Colorado Enacts Replacement Campaign Finance Enforcement System

Just one week ago, a federal court in Colorado held that the state’s system for enforcing its campaign finance laws was unconstitutional.  Moving quickly, the Colorado Secretary of state has enacted temporary enforcement rules, effective immediately.

Under the new rules, any person may file a complaint, just like under the old system.  However, the rules now include three protections that attempt to prevent abuse of the system for political purposes.

First, before referring a complaint for a hearing, the Secretary of State’s office will now review all complaints to determine whether the complaint actually identifies a violation and whether it alleges sufficient facts to support the alleged violation.

Second, the Secretary of State can now offer the targets of complaints a chance to “cure” minor violations instead of referring the matter for a hearing.

Third, the Secretary of State’s office is now responsible for conducting discovery and prosecuting the complaint, ending the private attorney general system that existed under the old rules (though complainants may still offer amicus curiae briefs and seek judicial review of the administrative hearing).

In a welcome move for current respondents, all pending complaints and hearings not yet decided will be remanded for Secretary of State review.

In addition to these enforcement changes, the new rules also establish a formal system for seeking advisory opinions on campaign finance issues.

There will almost certainly be more changes coming to Colorado campaign finance law– these rules are only temporary, and the legislature will take up a permanent enforcement solution in 2019.  It remains to be seen whether lawmakers take that opportunity to make substantive changes in the law as well.

Colorado Campaign Finance Enforcement System Found Unconstitutional

In a case with interesting ramifications, a federal court this week struck down major parts of Colorado’s campaign finance enforcement system as unconstitutional.

The system at issue, which was created through a ballot initiative, generally allowed any person who believed there had been a violation of the state’s campaign finance laws to file a written complaint with the Secretary of State.  The Secretary of State was required to refer the complaint to an administrative law judge within three days, and the judge had to hold a hearing within fifteen days.  There was no mechanism for filtering out bad cases — each and every complaint got a hearing.  In his opinion in Holland v. Williams, Judge Raymond Moore of the U.S. District Court for the District of Colorado held this system was facially unconstitutional as a violation of First Amendment political speech rights.

There are three main takeaways from the decision.  First, although the state’s campaign finance regulatory scheme remains in effect, it is temporarily without an enforcement mechanism.  A new enforcement system should be coming soon. In a release, the Secretary of State’s office stated it is working to adopt temporary enforcement rules quickly, and will seek a more permanent solution in the 2019 legislative session.

Second, any other states and localities that allow citizens to file campaign finance complaints, especially without a screening system, may face similar challenges to their rules.  While the court in this case seemed to indicate that a citizen-driven system could be permissible so long as there was a system for screening complaints, there is no guarantee that other judges will follow every contour of this decision.

Finally, the decision is another example in what is becoming a pattern of courts striking down citizen-initiated campaign finance and government ethics reforms.  In the last few years, voters in Colorado, South Dakota, and Missouri, have all passed reforms that they felt would be stricter than what state legislators were self-imposing, only for a judge to strike some aspect of the reform as unconstitutional.

Bank Loans to Federal Candidates

FEC audit reports often address obscure topics, but today one touched on an important issue for banks.  At an open meeting, a majority of FEC Commissioners would not support a staff recommendation that a bank violated the campaign finance laws when it made a loan based on collateral that was commercially reasonable under the banking laws, but from a source that was illegal under the election laws.  All Commissioners agreed the campaign and source of the improper collateral could face a fine from the FEC, but so long as the bank operated in a commercially reasonable way to ensure repayment of the loan, it would not face liability.

