On March 30, 2020, the inspectors general of several major agencies selected the Department of Defense Inspector General, Glenn Fine, to lead a newly created federal oversight entity that will investigate waste, fraud, and abuse in connection with the massive new coronavirus economic relief legislation. The inspectors general were exercising new authority contained in the legislation, but these actions also echo Congress’s past approach to oversight of recovery efforts. This client alert examines the new investigative authorities in the legislation and provides advice for companies, based on past examples.
Although a final version of the Coronavirus Aid, Relief, and Economic Security (CARES) Act is not yet available, based on what we know so far, it appears that the legislation will include the provisions described below establishing oversight functions for the use of stimulus and bailout funds. According to a number of sources, the bill provides for a Treasury Department Special Inspector General for Pandemic Recovery, a Pandemic Response Accountability Committee, and a Congressional Oversight Commission with subpoena power. Senate leaders reportedly modeled these provisions after the Troubled Asset Relief Program (TARP), which was similarly subject to a special inspector general, oversight board, and five-member congressional oversight panel. We expect that these provisions likely will survive any further negotiations and votes in both houses of Congress.
Special Inspector General for Pandemic Recovery
The bill establishes a Special Inspector General for Pandemic Recovery within the Department of the Treasury. The Special Inspector General will be presidentially appointed, as was the Special Inspector General for TARP. They will be responsible for conducting, supervising, and coordinating audits and investigations of the making, purchase, management, and sale of loans, loan guarantees, and other investments by the Treasury under this Act. Like the Special Inspector General for TARP, the Special Inspector General for Pandemic Recovery will also be responsible for providing quarterly reports to Congress.
Pandemic Response Accountability Committee
The bill establishes a Pandemic Response Accountability Committee through the Council of Inspectors General on Integrity and Efficiency to enhance government-wide protection for taxpayer dollars, and appropriates $80,000,000 for the Committee. TARP created a similar oversight board, called the Financial Stability Oversight Board, which was comprised of the Chairman of the Board of Governors of the Federal Reserve System, the Secretary of the Treasury, the Director of the Federal Housing Finance Agency, the Chairman of the Securities Exchange Commission, and the Secretary of Housing and Urban Development.
Congressional Oversight Commission
The bill authorizes the creation of a bipartisan Congressional Oversight Commission charged with the oversight of the Department and Treasury and Federal Reserve as they work to provide economic stability in the wake of the Coronavirus. Like the TARP Congressional Oversight Panel, the Oversight Commission will consist of five congressionally appointed members:
- 1 member appointed by the Speaker of the House of Representatives;
- 1 member appointed by the House Majority Leader;
- 1 member appointed by the Senate Majority Leader;
- 1 member appointed by the Senate Minority Leader; and
- 1 member appointed by the Speaker of the House and Senate Majority Leader, after consultation with the Senate Minority Leader and House Minority Leader.
Also like the TARP Congressional Oversight Panel, the CARES Congressional Oversight Commission will have significant authority to conduct oversight and investigations. It will be allowed to hold hearings, take testimony, and make requests for information. It will also be required to submit reports to Congress every 30 days, like the TARP Oversight Panel. The reports must specify the following:
- The impact of purchases made on the financial wellbeing of people, financial markets, and financial institutions;
- The extent to which the information made available on transactions has contributed to market transparency; and
- The effectiveness of loans, loan guarantees, and investments made in minimizing long-term costs to taxpayers and maximizing the benefits for taxpayers.
The Commission will terminate on September 30, 2025. We expect the Commission to be very active in that time, based on its predecessor. The TARP Congressional Oversight Panel held twenty-six hearings over two-and-a-half years on the causes, symptoms, and effects of the economic crisis and government response and reform efforts.
Given the significance of these newly proposed oversight functions, we will revisit this topic in greater detail once CARES is enacted.
The consequences of the COVID-19 pandemic are reverberating in every sector of the global economy, from life sciences to transportation, retail to manufacturing, financial services to sports and entertainment. As federal, state, and local governments attempt to blunt the pandemic’s public health and economic effects, many companies are frantically working with government to seek the help they believe they need to survive these trying times and to preserve their employees’ jobs. In addition, companies with products or services that could assist with the government’s response to the crisis are considering ways to contract with government agencies. As a consequence, many companies are more deeply engaged with government officials than ever before, including by seeking financial loans, grants, contracts, product approvals, regulatory relief, or guidance on how to operate in these times.
