules governing subpoenas, depositions, and confidentiality.

Yesterday, Covington issued a client advisory that provides a detailed catalog of the rules applicable to congressional investigations, reflecting changes that have been adopted since the new Congress organized itself in January.

Congress Amends LDA Forms to Require Reporting of Lobbyist Convictions

By Robert Kelner, Robert Lenhard, Zachary G. Parks, Derek Lawlor and Brady Bender on Posted in Lobbying Compliance

The recent passage of the Justice Against Corruption on K Street Act of 2018 (“JACK Act” or the “Act”) imposes new requirements on those registering and filing reports under the Lobbying Disclosure Act (“LDA”). The Act amends the LDA to require that LDA registrants disclose listed lobbyists’ convictions for criminal offenses involving bribery, extortion, embezzlement, illegal kickbacks, tax evasion, fraud, conflicts of interest, making a false statement, perjury, or money laundering.

Background

The JACK Act was inspired by Jack Abramoff, whose alleged corrupt lobbying activities placed him at the center of a political scandal that led to the conviction of more than twenty lobbyists, congressional aides, and politicians. Between 2006 and 2008, Abramoff himself was convicted of crimes including fraud, tax evasion, conspiracy to bribe public officials, and bribery of public officials. After serving four years in federal prison, Abramoff emerged as a purported political reformer, only to begin lobbying again.

The Law

Congress passed the JACK Act in response to Mr. Abramoff’s post-prison lobbying activities, in order to shed light on registered lobbyists with prior convictions. The Act specifically amends the LDA’s registration (form LD-1) and quarterly reporting (form LD-2) requirements to require registrants to report the date of conviction and a description of the offense “for any listed lobbyist who was convicted in a Federal or State court of an offense involving bribery, extortion, embezzlement, an illegal kickback, tax evasion, fraud, a conflict of interest, making a false statement, perjury, or money laundering.” Those who violate the JACK Act’s requirements are subject to the civil and criminal penalty provisions of the LDA. Those provisions establish civil penalties of up to $200,000 in fines for lack of compliance with LDA requirements or failure to appropriately remedy defective filings following notification. On the criminal side, those who “knowingly and corruptly” fail to comply with LDA requirements may be fined, imprisoned for up to five years, or both.

Going Forward

Amendments to Q4 2018 reports. The JACK Act took effect on January 3, 2019. As a result, any fourth quarter lobbying activity reports filed after January 3 are thus subject to its requirements.  Although guidance released by the Clerk of the House of Representatives is ambiguous as to whether all registrants are required to amend Q4 2018 reports if they were filed on or after January 3, the Office of the Secretary of the Senate has confirmed to Covington that registrants with no reportable convictions need not amend registrations or quarterly reports filed on or after January 3. However, registrants who have relevant convictions to report must file an amendment to their Q4 2018 reports, if those reports were filed on or after January 3. Guidance from the House Office of the Clerk provides additional information about how to disclose required information.

Future reporting. Moving forward, the JACK Act requires LDA registrants to take additional steps before filing lobbying disclosures. LD-1 and LD-2 forms now ask registrants to indicate whether or not lobbyists have reportable convictions, on lines 15 and 29, respectively. The LDA online filing system has been updated accordingly. To ensure filings are accurate, registrants should therefore conduct internal due diligence to identify any registered lobbyists’ reportable offenses. This diligence process could take a variety of forms, but it should at a minimum capture information concerning newly registered lobbyists and should provide a mechanism requiring all lobbyists promptly to inform those responsible for filing the registrant’s forms LD-1 and LD-2 of any relevant convictions. Because a lobbyist’s reportable convictions must be disclosed publicly on all future registrations or quarterly reports listing that lobbyist, registrants should be prepared for the reputational concerns and public scrutiny that may arise from employing or retaining a lobbyist with a reportable criminal history.

If you have any questions concerning compliance with the JACK Act, please contact a member of Covington’s Election and Political Law practice group.

