FEC to Reconsider Political Involvement by U.S. Subsidiaries of Foreign Corporations on Tuesday

Foreign nationals, both individuals and corporations, have long been barred from making contributions in federal, state or local elections in the United States. The statutory prohibition includes contributions made “directly” or “indirectly,” bars the solicitation as well as the making of contributions, and since 2002, includes a ban on expenditures, independent expenditures, or electioneering communications by foreign nationals.  Penalties are stiff, including incarceration for a criminal violation.

But how should the law treat U.S. corporations that are subsidiaries of a foreign corporate parent? Are they “American” if run by U.S. citizens, incorporated in the United States, and U.S. citizens make all funding and spending decisions?  The FEC first answered this question in a  1978 advisory opinion and, in essence concluded that if U.S. citizens control the decisions about contributions and the operation of the PAC, using corporate funds raised from U.S. operations, and the PAC contains only funds from lawful U.S. donors, the ban on “indirect” contributions by a foreign national does not apply, even if the U.S. subsidiary is wholly owned by a foreign parent company.

This view has always had its dissenters, but for decades this has been the view of a majority at the FEC. However, since 2012, at least three FEC Commissioners have argued that this view of the law is incorrect, and that the issues should be reconsidered and/or reversed so that U.S. subsidiaries of foreign corporations would be barred from making contributions or expenditures in federal, state or local elections, including being barred from operating a corporate PAC.  This has generated 3-3 deadlocks in a number of advisory  opinions. The FEC will revisit the issue Tuesday, as Commissioner Ravel has placed the issue on the agenda for the FEC’s next meeting, seeking to remove the exemption for U.S. subsidiaries run by U.S. nationals.

There seem to be three principal arguments in favor of a change.

  • The tools presently available to enforce the law are too weak to address the threat, and only an outright ban is sufficient to stop foreign involvement.
  • Even when foreign nationals have no direct role in contribution decisions, the foreign ownership alters the thinking of the Americans who run the U.S. subsidiary, and their loyalties cannot help but shift to the interests of their foreign owners, and only a total ban can prevent this indirect influence.
  • Citizens United led to an unwarranted expansion of corporate political power, and this is one way to reign it in.

In a statement released in advance of the meeting, Commissioner Ravel seems to be advancing the first of these arguments, citing a recent and successful Justice Department prosecution of a foreign national who funneled contributions into a state election, and a recent news report alleging that foreign nationals directly controlled a U.S. corporation’s decision to give to a super PAC. Some will take this as a sign the current regime is working, with violations being uncovered and prosecuted.

The issue is unlikely to be resolved at the FEC on Tuesday, but will remain a hot button topic in campaign finance, and should be on everyone’s radar screen if Congress takes up the issue of campaign finance reform in the next Congress.

OGE Updates Rules Governing Recruiting of Federal Employees to Private Sector Jobs

Companies are increasingly hiring out of the federal workforce, only to find that their new hires are restricted by “revolving door” rules that prohibit their participation in certain matters – sometimes for a limited time, sometimes permanently. New rules issued recently by the U.S. Office of Government Ethics (“OGE”) serve as a reminder that, even before hiring a federal employee, a company may find itself entangled in federal ethics rules that regulate the job negotiation process. This advisory outlines the newly issued rules that include substantive additions and changes that will affect employers.

The Senate’s District Court Win in the Backpage Subpoena Fight Could Have Significant Implications for Congressional Investigations

Last week, the U.S. District Court for the District of Columbia ruled in favor of the Senate Permanent Subcommittee on Investigations in a rare case that has the potential to contribute significantly to the case law concerning congressional investigations. It is uncommon for a federal court to have an opportunity to rule on a congressional subpoena – congressional subpoenas generally cannot be challenged in court unless the recipient defies Congress and Congress votes to hold the recipient in contempt.  Most private sector companies simply cannot endure the bad publicity and reputational damage that accompanies a congressional contempt proceeding.  Backpage, an online forum for classified advertisements that includes advertisements for adult services, and its CEO Carl Ferrer apparently are not swayed by such concerns.

