California Gov. Brown Signs California DISCLOSE Act into Law

By Andrew Garrahan on Posted in Campaign Finance, State Law

On Saturday, California Gov. Jerry Brown signed the California DISCLOSE Act, AB249, into law.  We posted a detailed analysis of the law when it passed the legislature, but the key points bear repeating as it will be of interest to anyone who gives or spends money in California elections.

The law requires that some form of “paid for by” statement appear on almost every advertisement.  It also requires that ballot measure ads and some outside candidate advertising carry prominent disclosures of the sponsor’s top funders.  Finally, the law alters the rules for “earmarked” contributions, with the goal of disclosing the real source of a group’s funds.  More controversially, it also allows undisclosed earmarks for certain small contributions of less than $500 per year.

The new law takes effect on January 1, 2018, in time for the state’s 2018 gubernatorial and legislative elections and ballot measure campaigns.  Any person or organization planning to contribute to, or place advertisements in, California elections moving forward should carefully consider the changes in the law, and think about consulting with counsel on how those changes might impact their activity.

St. Petersburg Passes Anti-Super PAC Ordinance, Hoping to Set Up Constitutional Showdown

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

The City of St. Petersburg, Florida yesterday passed an ordinance designed to take the question of “Super PACs” to the Supreme Court for the first time.  The ordinance, which we discussed in detail earlier this year, imposes a $5,000 limit on contributions to groups that raise money for or make independent expenditures or electioneering communications in city elections.  The goal is to set up a test case for the Supreme Court, which campaign finance reformers hope will uphold the limits on contributions to these “Super PACs,” effectively eliminating those organizations.

Supporters of this plan face a difficult path.  Every U.S. Court of Appeals in the country that has considered the question has held that a law like this is unconstitutional.  After the U.S. Supreme Court decided in Citizens United v. FEC that it is unconstitutional to place limits on corporations making independent expenditures in elections, many of the Courts of Appeals have been asked whether it is constitutional to place similar limits on corporate contributions to groups that agree to make only independent expenditures.  Starting with the U.S. Court of Appeals for the D.C. Circuit in SpeechNow.org v. FEC, each of those Courts of Appeals has held the contribution limits are unconstitutional.  The Federal Election Commission has agreed.

The ordinance’s supporters claim, however, that the U.S. Court of Appeals for the Eleventh Circuit, which governs Florida, has not considered the question.  Their goal is for this law to draw a constitutional challenge, convince the Eleventh Circuit that limits on contributions to Super PACs are constitutionally permissible, and take the matter on to the U.S. Supreme Court.

The law also strictly limits campaign finance activity by corporations where 5% of the company is owned by a single foreign owner, a total of 20% of the company is owned by foreign owners, or where a foreign owner participates in making decisions about the company’s U.S. political activity.  This could separately draw a constitutional challenge.

The law was pushed by campaign finance reform group Free Speech for People, which says that it is advancing similar laws in the Massachusetts legislature and potentially in California and Connecticut.  We will be watching developments in those states and St. Petersburg closely to see how the plan progresses and what it means for businesses and political committees going forward.

Is Corporate Political Disclosure Leveling Off? Crunching the latest CPA-Zicklin Numbers

By Zachary G. Parks on Posted in Corporate Political Spending Disclosure

For years, the Center for Political Accountability’s annual CPA-Zicklin Index of corporate political practices has touted marked year-over-year increases in corporate political disclosure practices.  Look at the subtitles for its recent reports: How Leading Companies are Strengthening Their Political Spending Practices (2013), How Leading Companies are Making Political Disclosure a Mainstream Practice (2014 and 2015), S&P 500 Review Shows Political Disclosure and Oversight Becoming Common Practices.  But new data published this week signals that momentum for voluntary corporate political disclosure has slowed slightly.

The non-profit Center for Political Accountability and the Zicklin School at Wharton annually rank all companies in the S&P 500 on political disclosure and oversight practices.  Companies receive “points” based on the type of political spending and oversight information they voluntarily report on their website; the more points, the better the ranking.  In its most recent report (subtitle: Sustained Growth Among S&P 500 Companies Signals Commitment to Political Disclosure and Accountability), the number of companies disclosing information about their political spending declined slightly for the first time.  A few data points:

  • The number of companies in the S&P 500 disclosing at least some election-related spending or prohibiting such spending altogether decreased from 305 in the 2016 report to 295 in 2017 report.
  • The number of companies disclosing at least some information about payments to trade associations, or instructing trade associations not to use their payments for election-related activity fell from 45 percent in the 2016 report to 41 percent in the 2017 report.
  • The number of companies disclosing at least some information about payments to 501(c)(4) social welfare organizations or restricting such payments altogether ticked down from 31 percent to 30 percent.
  • The average total score increased less than one percentage point (from 42.3 percent in 2016 to 43.1 percent in 2017), compared to a 2.5 percent increase between 2015 and 2016.

