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.

New Overtime Rules May Spell Trouble For Some Corporate PACs

The Obama Administration’s publication yesterday of a regulation increasing the universe of employees entitled to overtime pay might reduce the number of employees from whom corporate PACs can seek contributions.

The new regulations, which take effect on December 1, 2016, increase the salary level below which certain employees are entitled to overtime pay.  Currently, salaried employees are not entitled to overtime pay if they perform certain duties and are paid at least $455 per week (the equivalent of $23,600).  Under the new regulations, the duties test would remain the same but the salary threshold would increase to $913 per week, $47,476 annually, adjusted every three years for inflation.

As we described when the regulations were first proposed last year, the increase in the salary threshold should not require companies to stop asking the newly overtime-eligible employees for PAC contributions.  When evaluating whether an individual falls within the “restricted class” of employees who may be solicited for PAC contributions, FEC regulations require companies to look at the individual’s job duties, not the compensation amount.  And the new regulations do not change this “duties test.”

But even though the rules will not reduce corporate restricted classes as a matter of law, corporate decisions to change compensation structures in response to the rule might effectively shrink the “restricted class.”  Federal law provides that corporate PACs generally may only solicit PAC contributions from employees if, among other things, the employees are salaried.  If companies respond to the rule by paying the newly overtime-entitled employees on an hourly basis rather than on salary,  those hourly employees will need to fall off the restricted class lists even if their job duties would have otherwise placed them in the restricted class.

Enforcement, Clarity Delayed for FINRA Pay-to-Play and Third Party Solicitation Rules

The Securities and Exchange Commission announced Tuesday that it will allow further comment on a pay-to-play rule proposed by the Financial Industry Regulatory Authority (FINRA).

As we discussed previously, if the SEC approves FINRA’s pay-to-play rule, it would clarify that investment advisers are allowed to hire third party solicitors if they are subject to FINRA or Municipal Securities Rulemaking Board (MSRB) pay-to-play rules.  The SEC has indicated that it will hold off on enforcement of the third party solicitor provision until both FINRA and the MSRB rules go into effect.  If the FINRA rule had simply been adopted, the reprieve on enforcement would have ended this fall.

What impact will this decision have?  Most likely, delay of the inevitable.  Unless the federal pay-to-play landscape is radically altered, we expect the SEC and FINRA to reach agreement on a pay-to-play rule.  The most likely impact of the SEC’s announcement is to delay resolution of the SEC’s rule regarding the hiring of third party solicitors until later in the fall this year or into next year.  The SEC’s reprieve on enforcement is likely to continue until the matter is resolved.

Why is the SEC allowing comment?  One reason may be to protect itself against a legal challenge through careful consideration of comments critiquing FINRA’s proposed rule on First Amendment and other grounds.  One reason to suspect this is so is that critiques of the FINRA proposed rule are similar to those raised in a recent law suit that sought to overturn the SEC’s pay-to-play rule, and in a petition asking for the SEC’s rule to be repealed.

As the SEC proceeds with consideration of the FINRA rule and the petition to repeal the SEC rule, we may see further development of important statutory and constitutional questions regarding the viability of pay-to-play laws, as discussed in the Wagner case.

Annual GAO Report on Federal Lobbying Compliance Shows Mixed Enforcement Bag: Fewer Audits, More and Larger Enforcement Penalties

On Friday, the Government Accountability Office (GAO) issued its ninth annual report on compliance with the federal Lobbying Disclosure Act (LDA), covering from mid-2014 through mid-2015.  As in the past, the report is based on random audits of lobbyists’ filings and analysis of enforcement by the U.S. Attorney’s Office for the District of Columbia.  We examine the report’s data on enforcement, discuss common compliance issues, and identify three takeaways from the report.

Enforcement on the Rise

The report contains two noteworthy facts about enforcement of the LDA.  First, the GAO conducted fewer audits of quarterly LD-2 reports than it had in the past, looking at only 80 reports instead of the approximately 100 that it has historically examined (though it still audited the standard 160 semi-annual LD-203 contribution reports).  The report does not give any indication of whether this was a temporary or permanent reduction in audits, or what caused it.  While the audits are supposedly done at random and GAO does not conduct them to force registrants into compliance, they still make up part of the enforcement scheme insofar as surviving an audit should be a goal of all registrants.