But the basic rules covering interactions with government – including lobbying, government ethics, campaign finance, bribery, and fraud laws – all remain in place. And, as with prior economic and national security emergencies, heightened enforcement of these laws is likely to follow the current crisis. As a result, companies that cut compliance corners now may pay a price down the road.
This alert identifies some common areas of political law compliance risk to keep in mind, as companies engage with government concerning the COVID-19 crisis.
The countless lobbyists urging Congress to include relief for their clients in the third coronavirus legislative package (“COVID 3.0”) currently pending in Congress may soon be unemployed, at least if the House version becomes law.
The Take Responsibility for Workers and Families Act (H.R. 6379), proposed by Democrats in the House of Representatives on Monday (“House bill”), prohibits “[a]ny corporation that receives Federal aid related to COVID-19” from “carry[ing] out any Federal lobbying activities,” until the corporation has “repaid” all COVID-related aid to the Federal government.
The temporary ban on federal lobbying appears in a part of the 1,432-page bill that imposes a number of “conditions” on corporations that may receive aid under the legislation. In addition to refraining from federal lobbying, if the House bill becomes law, corporate recipients of COVID-related relief may not pay executive bonuses, pay “any type of compensation” to an executive who leaves the company, buyback any stocks of the corporation, or pay any dividends.
How the lobbying ban would operate in practice is unclear. For starters, what does it mean to “carry out” lobbying activities? Under the Lobbying Disclosure Act, “lobbying activities” includes “lobbying contacts”—communications with certain covered government officials on behalf of a client regarding “the formulation, modification, or adoption of Federal legislation” or “the formulation, modification, or adoption of a Federal rule, regulation, Executive order, or any other program, policy, or position of the United States Government—but also “efforts in support of such contacts.” 2 U.S.C. § 1602(7). Does this mean that any activity related to a government policy that affects the company must cease? Could the company conduct research for lobbying that will take place after the aid is repaid?
The legislation also raises questions about corporate participation in trade associations that employ lobbyists. Would this provision ban a corporation from joining and paying due to a trade association? What about strategizing with the trade association about its own lobbing? In light of the broad definition of “lobbying activities” under the LDA, the scope of this lobbying ban could be similarly broad.
In addition to the lobbying provisions, which apply only until the COVID-related aid is “repaid,” the House bill would impose permanent conditions and reporting requirements on certain aid recipients. The bill requires certain so-called “accelerated filers”—a term that the bill directs the Securities and Exchange Commission (SEC) to define—to file detailed disclosure reports with the SEC, disclosing, among other things, all “expenditures for political activities.” Such reports would include details about independent expenditures, electioneering communications, and trade association and other membership dues paid by the corporation, and would be made available to shareholders and to the public on a quarterly basis.
These provisions are one part of a rapidly developing COVID-19 relief package that is under active negotiation by both parties and both chambers of Congress. We will continue to monitor whether these provisions advance as part of the COVID 3.0 legislation, and will be ready to advise clients on their impact should they become law.
Last year, we blogged about a new and highly restrictive disclosure law in New Jersey that took aim at so-called “dark money” spending by nonprofit and political organizations. In response to a series of lawsuits, a federal court has issued an order permanently prohibiting the state from enforcing the law against “independent expenditure committees” as defined in that law. An independent expenditure committee is defined as an entity:
- organized under federal tax law as a 527 political organization or § 501(c)(4) social welfare organization;
- that is not otherwise a political committee in the state; and
- that raises or spends $3,000 or more in an attempt to influence an election or the passage or defeat of a public question, legislation, or regulation, without coordinating those activities with a candidate or party. “Coordinating” is defined in great detail.
The order notes that it does not prevent the state from passing new legislation on the same topic, which state leaders have previously indicated they plan to do.
Consistent with popular predictions and our prior posts, Congress made drug pricing a key item on its investigative agenda in the first year of the 116th Congress. Several factors contributed to the uptick in congressional drug pricing oversight activity, including the elevation of new Democratic chairs in the House with longstanding interests in drug pricing issues, and continued bipartisan interest in examining aspects of the pharmaceutical industry that affect price, such as the supply chain, patent protection, and generic entry. In 2019, more than ten committees took various forms of investigative action on drug pricing, including by issuing document request letters and holding more than twenty hearings. Although the general topic of drug pricing has long been of interest to Congress, the magnitude and focus was somewhat different in 2019.