New Department of Justice FARA Opinion May Narrow the “LDA Exemption”

By Robert Kelner and Brian D. Smith on Posted in Foreign Agents Registration Act

The Department of Justice’s FARA Unit appears to have signaled a significant narrowing in the scope of a major FARA exemption that is especially important to private sector companies, including U.S. subsidiaries of foreign corporations.  The apparent narrowing of FARA’s exemption for those who register under the Lobbying Disclosure Act (“LDA”) appeared in an advisory opinion issued last week that has not yet been released publicly.

When Congress enacted the Lobbying Disclosure Act in 1995, it also created a FARA exemption for private sector lobbying activities that are registered and disclosed under the LDA.  Under the LDA exemption, persons who would otherwise be required to register as foreign agents can register instead as lobbyists, under the less onerous and less stigmatized LDA.  The exemption, however, is limited.  First, it is not available for an agent working for a foreign government or political party.  Second, a long-standing Department of Justice regulation precludes the use of the exemption if a foreign government or political party is “the principal beneficiary” of the activities, regardless of the whether a government or political party is the actual client.

Although no court has ruled on the meaning of “the principal beneficiary,” FARA practitioners generally have relied upon its plain meaning:  The LDA exemption is not available if a foreign government or political party is the main beneficiary of the activities.  Conversely, the exemption is available if the main beneficiary is a foreign corporation or other foreign non-governmental organization.  For example, a foreign corporation might lobby on a business issue that would increase its revenue and thus its home country’s tax base.  The increased tax base would certainly benefit the foreign country, but “the principal beneficiary” of the lobbying is the company, not the government.  The government’s benefit is secondary and incidental to the corporate activities.

The new advisory opinion, however, signaled a significantly different reading of the exemption.  In an opinion issued by the FARA Unit’s new leadership, the Department found that the company seeking the opinion did not have to register under FARA because it met the terms of the LDA exemption.  But in a John Marshall-like move, the Department took the opportunity to insert a footnote, within the otherwise favorable opinion, that was not necessary to its decision (what lawyers call “dicta”).  “While not the case here,” the footnote read, “there are situations in which a foreign government or political party may not be the principal beneficiary, but a principal beneficiary of lobbying activities in which the LDA exemption would not apply.”  (Emphasis in the original.)

The FARA Unit’s footnote appears to suggest that the question is not whether a private company, on the one hand, or the foreign government, on the other hand, is the main beneficiary of the activities, but rather whether a foreign government could be said to be among several entities that all somehow were a principal beneficiary.  Notably, the text of the footnote stands in stark contrast to the Department’s regulations, which limit the LDA exemption when “a foreign government or foreign political party is the principal beneficiary.  Simply put, the regulation says “the,” not “a,” principal beneficiary.

As we have noted in prior client advisories, there are many situations in which a foreign corporation has a strong and legitimate corporate interest in supporting U.S. policy positions that bring some parallel and additional benefit to a foreign government.  The Department of Justice regulation specifying that the LDA exemption will apply unless a foreign government is “the principal beneficiary” has thus acted as a critical threshold for distinguishing those cases where FARA registration is not required, even though a foreign government might have some interest in the matter, and cases where registration is required because the activities primarily advance a governmental interest.

We wonder whether the footnote indicates that the Department is contemplating a new FARA rulemaking to replace “the principal beneficiary” with “a principal beneficiary.”  If it does not, the new interpretation could be open to court challenge because it conflicts with the text of the regulation.  Although courts often defer to an agency’s interpretation of its regulations under the agency-friendly “Auer deference” doctrine, courts will not defer to an agency interpretation that is “plainly erroneous or inconsistent with the regulation.”  Auer v. Robbins, 519 U.S. 457, 461 (1997).  Reading “the” to mean “a” seems both plainly erroneous and inconsistent with the regulation as it exists today.  A notice-and-comment rulemaking would enable the Department to weigh the consequences of changing the regulation, with input from the regulated community.  In the meantime, regulated persons will be left to guess at the standard the FARA Unit intends to apply, or to seek additional advisory opinions to see whether the footnote in last week’s opinion is more than mere dicta.

The advisory opinion will be posted on the Department’s website in due course, in redacted form, per the Department’s laudable new policy of publishing its FARA advisory opinions, and we will post a link here once it is publicly released.

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