For more than a year, the Senate Permanent Subcommittee on Investigations has been conducting an investigation of Backpage as part of an inquiry into human trafficking. According to the National Center for Missing and Exploited Children, advertisements on Backpage are associated with “a majority of the child sex trafficking cases being reported” to the organization.

After conducting an interview of Backpage’s general counsel in June 2015, the Subcommittee subpoenaed Backpage for documents in July 2015. Almost immediately, Backpage objected to the subpoena on First Amendment grounds.  After further back and forth, the Subcommittee subpoenaed Backpage’s CEO Carl Ferrer for a narrower set of documents and ordered him to appear at a hearing on November 19, 2015.  Backpage produced a limited set of documents to the Subcommittee, but it continued to object to a further response on First Amendment grounds.  Ferrer did not appear at the November hearing, and the Subcommittee held a hearing with an empty chair before it – another rarity in congressional investigations.  The Subcommittee approved a resolution to enforce its subpoena, and the resolution was adopted by the full Senate in March 2016.

In its ruling last week, the District Court found for the Subcommittee, rejecting four defenses raised by Ferrer.

First, the court addressed Ferrer’s claim that it lacked jurisdiction to hear the case because the Senate sought to enforce only three of the eight requests contained in the subpoena. Ferrer’s argument was based on a unique aspect of the statute authorizing the Senate to enforce its subpoena in court – the statute states that the court may not “modify” the subpoena.  In Ferrer’s view, selective enforcement equates to modification.  The court disagreed, stating that the statute does not constrain the Subcommittee’s ability to seek partial enforcement of its subpoenas.  Therefore, the court was enforcing, unmodified, those parts of the subpoena brought before it by the Senate.

Second, the court rejected Ferrer’s argument that the subpoena was not tied to a legitimate legislative purpose. Under Supreme Court precedents, Congress has the power to investigate any subject on which it can legislate.  Given that Congress can legislate on sex trafficking and the internet, and Congress has previously legislated on internet publishers’ immunity for statements of third parties, the court easily concluded that the subpoena was related to a legitimate legislative purpose.

Third, the court examined Ferrer’s First Amendment defenses and concluded that they did not protect him from complying with the subpoena. Ferrer claimed that the Subcommittee’s subpoena encroached on his First Amendment rights, sought to punish disfavored speech, and chilled his exercise of his First Amendment rights.  The court was unconvinced.  The court was most critical of Ferrer’s attempted use of the First Amendment to shield Backpage from even searching for materials in response to the subpoena, determining which of the documents reflect speech protected by the First Amendment, and explaining the specific manner in which the subpoena would intrude on First Amendment rights.  The court concluded that Ferrer’s position that “any responsive document that has not been produced contains constitutionally-protected information that no governmental need could possibly overcome” is “untenable and without legal support.”

Finally, the court rejected Ferrer’s claim that the investigation violated his due process rights by being ill-defined in scope and shifting in focus. The court described these arguments as “undeveloped,” “devoid of legal support,” and “unclear.”

The court ordered Ferrer to comply with the Subcommittee’s subpoena within ten days.

Instead of producing the subpoenaed documents, this week, Ferrer appealed the District Court’s decision to the Court of Appeals for the District of Columbia Circuit, and simultaneously sought to postpone his compliance with the subpoena while the appeal is pending. In his motion to stay compliance with the subpoena, Ferrer focused on his First Amendment arguments:  The District Court “misapprehends the nature of Mr. Ferrer’s First Amendment claims and undervalued the constitutional interests at stake,” the filing said.

Depending on the outcome of the appeal, this case may contribute significantly to the case law concerning congressional investigations and the enforceability of congressional subpoenas.

Litigation to enforce a congressional subpoena against a private sector company or individual is rare. According to the Senate Legal Counsel’s filings in the case, the Senate has sought to enforce a subpoena under its civil enforcement authority only five times, with the last enforcement proceeding occurring in 1994.  This case provides an opportunity for the appellate court to consider aspects of the statute that are rarely addressed in litigation, such as Ferrer’s argument regarding the statute’s limitation on courts modifying a subpoena.