The FEC staff audited the Kelly for Congress campaign, and found that it had secured a $50,000 bank loan with collateral from a campaign donor.  Under the FEC’s rules, that collateral is considered an excessive contribution by the donor to the campaign.  On this point, all four FEC Commissioners agreed.  But the staff went further, recommending a finding that the bank had also violated the Federal Election Campaign Act of 1971, as amended (FECA), by permitting the loan to be made with collateral that was illegal under the campaign finance laws.  The FEC staff reasoned that this meant the bank loan was not made under terms that “assured repayment.”  Only two of the four Commissioners supported this view.  Chair Hunter and Commissioner Petersen found the regulation that permitted the agency to look at the totality of the circumstances to determine if the loan was made on a basis that assured repayment had been met when the bank followed its normal course in securing adequate collateral for the loan.

This is not the first time the FEC has reached a similar result, although the facts were a bit different here.  See, e.g., MUR 5262.  But its effect is significant, for it means that banks need not be as concerned with the requirements and restrictions of FECA, and can remained focused on traditional banking standards and regulations when considering federal candidate loans.  As with any rule based on a “facts and circumstances” test, banks should not read these decisions as a blank check.  Had the collateral offered here not been from one of the bank’s trusted customers, but a secured interest in a Russian bot farm instead, presumably the FEC would have cast a colder eye on the commercial reasonableness of the transaction.  But these decisions should provide some comfort to banks considering loans to federal candidates, parties and PACs, for it will limit their exposure in many instances.

“Straw Donor” Cases Are In The News Again Today

In a 2014 blog post about the Dinesh D’Souza case, we speculated that it might have been one of the first “straw donor” cases identified based on automated analysis of campaign finance disclosure reports.  It’s not clear that was actually the case, though the Department of Justice did say at the time that “the indictment [of D’Souza] is the result of a routine review by the FBI of campaign filings with the FEC.”  There has since been considerable debate about exactly how routine that review really was.

Straw donor schemes are surprisingly common.  Such schemes involve an individual who has made the maximum donation to a campaign and who seeks to circumvent the contribution limit by funneling money through friends and family, causing FEC reports inaccurately to list those other persons as the true donors.  Depending on the amount of money involved, this can be a criminal misdemeanor or felony offense.  It is often not difficult to ferret out such schemes by closely reviewing or “data mining” disclosure reports filed by the campaigns with the Federal Election Commission.

There is a typical pattern to these cases.  Often the person who initiates the scheme asks close family, friends, employees, or vendors to make contributions to the candidate, and then reimburses them for their contributions.  The employees and vendors might include individuals with modest salaries who nonetheless all make the maximum contribution of $2,700 per election or $5,400 per election cycle (current limits).  On FEC reports, they will all show up as having contributed around the same time, in the same significant amount.  Some may list the same “employer” when they make their contribution, as reported on FEC reports.  They may be associated with a common address.  Some may list occupations that would not be typical for major political donors.  So with a bit of diligence and old fashioned gumshoe detective work, or with the aid of a computer algorithm, it is not rocket science to look for patterns in FEC reports that suggest the identity of the person perpetrating the straw donor scheme.

Given the tens of thousands of federal, state, and local campaigns across the country, there are probably many more such straw donor schemes than you read about in the newspapers.  Only a small number are detected and actually prosecuted.  When they are prosecuted, they often do result in criminal convictions for the perpetrator of the scheme, though often not for the persons who act as conduits for the contributions.  Courts have varied widely in the severity of sentences imposed, sometimes imposing prison sentences, and sometimes not.

Given the public nature of campaign finance disclosure reports, it is a bit of a puzzle why there are not more prosecutions related to straw donor schemes.  One likely explanation is the “glass houses” effect.  While campaigns do aggressive opposition research on one another, and uncovering an opponent’s use of straw donors could provide grist for filing a highly public complaint, there is always the risk that the opponent would take a close look at the complainant’s own campaign donors, which might also include a straw donor or two (or quite a few).  So campaigns tend not to include this in their opposition research arsenal, perhaps to avoid mutually assured destruction.

Meantime, for anyone who is politically active, the main takeaway is that it is illegal to reimburse political contributions made by others, and it is not difficult for a diligent adversary, journalist, or law enforcement agency to pick you out of the haystack and trigger an investigation.