Second, while audits were down, civil penalties are up in both frequency and amount, with potential for continued increases in coming years.  According to the report, we should expect the U.S. Attorney’s office to announce up to five LDA enforcement actions soon.  This could make 2015-2016 the busiest year for civil penalties on record.  The GAO also notes that a previously-announced settlement of $125,000 is the largest ever for noncompliance.  Finally, in 2013 (the most recent year with complete data) Congress referred significantly more noncompliant lobbyists to the U.S. Attorney for potential enforcement than in prior years.  This could indicate even more civil settlements to come.

Common Compliance Issues

The areas where the GAO found the highest rates of noncompliance included:

  • Former Positions. 21% of LD-2 reports may not have properly disclosed lobbyists’ prior government work. In advance of audits, the GAO searches public sources like LinkedIn to review work history of audited lobbyists to find unreported positions that it can ask about in the audit.
  • Rounding. 31% of LD-2 reports did not round to the nearest $10,000. The report speculates, based on anecdotal evidence, that some registrants report exact amounts instead of rounded amounts because the rounding rule is contained in congressional guidance and the law, but the LD-2 form can be read to request an exact dollar figure.
  • LD-203 Reporting. 15% of registrants failed to file semi-annual LD-203 reports documenting political contributions, required of all lobbyists whether they made covered contributions or not. This is a big issue, because the LD-203 both reports contributions and is a mechanism of ensuring lobbyist compliance with Congressional gift rules. Lobbyists who do not file an LD-203, even if inadvertently, avoid this compliance mechanism. The auditors also check these reports against FEC campaign finance reports to seek out violators.

Three Key Takeaways

The report contains a few takeaways for registrants.  First, compliance is not easy.  By many of the rubrics the GAO measured, 20% or more of registrants are not in compliance with the law even though most of those audited said compliance was easy or very easy.  This indicates that even those who think they are in close compliance may have missed an issue.  Second, while odds of facing audit are slightly down, odds of paying a penalty are increased, as are penalty amounts.  While these cases still focus on what the GAO refers to as “chronic offenders,” the U.S. Attorney’s Office’s increased emphasis over the years on these cases bears watching.  Third, the GAO has continued to streamline and perfect its audit processes and is looking at more than just filings – for example, the report explains GAO might look at lobbyists’ social media accounts and FEC reports to catch noncompliance.  For these reasons, it is more important than ever that registrants be prepared for an audit or potential enforcement action.

FCC Releases TCPA Enforcement Advisory Directed to Political Campaigns

Yesterday, the FCC released an Enforcement Advisory to remind political campaigns about their obligations under the Telephone Consumer Protection Act (“TCPA”).  The Advisory did not set forth any new rules for calls and texts; rather, it confirmed existing rules and reminded political campaigns that they are subject to them.

The Advisory first confirmed that prerecorded or autodialed calls to mobile phones are prohibited, except in cases of emergencies, federal debt collection, or with the prior express consent of the recipient.  The Advisory then summarized the requirements for prerecorded or autodialed calls to landline phones, including identification and line seizure requirements.

The Advisory concluded with a reminder that failure to comply with the TCPA can lead to enforcement actions and penalties as high as $16,000 per violation.  This is in addition to any private right of action that the TCPA authorizes, with statutory damages as high as $1,500 per call.  The Advisory also cross-references talking points and a FAQ with further information about how the TCPA applies to political campaigns.

Expanded March 30 Filing Enhances Pay-to-Play Disclosure, Highlights Penalties for New Jersey Government Contractors

New Jersey is well-known for having strict, comprehensive, and complex pay-to-play laws.  Two new changes to an annual pay-to-play filing required of some government contractors will only enhance that reputation.

State law requires a company that receives $50,000 annually through government contracts in New Jersey to file a report by March 30 of the following year disclosing most of its public contracts and political contributions in the state.  Covered companies must disclose their 2015 activity online using Form BE by March 30, 2016.

The New Jersey Election Law Enforcement Commission (“ELEC”) recently amended Form BE to include two new requirements effective this year.  First, the filer must certify that the statements in the form are true, and that he or she is aware that willfully filing a false statement may lead to punishment.  Second, the form now requires that a filer identify whether each disclosed contract “was awarded pursuant to a fair and open process.”