Practitioners and scholars generally consider jurisdictional challenges to congressional investigations to be foreclosed by the modern scope of Congress’s legislative authority. Because Congress’s legislative reach is so broad, and its investigative authority is coextensive with its legislative authority, Congress can investigate practically anything, the reasoning goes.  The appellate court may have an opportunity to address these issues if Ferrer continues to argue that the subpoena is not tied to a legitimate legislative purpose.

Finally, and potentially most significant, it appears that the D.C. Circuit will have an opportunity to address the limitations that constitutional protections place on congressional investigations. Although Congress takes a dim view of many privileges and protections, including the attorney-client privilege and executive privilege, Congress readily acknowledges that it is bound by constitutional limitations such as the First Amendment.  There is very little recent case law addressing constitutional protections in the context of congressional investigations, even as the Supreme Court’s views on the First Amendment and other constitutional rights have evolved over recent decades.

House Clerk’s Office Apparently Sends Out Late Lobbyist Report Notices In Error

Earlier this afternoon, the House Clerk’s Office sent out emails to a number of registered federal lobbyists and lobbyist organizations alerting them to a missing 2016 Mid-Year LD-203 contribution report (due on August 1, 2016).  It appears that this email was sent in error to a batch of registrants who properly filed their reports on time.  We have confirmed with the House Clerk’s office that they are aware of this error.

It is unclear how many of these erroneous LD-203 late notice emails were sent, but if you received one, you should be on the lookout for a clarifying email from the Clerk’s Office.  If you call to try to confirm your filings, you may face long hold times.

IRS Steps into Fray on Political Activities

The Internal Revenue Service (IRS) recently issued two private letter rulings (PLRs) that may be interesting for tax-exempt organizations that engage in political activity.

In the first ruling, the IRS held that a company could not deduct payments made to charity under a PAC matching contribution program as an “ordinary and necessary business expense.”  While the Internal Revenue Code already prohibits income tax deductions for political contributions, the company requested a PLR holding that the charitable contributions are deductible business expenses.  In rejecting the deduction, the PLR reasoned that “the contributions to [the] PAC and [the company’s] matching contributions are inextricably linked,” because the company would not have donated to the charity but for the employees’ contributions to the PAC.   Plus, the letter held, the matching program is intended to incentivize contributions to the PAC,  thus the charitable contributions are clearly “in connection with a political campaign” and not deductible.

The PLR comes on the heels of the FEC’s surprise approval of 2-to-1 corporate charitable PAC match programs this past January and provides some clarity into the tax implications of such matching programs. While campaign finance law now clearly allows corporations to grow their PACs by sponsoring charitable matching programs to incentivize giving, these programs should be viewed with eyes wide open: charitable contributions that help pad a corporate PAC’s coffers are not deductible business expenses.

In a separate ruling, the IRS issued a PLR late last year formally rejecting an organization’s qualification as a 501(c)(4) social welfare organization because it failed to adequately explain what social welfare activities it would undertake.  The organization  applied for (c)(4) status, claiming that its sole activity in the prior year was to hold a candidate forum and that it had no future activities planned.  The organization also acknowledged that it planned to spend money to influence elections, although that was not its primary purpose. The organization repeatedly ignored IRS requests for additional information to verify the social welfare activities of the organization.

Unlike 501(c)(3) charitable organizations, 501(c)(4) organizations may conduct some political activity as long as it is not the organization’s primary purpose.  501(c)(4)s are a common vehicle for lobbying activity, in the form of direct and grassroots advocacy, and some political expenditures; however, the PLR is an important reminder that a (c)(4) must engage in some social welfare activities, which do not include intervention in campaigns for or against candidates.

The PLR also emphasizes the importance of prospectively explaining to the IRS the exempt activities the organization plans to undertake.  While the letter acknowledged that “candidate forums” and similar activities “may meet the definition of social welfare by furthering voter education purposes,” it still faulted the organization for failing to describe its “planned activities for the future.”

Finally, the letter serves as a cautionary tale for (c)(4)s that failure to respond to questions by the IRS could result in the denial of tax-exempt status.  We note that the organization had the option to “self-declare” tax-exempt status as a 501(c)(4) organization rather than filing an application with the IRS.