DOJ Announces Planned Release of FARA Advisory Opinions

The Department of Justice has begun informing persons who obtained Foreign Agents Registration Act (“FARA”) advisory opinions that it will “soon” publish on its website copies of advisory opinions issued since January 1, 2010.  The opinions apparently will be redacted to remove the identities of the requesters and their clients.  For years, the Department has been criticized for maintaining a body of what amounts to secret law concerning FARA, in the form of unpublished advisory opinions.  This has made compliance with FARA difficult, and has led to confusion among the regulated community concerning the Department’s positions on key interpretive issues.  Publication of close to eight years’ worth of recent advisory opinions could shed substantial light on the Department’s approach to the triggers for FARA registration, exemptions, and perhaps certain reporting issues.  It is not yet clear exactly when the opinions will be posted.  Covington will be tracking this issue closely and will update clients on developments once the advisory opinions are released.

Covington Publishes Detailed Guide To The Revolving Door Rules

The scenario is all too common: After months of searching for the right candidate and weeks negotiating duties and compensation, a company finally hires a new employee to a position that will entail work on certain government policy issues. The employee seems to be a perfect fit, but after a few days on the job, someone asks whether “revolving door” rules prohibit the employee from engaging in a specific task. That question triggers a broader review by lawyers who advise that, due to these unforeseen post-government employment restrictions, the employee is unable to perform many of the most crucial aspects of the new job. For both the company and the employee, this is an embarrassing and costly fiasco. It is therefore essential that companies who hire government officials understand the potential post-employment restrictions that may apply before the job offer is extended.

To assist companies with these reviews, Covington has published a nine-page primer with text and charts that provide an overview of the most important post-employment restrictions applicable to federal officials and employees, while highlighting similar provisions adopted by state and local governments throughout the country. We then identify a number of steps private employers can take to ensure their newest hires are ready and able to hit the ground running on their first day in the office.

Plea Agreement Hints at Justice Department’s Expanded Reading of the Foreign Agents Registration Act

In recent months, we have highlighted trends of increased enforcement and increasingly aggressive interpretation of the Foreign Agents Registration Act by the Department of Justice.  These trends are evidenced in the Justice Department’s announcement last week that the President of the Pakistan American League, Nasir Adhem Chaudhry of Maryland, had agreed to plead guilty for failure to register under FARA.  The case is unusual in several respects.

FARA prosecutions themselves are few and far between.  In 2016, the Justice Department’s Office of Inspector General reported that, over the last 50 years, the Justice Department had brought only seven criminal FARA cases.  Any FARA prosecution itself is therefore inherently notable.  Moreover, while criminal penalties have always been possible, the FARA Unit has typically adopted a “voluntary compliance” posture, often seeking to resolve matters through the filing of late registrations and reports.  The fact that FARA charges were filed at all therefore suggests a continued shift away from voluntary compliance and towards criminal prosecutions.

The case is also notable because the plea agreement’s stipulated facts focus primarily on Mr. Chaudhry’s “information gathering” role for the Government of Pakistan, stating that Mr. Chaudhry engaged in activities “to obtain and manage information on … the status of the United States Government’s policies regarding Pakistan, and its views of, and intentions towards, Pakistan.”  For example, he allegedly made contacts at think tanks “to obtain in-depth information regarding the United States government’s policies towards Pakistan.”  This heavy focus on information gathering is curious because information gathering for a foreign principal, without more, has not in the past necessarily been viewed by the Department of Justice as triggering FARA registration.  Rather, FARA registration can be required by, among other things, engaging in activities that are intended to influence the U.S. Government or a section of the public with respect to U.S. domestic or foreign policies.  In addition, acting as a “political consultant” might trigger FARA, but DOJ had previously interpreted this provision narrowly, telling Congress in 1989 that the term “political consultant” requires more than “merely advising the foreign principal,” and instead requires such things as “arranging meetings with U.S. Government officials on its behalf or accompanying the principal to such meetings.”  Thus, many of the key facts listed in the stipulation — which emphasize Mr. Chaudhry’s information gathering and, to a lesser degree, his political consulting roles — do not obviously support a FARA charge as the statute has previously been interpreted.