These numbers all suggest that average corporate political disclosure practices are beginning to level off.

Still, companies should be cautious about reading too much into these reduced figures.  Some of the score changes can be explained by year-over-year changes to the composition of the S&P 500.  As companies with disclosure policies have fallen out of the S&P 500, new companies without these policies have joined the list.  Indeed, the average disclosure scores for those companies who were in the S&P 500 in each of the last three years continued to steadily increase.

Moreover, even if some disclosure scores are sliding, the Index continues to pressure low performers, calling out so-called “basement dwellers.”  The latest report, for example states, “Today, 59 companies in the S&P 500 reside solidly in the basement.  They lag behind in taking reasonable, easily manageable steps to safeguard themselves and shareholders against the risks posed by corporate spending on politics.”  We expect that some of these companies, in the coming year, will face pressure from shareholders, activists groups, and the press to take steps to increase their scores.

For more information about prior CPA-Zicklin reports, see our posts from 2015, and 2016, and our how-to guide for in-house counsel on corporate political disclosure initiatives.

The Top Three Political Law Risks for Hedge Funds, Private Equity Funds, and Investment Firms

By Zachary G. Parks on Posted in Campaign Finance, Lobbying Compliance, Pay-to-Play, State Law, State Pay-to-Play

Perhaps no industry faces more scrutiny and regulation of its political activities than the financial services industry.   Even though these rules are often not intuitive, failure to comply with them can result in big penalties, loss of business, and debilitating reputational consequences.  In this advisory, we describe three sometimes overlooked political law related risks for hedge funds, private equity funds and other investment firms: (i) ensuring that covered employees and others affiliated with the investment firm do not make political contributions that result in “pay-to-play” problems for the firm; (ii) identifying when investor relations activities trigger state or local lobbying registration requirements; and (iii) conducting political law due diligence on prospective investments and portfolio companies.  For each risk area, we outline steps and policies firms can adopt to avoid these common compliance traps.

California Legislature Passes “California DISCLOSE Act,” a Complex but Clarifying Update to the State’s Political Advertising Disclosure Rules

By Andrew Garrahan on Posted in Campaign Finance, State Law

Over the weekend, the California legislature passed AB249, the California DISCLOSE Act, a controversial set of campaign finance disclosure rules that have been years in the making.  The law now awaits Gov. Jerry Brown’s approval.  The law’s proponents have argued that it is necessary in order to provide voters with complete information about the sponsors of advertising.  Its opponents have called prior versions of the bill confusing.  Regardless, assuming the law is not vetoed, it will make some key changes to the California Political Reform Act of which anyone active in California political advertising and campaign finance should be aware.

First, the law requires that almost all advertising carry some form of “paid for by” statement, though it does so in a complicated manner.  Under the prior law, it was not entirely clear where and how sponsorship information was to be disclosed, especially where electronic advertising was concerned.  Under the DISCLOSE Act, depending on the type of electronic advertising, it usually must include sponsorship information, in the form of a link that reads, “Who funded this ad?,” a direct link to sponsor information, or include the sponsor information in the ad itself.  The law also establishes special rules for disclosures in social media, text messaging, standard websites, and other electronic communications.  The law maintains the exceptions to disclosure for communications from an organization to its members, and for communications where including the disclosure might be difficult because of the item on which the communication appears or because of technological limitations.  However, these various rules are spread across numerous provisions of the Political Reform Act — tracing the requirements through the law is a time-consuming task.

Second, in what will probably be the change most noticeable to the public, the law would make the on-advertisement disclosure of an ad’s sponsor and top donors much more prominent for ballot measure ads and candidate ads funded by outside groups.  While much of this information is required already, it has often been buried in fine print and made hard to read by using all uppercase letters.  Under the new law, these advertisements generally must include the names of those three persons who have each contributed the most to the sponsoring committee in an amount over $50,000 in the prior year (if there are any such contributors), as well as the “paid for by” information.  On television and other video ads, sponsor and donor names must appear in a black box, usually taking up 1/3 of the screen for at least five seconds at the start or finish of the ad, with each name on its own line, using standard capitalization.  Large donors to ballot measures and outside committees supporting candidates should consider that their names would be prominently placed on the recipient’s advertising.