These changes may appear minor but are significant for three reasons.  First, highlighting the possibility of false statements prosecution signals  a potential liability for contractors at a time of increased attention to pay-to-play violations in New Jersey.  The state is wrapping up its largest-ever prosecution of pay-to-play violations in which multiple executives of a company pled guilty to evading the pay-to-play laws.  Individual sentences included six-figure fines, debarment, and likely jail time, while the company paid $2 million in fines and is no longer in business.  In this atmosphere, and with this new certification, a truthful and accurate disclosure is of paramount importance.

Second, the fair and open certification touches on other parts of New Jersey’s notoriously complex pay-to-play reporting and prohibition system.  For example, certain laws only apply to contracts not awarded via a fair and open process, so identifying a contract as one that was not awarded by a fair and open process highlights the contract for regulatory agencies.  Disclosing that a large contract was awarded by other than a fair and open process may create public relations problem for contractors as well.

Third, determining whether a contract was awarded pursuant to a fair and open process is not always a simple task.  State law requires a contract awarded according to a “fair and open process” to, “at a minimum,” be:

  • advertised in advance in newspapers or on the contracting entity’s website;
  • awarded by a process providing for public solicitation for proposals and under a process established in writing; and
  • opened and announced publicly upon award.

However, the final decision on whether a contracting process was fair and open is left to the entity awarding the contract.  This means that the fair and open analysis rules might change based on who awarded the contract.  Nonetheless, contractors will have to make this determination and disclosure with the new false statements certification lurking in the background.

MSRB Pay-to-Play Rule Expanded, Opening Door to Enforcement

On Wednesday, the Municipal Securities Rulemaking Board (MSRB) announced that its expanded pay-to-play rules will cover municipal advisors, including third-party solicitors, as of August 17, 2016.

As we noted previously and discussed during Covington’s Corporate Political Activity & Government Affairs Compliance Conference earlier this month, the MSRB has been drafting an expansion to its pay-to-play rule, Rule G-37.

Within the past few days, the MSRB received approval from the Securities and Exchange Commission (SEC) to extend its pay-to-play rule.  The new rule introduces a number of technical changes, but, essentially, it extends the rule to prohibit a municipal advisor from engaging in advisory work for a municipal government within two years after a covered person associated with the municipal advisor makes a political contribution to covered municipal officials.  The prohibition also applies if the advisor engages a third-party solicitor and the third-party solicitor has made a covered contribution within the past two years.  The MSRB rule retains its exception for contributions of $250 or less per election to officials for whom the contributor is entitled to vote.  In addition to restrictions on contributions, the rule limits solicitation of payments to covered officials and political parties.

By way of background, when the SEC proposed its own pay-to-play rule regarding contributions by investment advisers, it recognized that contributions by third-party solicitors hired by investment advisers could raise many of the same issues.  To address this concern, the SEC rule limits the use of third-party solicitors to certain persons, including those regulated by the MSRB and those regulated by the Financial Industry Regulatory Authority (FINRA)—but only if the MSRB and FINRA adopt a pay-to-play policy that passes muster before the SEC.  Given that neither body had finalized its pay-to-play rule, the SEC indicated that staff would not recommend enforcement.

Now that the MSRB’s rule is set to go into effect this summer, we will be watching the progress of the FINRA rule.  At this point, the SEC is expected to act on the FINRA rule before April.  Expect the SEC’s temporary reprieve on enforcement to end this year once both MSRB and FINRA rules are in effect, which is on track to happen this fall.

California Regulation, Proposed Statute Add to State’s Reputation for Complex, Detailed Disclosure

California is already home to some of the most complicated and searching political regulations in the country, especially in its efforts to expose “dark money” and other undisclosed political spending.  A newly-amended lobbying regulation and proposed campaign finance law will enhance that reputation.  The practical effect of each is to invite deeper scrutiny of not only the regulated entity,  but also of its donors, employees, consultants, and other affiliates, all of whom face much greater exposure under the new laws.