To be sure, information gathering was not all that led to Mr. Chaudhry’s guilty plea.  One paragraph describes Mr. Chaudhry “controlling and manipulating discussion at roundtable events” with U.S. government officials and scholars “in order to neutralize unfavorable views of Pakistan.”  Another states that he “organized press briefings” “for visiting Pakistan government dignitaries,” potentially influencing U.S. public opinion on domestic or foreign policy matters.  While these activities might by themselves have supported a FARA prosecution, the extensive focus in the plea documents on information gathering is striking and may reflect an effort by the Justice Department to broaden the range of activities that trigger registration.

It is possible that there is more to the story.  A supplement is under seal, and there may be sealed material that would provide further color on why the Government chose to pursue FARA charges in this case.  But, at least on the surface, this prosecution is another example of the Justice Department’s renewed focus on FARA and its willingness to file charges in cases that in the past frequently would not have been prosecuted.

Political Law Potpourri—The Consolidated Appropriations Act of 2018

While the din over a possible government shutdown dominated the headlines, political law played a supporting role in the recently enacted Consolidated Appropriations Act (Pub. L. No. 115-141).  The content and omissions of the so-called “Omnibus” spending bill will be of interest to political actors in all sectors, but particularly those operating nonprofit entities engaged in political activity.  The Act also continues to prohibit government agencies from requiring corporate political activity disclosure, including from government contractors.  Below, we summarize these and other political law provisions.

Tax-exempt Organizations

First, the Act takes particular aim at the Internal Revenue Service (“IRS”), attempting to, at least rhetorically, reign in review of certain organizations that some believe were unfairly targeted in the past.  As a result, the Act prohibits the IRS from using appropriated funds: (1) “to target citizens of the United States for exercising any right guaranteed under the First Amendment to the Constitution of the United States,” § 107; (2) “to target groups for regulatory scrutiny based on their ideological beliefs,” § 108; or (3) “to issue, revise, or finalize any regulation, revenue ruling, or other guidance not limited to a particular taxpayer relating to the standard which is used to determine whether an organization is operated exclusively for the promotion of social welfare for purposes of section 501(c)(4),” § 125.

Despite their sweeping rhetoric, none of these provisions limits the IRS’s current authority to oversee tax-exempt organizations, including its authority to take enforcement action against 501(c)(4) organizations that engage primarily in political activity.  Moreover, existing guidance issued by the IRS concerning the political activity of exempt organizations remains fully intact.

Equally interesting is what political law provisions were omitted from the Act.   For example, the bill did not include a repeal of the so-called Johnson Amendment, which prohibits 501(c)(3) nonprofit organizations from engaging in partisan political activity.  A repeal, which was opposed by the National Council of Nonprofits, would have permitted charitable organizations, including churches and foundations, to engage in partisan politics without endangering their tax-exempt status.

Efforts to repeal the Johnson Amendment have a long history, including an Executive Order by President Trump last May instructing the Treasury Department “to the greatest extent practicable” not to take adverse action against religious organizations for speech on “political issues.”  While concerns about the rise of “educational” entities with large political operations did not result in new restrictions in this legislation, this issue is likely to re-emerge and remain a focus for campaign finance reform lobbyists and others.

Corporate Political Disclosure

In welcome news for corporations and trade associations, Section 631 of the Act prohibits the Securities and Exchange Commission (“SEC”) from using any appropriated funds “to finalize, issue, or implement any rule, regulation, or order regarding the disclosure of political contributions, contributions to tax-exempt organizations, or dues paid to trade associations.”