501(c)(4) Social Welfare Organizations Must Provide Notice to the IRS

In December 2015, we informed readers of the new requirement for 501(c)(4) social welfare organizations to notify the IRS upon formation. Enforcement of the requirement was delayed until the IRS was able to issue an appropriate form. The IRS recently announced that 501(c)(4) organizations may now register on the IRS website.  We respond to common questions about the procedure below.

What form is used to provide notice?

Form 8976, Notice of Intent to Operate under Section 501(c)(4).

What 501(c)(4) organizations don’t have to submit Form 8976?

501(c)(4) organizations that were organized on or before July 8, 2016 that have either (i) applied for a determination letter by filing IRS Form 1024, Application for Recognition of Exemption under Section 501(a); or (ii) filed at least one annual information return or notice (Form 990, Form 990-EZ, or 990-N) are not required to file Form 8976.

When is Form 8976 due?

September 6, 2016 for those organizations formed on or before July 8, 2016 which have not either (i) applied for a determination letter by filing IRS Form 1024, ; or (ii) filed at least one annual information return or notice (Form 990, Form  990-EZ, or 990-N).

For organizations formed after July 8, 2016, the due date is 60 days after the date of organization, e.g., date of incorporation.

Are there any penalties if the Form 8976 is submitted late?

Yes, a penalty of $20.00 per day (not to exceed $5,000) may be imposed on the organization and, in certain cases, on the person responsible for the failure to file.

How does one submit Form 8976?

Forms 8976 must be submitted online at the IRS registration services website. Paper submissions will not be accepted. The filer must first obtain a password to use the site before filing Form 8976.

Is there a fee to file?

$50.00 for 2016. Pay at www.pay.gov.

What information do I have to provide about the organization?

  • Name of the organization;
  • Address of the organization;
  • Employer Identification Number (EIN) of the organization;
  • Date of formation;
  • State or other jurisdiction of organization;
  • Statement that the purpose of the organization is to operate as either a (i) social welfare organization/civic league, or (ii) local association of employees;
  • Month the organization’s annual accounting period ends; and
  • Attestation that the information provided is correct and the individual submitting Form 8976 is authorized to submit it on behalf of the organization.

Will I receive an acknowledgment from the IRS?

After the bank confirms payment of the fee and the IRS validates the organization’s information and eligibility, the organization will receive an acknowledgment notice within 60 days.

Is Form 8976 available to the public?

No, Form 8976 is not open to public inspection.

Does the receipt of an acknowledgment mean that the IRS has determined that the organization qualifies as tax-exempt?

No, an organization that files Form 8976 is merely notifying the IRS that the organization exists. To obtain a determination letter from the IRS the organization must file IRS Form 1024, Application for Recognition of Exemption under Section 501(a).

May an organization that files Form 8976 operate as a 501(c)(4) organization without filing an application for exemption (Form 1024)?

Yes, section 501(c)(4) organizations may “self-declare” tax-exempt status but must annually file the applicable information return or notice (Form 990, Form 990-EZ, or 990-N).

If a 501(c)(4) organization files Form 8976, must it also file Form 990, Form 990-EZ, or 990-N each year?

Yes.

The Supreme Court Redraws the Lines for Corruption Prosecutions

The Ferrari carrying former Virginia Governor Bob McDonnell appears to have made a U-turn this week on its way to the federal penitentiary.  Covington released today a Client Alert on the Supreme Court’s decision in McDonnell v. United States, a decision which vacated Governor McDonnell’s conviction and redraws the lines for corruption prosecutions.   The Court held a public official does not violate federal law simply by taking a benefit in exchange for arranging a meeting with or providing access to public officials and employees, or asking those employees to consider an issue.  Instead, the official must take action or make a decision, or agree to do so, on a specific and focused matter that involves a  formal exercise of government power, including advising or pressuring others to take an action or make a decision.  But, as described in the Client Alert, the consequences of McDonnell should not be exaggerated.