Over the past year, we have seen an increased effort by Congress to investigate specific substantive issues in the U.S. pharmaceutical market that may affect the pricing of drugs. For example, some committees held hearings or conducted inquiries on issues such as the supply chain, market competition, patents and generics, and patient out-of-pocket costs. Committees have also looked at therapeutic classes of drugs, such as insulin, as a means of examining various market forces such as generic competition and antitrust considerations. We have also observed some Members seeking to tie oversight activities to legislative efforts by using oversight to highlight and build public support for particular pieces of legislation, such as the CREATES Act, HR 3, and the Grassley-Wyden plan.
As we enter 2020, it now seems clear that the last five or so years of drug pricing investigations have progressed over an arc with three phases. First, in the early days of modern drug pricing investigations Congress focused on perceived outliers. This was the era that began around 2015 and included the infamous case of Martin Shkreli and Turing, which increased the price of the anti-parasitic drug Daraprim by more than 5000%. Soon, however, Congress had fewer perceived outliers to highlight. And when it tried to investigate some that it perceived as outliers, it often ran right into the complexities of the system. Mylan, for example, countered criticism of its EpiPen price by noting that the company’s actual net price had not been increasing even as the list price increased. The costs in the system, it seemed, were going elsewhere. Third, then, Congress became more intrigued about these systemic factors affecting drug prices and turned its attention there. These more narrow investigations of systemic issues have been the key hallmark of drug pricing investigations in 2019.
The level of congressional oversight and investigative activity on drug pricing is likely to continue this year, and it could very well intensify as we move closer to the national elections. For example, the Democratic National Committee recently launched an advertising campaign that criticizes the President and Republicans in Congress for not achieving drug pricing reforms. Some of the broad investigations of industry practices that began last year are continuing this year as well, and we expect any new investigations to continue the trend of looking at systemic issues. We also expect that drug pricing investigations will continue across many different committees, companies, and classes of drugs for the rest of 2020.
In the meantime, pharmaceutical companies can continue to evaluate critically the issues that may bring congressional scrutiny. Companies can prepare now by developing response plans under guidance from counsel experienced in handling congressional investigations.
Amid ongoing focus on how social media and other companies approach online advertising, California’s latest effort to require disclosure of online advertising will take effect January 1. We blogged on these revisions to the California DISCLOSE Act, sometimes called the Social Media DISCLOSE Act, when they passed back in 2018. Absent federal action, we expect to see the states continue to push into this area, potentially requiring online ad disclosure and imposing requirements on advertisers or campaigns to keep a file or record of online ads they place or display.
On December 13, the Federal Communications Commission (“FCC”) issued a Notice of Apparent Liability (“NAL”) against Kenneth Moser and his telemarketing company, Marketing Support Systems (“MSS”), proposing a fine of $9,997,750 for allegedly transmitting more than 47,000 unlawful spoofed robocalls. The calls were made over a two-day period in May 2018, one week before California’s primary election. The calls consisted of prerecorded voice messages that contained false allegations about a candidate that had been investigated and disproven by the San Diego County Sheriff’s Department.
Although the calls were initiated by Moser and his company, they appeared to originate from the telephone number of a rival, HomeyTel. The FCC alleged that Moser arranged to display HomeyTel’s telephone number as the caller ID information in violation of the Truth in Caller ID Act. Apparently, Moser and HomeyTel were involved in lawsuits against one another other pertaining to Telephone Consumer Protection Act (“TCPA”) violations. As a result of these spoofed calls, HomeyTel rather than Moser or MSS received a “multitude of complaints” from recipients and a cease-and-desist letter from the candidate.
The FCC claims that these calls violated the Truth in Caller ID Act, which prohibits callers from knowingly transmitting misleading or inaccurate caller ID information with the intent to defraud, cause harm, or wrongfully obtain anything of value, and authorizes the FCC to propose monetary forfeitures for violations.
Separately but relatedly, the FCC also issued a Citation and Order against Moser and MSS to notify them that their conduct also violated the TCPA’s prohibition against transmitting prerecorded voice calls to mobile telephone numbers without recipient consent, and its prerecorded call disclosure requirements. By issuing this Citation and Order, the FCC can now propose monetary forfeitures against Moser for these TCPA violations if they occur again.
This case reflects the FCC’s current enforcement policy against vendors that fail to comply with applicable telemarketing laws and regulations. Those active in sponsoring call campaigns and using such vendors should take steps to ensure that they are aware of, and are complying with, all applicable federal and state telemarketing laws.
Assistance from congressional offices can be invaluable to an organization with interests before executive branch agencies. But it also can pose legal and optics risks to both the organization requesting the assistance and the congressional office and Member of Congress doing the outreach. A number of high-profile scandals, including the Keating Five matter in which five senators met with the Federal Home Loan Bank Board on behalf of a financial institution that later went bankrupt, involved outreach to federal agencies on behalf of businesses and individuals.