We have previously reported on efforts to require more disclosure of corporate political activities.  The SEC formally dropped corporate political disclosure as one of its regulatory priorities in 2014 and appropriations bills have continued to formally deny the SEC funds to adopt and enforce political disclosure rules, effectively prohibiting the agency from changing its mind.  While over the past few years activist shareholders have been successful in extracting additional disclosure from public companies, recent data suggests that momentum for additional disclosure has waned.  By preventing the SEC from taking action in this space, Congress continues to ensure that the SEC will not force companies to disclose their political activities.

The Act also enacts into law language from previous appropriations bills prohibiting the SEC from requiring disclosure of trade association dues.  Corporations remain free to join trade associations without disclosing to the public the value of their dues payments, including the portion that may be spent on trade association lobbying efforts.

The Act limits the government’s authority to require disclosure of political activity by federal contractors.  Section 735 of the Act prohibits any appropriated funds from being used to “recommend or require” any potential federal contractor to disclose any political contributions, expenditures (including independent expenditures), or disbursements for electioneering communications made by the entity, its officers or directors, or any of its affiliates or subsidiaries, with respect to a federal office.  This provision also goes one step further, and also prohibits the use of appropriated funds for the purpose of requiring disclosure of any other disbursement of funds made “with the intent or reasonable expectation” that the person receiving the payment will use the funds to make a contribution or expenditure.  These provisions together ensure that federal contracting agencies cannot, as a condition of awarding a contract, require disclosure of the political activities of the contractor or its officers or directors.

Campaign Finance—The Things Not Seen

Although other proposed appropriations bills have contained language relaxing rules on coordinated spending between candidates and political parties, or prohibiting the Federal Election Commission from enforcing rules on trade association PAC fundraising, none of these provisions were enacted into law.

However, the Act does contain a provision that requires the national political party committee of the incumbent president to maintain a $25,000 deposit for the cost of reimbursable political events held at the White House.  The statute also requires all other persons who sponsor a reimbursable political event at the White House to pay the estimated cost of the event in advance of the White House incurring the expenses.

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While the omnibus ultimately did not include sweeping changes to tax-exempt organization and campaign finance law, these issues will remain the subject of future policy discussions, and could reemerge as riders on future bills.  Covington will continue to monitor future legislation for developments.

New Wave of Trade Lobbying Presents FARA Registration Concerns

Washington is awash with lobbyists seeking to address new steel and aluminum tariffs, and other potential tariffs, on behalf of both foreign and domestic clients.  Lobbying on trade issues in some circumstances may trigger Foreign Agents Registration Act (“FARA”) obligations.  The connection between trade lobbying and FARA was the subject of close scrutiny several decades ago, when Congress considered the issue in a 1991 hearing.  The latest changes in U.S. trade policy are bringing this issue back into focus.  Today, Covington issued a client advisory addressing the interplay between trade lobbying and FARA, which you can read here.

Federal Court Decision Puts Brakes on Issue Ads

As the 2018 mid-term season approaches, viewers may be seeing fewer issue advertisements paid for by so-called “dark money” groups.  In a consequential decision, a federal court in Washington, D.C. concluded yesterday that all “electioneering communications” presumptively count as political spending for purposes of determining whether a group should register as a political action committee and disclose its donors.  As a result of this decision, we expect that many donors concerned about public disclosure will demand that 501(c)(4) organizations and similar groups take a less aggressive approach to their election-related spending.

As background, both the Federal Election Commission and the Internal Revenue Service impose what amounts to a “major purpose” test on groups that air advertisements related to elections.  Following the Supreme Court’s landmark decision in Buckley v. Valeo, the FEC has for over forty years held that an organization does not become a political committee that must disclose its donors unless it is “under the control of a candidate” or its “major purpose [] is the nomination or election of a candidate.” Similarly, IRS rules provide that 501(c)(4) social welfare organizations and other groups cannot be “primarily” engaged in intervening in political campaigns.