Coercing Contributions at Work: The FEC’s Latest Decision

On Friday, three Federal Election Commission (FEC) Commissioners provided a clear description of their understanding of the facts and law that led them to oppose opening an investigation into whether Murray Energy coerced its employees into making political contributions. Statement of Reasons of Chairman Petersen and Commissioners Hunter and Goodman, FEC MUR 6661.  While clarity in the law is always to be commended, the standard they use to define when a contribution is coerced is narrow and will certainly allow conduct that many employers now reject as excessive.  As with two earlier decisions in which three Commissioners voted not to pursue enforcement actions against employers who compelled employees to attend a candidate’s rally or to waive signs or make calls supporting a candidate, it is clear that the FEC will not be an effective barrier to employers pressuring employees to engage in many kinds of political activity.  As Lindsay Burke and I noted in a recent article in Corporate Counsel Magazine, there remain state employment law issues to consider, but the signal from this recent FEC case is unmistakable.

The FEC needs the affirmative vote of four Commissioners to proceed with an investigation or enforcement action, so the rules as articulated by these three Commissioners will define enforcement going forward. They are clear on the following points.

  • So long as a standard FEC disclaimer (that little box of words at the bottom of the page in a solicitation) is present, only clear evidence of an employer’s specific acts or statements constituting a threat of physical force, job discrimination or financial reprisal is prohibited. There must be “demonstrable, objective evidence of threats or reprisals” for a violation to occur. So in all but the most extreme cases, the presence of a disclaimer can be a “get-out-of-jail-free” card.
  • The subjective view of the employee or even of the FEC that a solicitation is potentially coercive is not determinative. The three Commissioners find it “natural” for an employee to feel “uncomfortable” when solicited by a supervisor, so feeling pressure to give is not evidence of coercion. Instead, the employer must make an explicit threat or take retaliatory action.
  • The statute only limits coercion in soliciting contributions to the PAC. The three Commissioners appear to adopt the view that the FEC’s rules do not protect an employee from being coerced into giving directly to a candidate or political party.

With this standard in place, the three Commissioners found the following conduct did not meet the test for beginning an investigation into whether there was “demonstrable, objective evidence of a threat or reprisal.”

  • An employer asking employees for a show of hands of those who were contributing to the PAC.
  • Informing employees that the response to a prior solicitation was “poor” and “if we do not win this election,” the industry will be eliminated “and so will your job.”
  • Informing employees that their supervisor or the CEO is “insulted” by every salaried employee who does not contribute.
  • Multiple solicitations targeting employees who did not give when asked the first time.
  • A general sense among employees that contributions are required for successful advancement at the company.

There is no doubt the standard as articulated, and the application of it to the facts here will be seen as moving the line significantly for those employers who ask: “Will I get in trouble with the FEC for doing this?” Many employers choose to stay far from the line for organizational reasons, as well as because they believe the law requires it.  In addition, some state laws protect employees from coerced political activities and the Justice Department retains concurrent jurisdiction to pursue criminal violations of the campaign finance laws.  But the statement issued Friday makes clear that, for many companies, a decision to be far more aggressive in requesting contributions from employees will not be second guessed at the FEC, so long as the appropriate disclaimer appears on the bottom of the solicitation.

“When One Door Closes . . .”: McCain-Feingold Opens “Soft Money” Loophole In the States

A recent settlement between the Massachusetts Office of Campaign and Political Finance (OCPF) and Massachusetts Republican Party may highlight an emerging trend: state parties using federal preemption to avoid strict state campaign finance laws.  At issue was whether the Massachusetts Republican Party could use funds from its federal campaign account to pay for staff and overhead expenses of Party employees who were working largely or exclusively on state races.  Massachusetts law has tighter contribution limits than federal law, so for state races, federal funds include money that would be impermissible under state law.  In the end, Massachusetts regulators acquiesced to the Party’s use of the less regulated federal funds, even when working overwhelmingly on state races.  Only when party staff was working exclusively on state races did the OCPF and Party agree that state funds had to be used.  This result is similar to an issue we have written about in Connecticut, where litigation is ongoing over a state party’s use of federal funds that did not comply with the state pay-to-play law, to fund activities that supported the governor’s reelection campaign, as well as federal candidates.