Third, the law expands and clarifies the state’s rules for reporting earmarked contributions, with the goal of preventing committees from burying their donors under layers of organizations, though there is a key loophole here.  Under the DISCLOSE Act, if contributions are given to one committee formed to support a candidate or ballot measure and earmarked for that candidate or ballot measure, and the recipient gives them to a second committee formed to support that candidate or measure, the second committee must report as the donor not the first committee but the original source of the earmarked money.  The apparent goal behind this requirement is best illustrated by example.  Assume a trade group solicits contributions to a committee named “Businesses Against Prop 1,” and ABC Corp. and The Smith Co. each contribute over $50,000, knowing the money will then go to the broader “No on 1” committee.  Under the old rules, the donor disclosed on “No on 1” ads may have been “Businesses Against Prop 1.”  Under the DISCLOSE Act, the ad may need to display “ABC Corp.” and “The Smith Co.”  However, there is also a new loophole built into the law for earmarked contributions in the form of dues or assessments to a membership organization or its sponsored committee by its members that are earmarked but are less than $500/year per donor.

This is only a sampling of the changes the DISCLOSE Act makes to the state’s disclosure system — the reality is that the changes are too detailed and complex to be captured in a single blog post.  The main takeaway for any organization planning to contribute to, or place advertisements in, California elections moving forward should carefully consider the changes in the law, and think about consulting with counsel on how those changes might impact their activity.

Unless vetoed, these changes take effect on January 1, 2018, in time for the November 2018 election that will feature an open gubernatorial race as well as legislative races and ballot measures.

SEC Pay-to-Play Rule Set to Expand to Capital Acquisition Brokers

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

The universe of those covered by the SEC’s pay-to-play restrictions is expanding. If a newly proposed SEC rule is adopted as expected, pay-to-play restrictions will now extend to cover the recently created class of broker-dealers called Capital Acquisition Brokers (“CABs”).  In this advisory, we discuss the background on the proposed rule and its implications for CABs themselves and for investment advisers that retain CABs to solicit business from government entities.

Avoiding State and Local Lobbying Compliance Violations

By Andrew Garrahan on Posted in Lobbying Compliance, State Law

Corporate legal and compliance departments are usually well aware of the laws regulating lobbying the federal government. Recent news reports, however, indicate that companies have more trouble with state and local lobbying laws. A few features of state and local lobbying make it a tricky blind spot. This increases the risk of failing to properly register or file lobbying reports, or of running afoul of restrictions imposed on lobbyists. In this alert, we outline the questions that can help avoid these headline-grabbing violations.

MSRB Pay-to-Play Challenge Stymied by Sixth Circuit over Standing

By Kevin Glandon on Posted in Campaign Finance, Litigation, Pay-to-Play, SEC Pay-to-Play

Over the past few years, a few state political party committees have relentlessly sought to block or overturn pay-to-play laws overseen by the Securities and Exchange Commission (SEC). Yesterday, the Sixth Circuit delivered another defeat to an ongoing effort to challenge federal pay-to-play laws.

Last year, we noted that the Municipal Securities Rulemaking Board (MSRB) had drafted an amendment to its pay-to-play rule, Rule G-37, expanding their scope. Not long after our article, the Tennessee Republican Party, the Georgia Republican Party, and the New York Republican State Committee filed petitions to review the final rule adopting the MSRB’s amendments.

The Sixth Circuit dismissed this latest challenge for lack of standing. The result is not entirely surprising in that the petitioners faced a high hurdle: because they challenged the amendments to the MSRB’s rule, but not Rule G-37 itself, they were required to focus on activity restricted specifically due to the amendments and not the preexisting rule.

Essentially, the Court determined that the parties had not identified any particular person who could have made a contribution under the preexisting MSRB rule and would do so now but for the 2016 amendments. Similarly, the parties were unable to show that their fundraising efforts faced greater challenge post-amendment than under the old rule.

This opinion should not be seen as an endorsement of the substance of the pay-to-play rules. Rather, as with the an earlier challenge to the SEC’s rule, yesterday’s opinion from the Sixth Circuit emphasizes the importance of ensuring that the right people file their challenge in the right place at the right time.