First, the state’s Fair Political Practices Commission recently voted to amend regulation 18616.  The amendments are specifically designed to target and expose payments for “shadow lobbying” and grassroots campaigns.  Effective July 1, if a lobbyist employer pays over $2,500 in a quarter to a person to influence lawmaking, it must disclose the recipient, amount, and purpose of those payments.  This could include payments for, among other purposes:

  • salaries for non-lobbyist employees who spend 10% or more of their time in a month lobbying or supporting lobbying;
  • directly billed lobbyist expenses;
  • government relations consulting, strategic advice, and other “shadow lobbying” legislative services;
  • grassroots campaigns;
  • advertising and media campaigns; and
  • polling and other research.

Second, the Assembly has passed, and the Senate has taken up, AB-700, the “California DISCLOSE Act.”  The Act would require many political advertisements to prominently display or announce the names of the ad sponsor’s top donors of $50,000 or more.  Adding another layer of disclosure, the bill also makes clear that efforts to hide contributions using middleman organizations or earmarked funds are impermissible — the true source of funds must be disclosed.  While the bill could be killed or amended before passage, this is a major broadening of California’s current on-advertisement disclosure laws and another blow at undisclosed funders.

UPDATE: 501(c)(4) Organizations Not Required To Provide Notice Until Treasury Issues Regulations

Under a new law, each 501(c)(4) organization will have to notify the IRS of the intent to operate as a 501(c)(4) organization; however, such notice will not be due until at least 60 days after regulations are issued implementing the notification procedures.

As reported in Inside Political Law on December 22, 2015, The Protecting Americans from Tax Hikes Act (PATH Act), added a new provision to the Internal Revenue Code that requires all newly-formed 501(c)(4) organizations to file a notice of registration with the IRS within 60 days of the organization’s formation.  The PATH Act also required certain 501(c)(4) organizations established prior to its enactment to file a notice within 180 days if they had not yet filed an exemption application (Form 1024) or annual information return (Form 990/990-EZ/990-N).

IRS Notice 2016-09 clarifies that organizations need not submit any notification until regulations are issued that implement the notification procedures.  According to Notice 2016-9,  the regulations will provide transitional rules for organizations to comply.  Once the procedure is established, section 501(c)(4) organizations that submit the required notice will receive an acknowledgment of the submission but will not receive a determination letter recognizing tax-exempt status unless a complete Form 1024 is submitted.

SEC Issues Fines for Pay-to-Play Violations That Predate Its Pay-to-Play Rule

A $12 million settlement announced last week by the Securities & Exchange Commission suggests that the SEC will aggressively pursue alleged schemes connecting political contributions to government contracts even if the political contributions do not violate its 2010 pay-to-play rule.  According to the settlement order, in 2010, the head of Public Funds at State Street Bank and Trust Company arranged to make payments, through an intermediary lobbyist, to the Ohio deputy state treasurer “in exchange for several lucrative subcustodian contracts awarded by the Office of the Treasurer of the State of Ohio.”  In addition to these cash payments, the executive also allegedly arranged for others to make at least $60,000 in political contributions to the Treasurer’s election campaign.  Based on these allegations, the SEC and State Street entered into a settlement order requiring State Street to disgorge $4 million and pay penalties of $8 million.  The conduct, the SEC alleged, “violated Section 10(b) of the Exchange Act and Rule 10b-5 thereunder, which prohibit fraudulent conduct in connection with the purchase or sale of securities.”

In announcing the settlement, the SEC provided more evidence that schemes connecting the award of public contracts to political contributions and fundraising are an enforcement priority: “Pay-to-play schemes are intolerable, and lobbyists and their clients should understand that the SEC will be aggressive in holding participants accountable.”  The case follows on the heels of its first major pay-to-play enforcement case in 2014.

Importantly, the conduct at issue in this case took place before the SEC pay-to-play rule was effective.  The settlement therefore suggests that even if a political contribution is not technically covered by the SEC’s specialized pay-to-play rule, it still might lead to an enforcement action under the Exchange Act’s general anti-fraud provisions.  Some of the contributions made in the State Street case, for example, were not made by “covered associates” who are subject to the SEC pay-to-play rule.  Nevertheless, the SEC apparently believed that the contribution scheme still violated general statutory and regulatory prohibitions on fraudulent conduct.  When reviewing contributions for pay-to-play compliance, compliance departments should therefore pay careful attention to the surrounding facts.  Even if the SEC pay-to-play rule technically does not apply, if facts suggest the contribution was intended to secure or retain public contracts, the contribution could still result in potentially crippling penalties.

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