The House and Senate ethics committees generally appreciate the legitimacy of outreach to federal agencies on behalf of constituents and other stakeholders and generally provide broad authorities for members to engage in these activities. The Senate Ethics Manual notes that assisting petitioners with executive or independent government officials and agencies “is an appropriate exercise of the representational function of each Member of Congress.” The Senate Rules give senators pretty broad leeway to engage in outreach to the executive branch, specifically sanctioning communications with an executive or independent government official or agency “on any matter” to “request information or a status report,” “urge prompt consideration,” “arrange for interviews or appointments,” “express judgments,” or “call for reconsideration of an administrative response which the Member believes is not reasonable supported by statutes, regulations or considerations of equity or public policy.” The rule admonishes that any such acts may not be made on the basis of political contributions or in instances in which the senator has a conflict of interest. The House Ethics Committee gives similar instructions regarding outreach to federal agencies.
Further restrictions apply to matters involving procurement and adjudicatory proceedings at agencies, as agencies have particular interests in protecting the integrity of their decisions in these types of activities. Congressional offices may also have their own policies on the sorts of matters about which they will engage with agencies. For instance, many offices may not want to weigh in on behalf of a constituent seeking a competitive grant if other constituents are seeking the same grant.
Additional risk — that is of criminal investigation and prosecution — applies when the individual or organization requesting support from a congressional office is a contributor to the Member of Congress. While the Supreme Court’s 2016 decision in McDonnell v. United States greatly narrowed the definition of “official act” under the federal bribery statute, post-McDonnell cases have established that inter-branch lobbying by a congressional office can be an official act supporting a corruption conviction.
Those considering asking congressional offices to conduct outreach to federal agencies on their behalf may find the following guidelines useful for reducing legal and optics risks:
- Never implicitly or explicitly connect a past, pending, or future contribution or fundraising event to a request for outreach.
- Avoid asking Members of Congress to engage in outreach while at a fundraising event.
- An individual or organization making a request for outreach should have a connection with the Member of Congress other than being a contributor, like being a constituent or having a unity of interests in the subject matter of the request.
- Requests for outreach should be made to congressional staff, and never to fundraising staff.
- Do not ask for special treatment because of a contribution history or political affiliation.
- Seek legal advice before asking a Member of Congress to get involved in a procurement decision or agency adjudication.
In a rare case, a so-called “dark money” group has now publicly released the names of its donors. Under federal law, if an organization has as its “major purpose” the nomination or election of federal candidates, the organization may be a “political committee” required to report its receipts and disbursements with the Federal Election Committee. Relying on this definition of a “political committee,” in 2012, Citizens for Responsibility and Ethics in Washington filed a complaint with the FEC arguing that Americans for Job Security, a 501(c)(4) social welfare organization, should have registered as a PAC and publicly disclosed its donors and expenses. CREW argued that because 72 percent of AJS’s spending in 2010 was for independent expenditures (advertisements that expressly advocate the election or defeat of a federal candidate) or electioneering communications (TV or radio advertisements naming or depicting a federal candidate shortly before an election), AJS had, as its “major purpose,” the election of federal candidates. Thus, CREW contended, AJS should have registered as a PAC.
For the next seven years, the matter wound its way through the FEC and the courts until last month AJS entered into a “conciliation agreement” with the FEC to finally settle the case. Under the terms of the agreement, AJS agreed to effectively back-register and report as a PAC by making a single filing with the FEC that disclosed “its receipts, including the identity of any person or organization that gave money to AJS, and disbursements for 2010 through 2012.” This information has now been filed with the FEC and made public.
As this case highlights, there is no guarantee that donations to a 501(c)(4) non-profit will be forever kept confidential. Within the last decade, state regulators have inadvertently disclosed confidential donor information online, donor identities have leaked to the press, and several state enforcement cases have resulted in donor disclosure. Donors concerned about their anonymity should therefore carefully vet recipient groups before donating, rather than merely relying on the organization’s 501(c)(4) status to assume their donations will be kept confidential. At a minimum, donors should understand how the group spends its money, the political and non-political activities in which the group engages, and the safeguards the group has in place to ensure that it will not engage in activities that trigger donor disclosure. It is often also prudent for donors to obtain an “assurance” letter from the recipient group that clarifies many of these points. These risks should be calibrated, and the assurance letter obtained, before writing the check or sending the wire.