Kentucky Raises Contribution Limits in July, Adjusts Reporting

By Kevin Glandon on Posted in Campaign Finance, State Law

Starting this month, nearly all of Kentucky’s campaign contribution limits increase, excepting contributions that remain either unlimited in amount or prohibited.

Perhaps the most substantial change is the establishment of building fund accounts for political party executive committees, which may now accept unlimited funds from corporations. Also of note is the elimination of an aggregate $10,000 or 50%-of-total-contributions limit on how much a candidate or slate of candidates may accept from certain committees, which would have the practical effect of allowing parties to direct more funding into contested races.

Limits are raised to $5,000 annually to any executive committee or caucus campaign committee (up $2,500 over the prior limit); to $2,000 per election for candidates and slates (+$1,000/election); and to $2,000 annually for permanent committees and contributing organizations (+$500/year). The latter two limits would be adjusted every other year. Limits on cash and anonymous contributions would also be raised to $100 from $50.

Other changes include increased thresholds for campaign finance reporting and modified reporting dates. The Kentucky Registry of Election Finance prepared a helpful summary of the changes.

Kentucky’s new campaign finance law follows a trend we have observed over the past ten years. As contributions to outside groups that are permitted to receive unlimited funds have surged, campaign resources have shifted away from candidates and parties and toward outside groups.  One response to this dynamic has been a push to raise contribution limits to candidates and parties. As discussed during the legislative debate, Kentucky’s new law does just that.  Expect more states to follow suit.

U.S. House Considering Major Change to Trade Association PAC Fundraising Rules

By Andrew Garrahan and Matthew Shapanka on Posted in Campaign Finance

The U.S. House Committee on Appropriations is considering a major change to the way trade associations are allowed to raise money into their political action committees (PACs).  Currently, if a trade association wants to solicit money from its member companies’ employees, it must first get advance approval from the company, and each company can authorize only one trade association to solicit its employees for any calendar year.  The current draft of the Financial Services and General Government Appropriations bill, which provides funding for the Federal Election Commission (FEC), includes a rider that would prohibit the FEC from using any of the appropriated funds to enforce these trade association PAC fundraising rules.  In another piece of welcome news for trade associations, the bill would also prohibit the Securities and Exchange Commission (SEC) from requiring public disclosure of companies’ trade association dues payments, a provision which was also successfully included in last year’s appropriations bill by agreement with the White House.

The practical effect of this provision would be that the FEC could not enforce the existing restrictions on trade association PAC fundraising at all during fiscal year 2018 (October 1, 2017 through September 30, 2018).  If this provision were not enforced, this could have a major impact on trade association PAC fundraising.  The dual restrictions of 30118(b)(4)(D) can severely limit a trade association’s ability to raise money for its PAC.  Currently, if a trade association wants to solicit a member company’s employees, it must first convince the company to allow the solicitation, but the FEC’s rules severely limit what the trade association can say when making the request.  Most companies are members of more than one trade association, but can currently only approve one of those associations’ PAC solicitations.  Thus, companies must choose between supporting the PAC of a large business-wide trade association (like the Chamber of Commerce or National Association of Manufacturers), or a more industry-specific trade association.  With these burdens lifted, trade associations will be able to solicit funds freely from the executives, administrative staff, and stockholders of all of their member companies, plus those individuals’ families.  This should come as welcome news to trade associations, but will be less exciting to member company executives who could face an onslaught of new solicitations.

However, this all comes with two major caveats.  First, the bill does not eliminate the solicitation rule.  Instead, it essentially prohibits enforcement of the rule for FY2018.  If the FY2019 appropriations bill does not contain the same restriction as this FY2018 bill, then the FEC presumably could resume enforcement of violations, including violations that occurred in FY2018.  Second, even if the FEC is barred from enforcing this prohibition, the Department of Justice might theoretically be able to, acting independently, bring criminal charges for knowing and willful violations.

Therefore, even if this provision remains in the final bill, it would be prudent to seek advice of counsel before making a solicitation that violates the fundraising restrictions.  The bill passed through subcommittee markup on Thursday with no changes.

The same bill also includes other political and election law provisions, including elimination of the Election Assistance Commission, which provides guidance on election best practices; restrictions on the IRS’ ability to enforce the rule against religious organization political activity; a prohibition on any IRS rulemaking that would regulate the political activity of 501(c)(4) social welfare organizations; and a prohibition on any SEC requirement that companies disclose their political contributions or trade association dues.

LexBlog