In Massachusetts, the state Republican Party used its federal account to pay staff salaries, office rent, health insurance, and payroll taxes for state campaign activities. In the Bipartisan Campaign Reform Act of 2002 (“BCRA” or “McCain-Feingold” as it was more commonly known),  Congress distinguished between mandatory and permissive spending of federal dollars for staff and office space used for both state and federal campaign purposes.  For staff who spend more than 25% of their time on federal campaign activities, salaries must be paid entirely out of a federal account.  Thus, a state party employee who spends 70% of their time on state races must be paid with 100% federal funds, under federal law.  Since at least 2008, OCPF guidance has recognized that where certain expenses are required by federal law to be paid from a federal account, those funds may be used to support state candidates.  For other administrative expenses, including rent, utilities, and office equipment, federal regulations permit state parties to either (1) spend entirely from the federal account, or (2) allocate between state and federal accounts, with a minimum amount allocated to the federal account depending on which federal offices stand for election that cycle.  As a result, state party committees can spend significantly less state funds on staff by sharing the cost with their federal account, which has a higher fundraising limit and can receive unlimited transfers from the national party.

Thus, while federal law requires the use of federal funds for federal election activities under certain circumstances, what is less clear is whether a permissive federal rule will trump a mandatory state rule:  If state law requires certain expenses to be paid from state funds, but federal law allows those expenses to be paid from federal funds, who prevails?

Although it did not expressly find that state law is preempted—the decision came in the form of a settlement agreement, rather than an enforcement order—the agreement strongly suggests that OCPF believes federal regulations constrain its power to limit state parties’ use of federal dollars for expenses that federal law merely permits to be paid from federal dollars.  Federal rules allow parties to either pay 100% of these costs from a federal account, or to allocate (with at least 28% coming from federal funds in a presidential election year) expenses between the federal and state account, but do not mandate which option to adopt.  The rules also allow, but do not require, parties to allocate salaries, as long as the staffers spend more than 75% of their time on state activities.  Only when state party staff worked exclusively on state candidate activities did the OCPF and the party agree that non-federal funds had to be used.

The OCPF and state party were not explicit as to the reasoning why parties could operate under the federal rules in these permissive scenarios rather than having to allocate their expenses between their state and federal account in order to comply with the state law requiring state campaigns to use state funds.  However, the OCPF’s 2008 decision can be read to support parties having this  choice.

The settlement may also make it harder for Massachusetts to regulate party committees that opt into an all-federal spending model.  This is because federal law permits a political committee that opts to pay salary expenses entirely from federal funds to not maintain a log of staff time spent on state versus federal activities.  In the event that the amount of federal activity slips below 25%—meaning payment of salaries is merely permissive under federal law—or to zero—meaning that federal funds cannot be used for state activities—state regulators will have greater difficulty proving a violation when no time records exist.  Indeed, the Mass GOP settlement itself reflects this phenomenon: because the party did not keep a log of staff time, OCPF could not determine whether certain party staffers were engaged in federal election activity and to what extent, and found they should have been paid from the state account.

In the wake of this decision, some voices in Massachusetts are calling for greater transparency.  For example, a bill has been introduced that would require that all contributions from political committees (including in-kind contributions from federal accounts) to state candidates come from state funds.

While the impact of this decision on OCPF’s regulation of the line between state and federal elections remains to be seen, this settlement and the ongoing litigation in Connecticut demonstrate that federal law can undercut the ability of states to police and disclose the influence of soft money in state elections.  This trend only underscores the irony of McCain-Feingold: a federal law designed to limit the influence of soft money in federal elections is preventing states from enforcing regulatory regimes that would more robustly regulate political money.

Forming and Operating Super PACs: A Practical Guide for Political Consultants in 2016

Covington recently released a high-level primer that provides political consultants with a practical resource for creating and running a federal Super PAC in a legally compliant manner.  The primer, which is available here, explains the history and basic rules that apply to federal Super PACs.  The primer then discusses the following key topics:

  • checklist of steps for creating a federal Super PAC;
  • options available to Super PACs for federal reporting;
  • safeguards Super PACs should implement to avoid illegally coordinating with candidates;
  • “do’s” and “don’ts” for candidate involvement in fundraising; and
  • rules governing the operation of Super PACs alongside Section 501(c)(4) social welfare organizations.

This primer draws from Covington’s extensive experience advising federal, state, and local Super PACs and their donors.

LexBlog