There has always been uncertainty regarding what kinds of activities count toward the “political” side of the ledger for FEC and IRS purposes.  Advertisements that expressly advocate the election or defeat of a candidate undoubtedly count as political (e.g., “This November, Defeat Senator Jones”).  But what about advertisements that do not include express advocacy but encourage support or opposition to a candidate’s views or actions shortly before an election (e.g., “Senator Jones lacks the courage to stand up to big polluters.  Call him and tell him that it’s time to protect our environment.”)?  Political tax lawyers have long believed that these issue ads might count as “political” for IRS purposes, given the IRS’s “facts and circumstances” approach to evaluating these activities.  But, in recent years and especially in light of the Tea Party scandal, some 501(c)(4) groups have been willing to push the IRS envelope, taking an aggressive view and treating at least some issue ads as “non-political.”

Yesterday’s decision, Citizens for Responsibility & Ethics in Washington v. FEC, however, may compel these groups to take a more conservative approach, by shifting the focus from the IRS as the arbiter of what counts as “political” to the FEC. In the decision, the D.C. District Court held that all “electioneering communications” presumptively count toward the political side of the ledger for purposes of assessing whether the group’s “major purpose” is influencing elections and whether it must therefore register with the FEC as a political action committee and disclose its donors.  In only “rare” or “extraordinary” cases should an electioneering communication fall on the non-political side of the ledger for purposes of the applying the “major purpose” test, the court concluded.  The court described an electioneering communication that would likely be treated as non-political:  “[An ad] runs 60 days before a midterm election; it does not mention the election or even indirectly reference it (e.g., by cabining the message’s timeframe to ‘this November’); the meat of the ad discusses the substance of a proposed bill; the ad urges the viewer to call a named incumbent representative and request that she vote for the bill; but it does not make any reference to the incumbent’s prior voting history or otherwise criticize her.”  The consequence of this standard is that the type of hard-hitting issue ad we have grown accustomed to seeing shortly before an election will now almost certainly count toward the “political” side of the calculation of whether a group must register as a political committee.

The basis for the decision is likely to be challenged.  It relies primarily on the argument that Congress “clarified … that it viewed the vast majority of electioneering communications as corroborating a purpose of electing candidates to federal office” when it passed the Bipartisan Campaign Reform Act in 2002.  But while BCRA imposed reporting requirements on electioneering communications because of their potential electoral effect, it does not necessarily follow that Congress intended these ads to count as political spending under the “major purpose” test.  As a result, the Court’s reading of BCRA as reflecting an implicit Congressional decision to define the “major purpose” test is debatable.  Further, “electioneering communications” include only TV and radio advertisements.  The logic of the Court’s decision, therefore, suggests that direct mail or digital issue advertisements are not presumptively political while TV and radio advertisements with the same content distributed at the same time are presumptively political.

We therefore expect more twists and turns to this case before the issue is finally resolved.  (All four FEC Commissioners will be required to vote unanimously in favor of appealing the ruling, pursuing an enforcement case against the original respondent American Action Network, or finding some other grounds to decline to pursue the Complaint.  Given the current composition of the FEC, it seems unlikely that the Commission will take any of these approaches.)  But at least in the near term, we expect the decision will cause some 501(c)(4) groups to cut down on the volume of electioneering communications because of the increased risk  those advertisements will be treated just like independent expenditures for purposes of determining whether the group’s “major purpose” is political.  Some of this reduction may also be driven by donors who are concerned about the possibility of public disclosure.  While the Court’s decision may be challenged, it is unclear whether any challenge would succeed and, for at least now, the Court’s opinion sets forth a clear and binding judicial framework for assessing whether electioneering communications should be treated as “political.”  As a result, these donors may, for example, demand an explicit assurance that the groups are primarily engaged in non-political activities and that the group’s independent expenditures, electioneering communications, and other political expenditures account for less than 50 percent of the group’s total activities.

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