New Online Political Advertising Rules Coming to California January 1

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.

FCC Proposes Nearly $10 Million Fine Against Campaign Vendor for Spoofed Robocalls

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.

Requesting Congressional Outreach: Key Compliance Considerations

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.

So-Called “Dark Money” Group Reveals its Donors

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.

New Changes to Foreign Agents Registration Act Forms and E-File System

Following the Department of Justice’s announcement in March of an initiative to increase enforcement of the Foreign Agents Registration Act (“FARA”), the Department has rolled out a new e-file system for FARA registrations.  Notably, the new system only applies to new registrants, although the Department indicated that it will transition existing registrants to the new system in “the coming months.”

The changes were announced in a notice to existing registrants.  The new system, the Department said, “will allow registrants to submit data though a self-guided, web-based questionnaire, rather than uploading PDFs.”  Previously, registrants submitted FARA filings by completing PDF forms and uploading the completed forms to the Department’s filing system.

There are several notable differences regarding this new system.

  • The system now requires that registrants complete an online web-based form. Previously, filers could complete filings and later upload them.  The Department has promised to provide templates that can be completed offline, but they are not yet available.
  • Registrants must now answer each question on the form. The prior PDF forms permitted registrants to leave answers blank or insert clarifying text.  Answering complex questions in the new form may be challenging.  For example, the forms offer only yes/no answers to questions concerning a foreign entity’s relationship with a government.
  • Filers must scan a document containing an actual signature. The PDF forms formerly permitted a filer to click a box that indicated an electronic signature.  This new requirement will strengthen the accountability of filers for the submissions, for electronic signatures were sometimes executed by counsel or other authorized party.  This may facilitate false statements prosecutions in certain situations, 18 U.S.C. § 1001.

Importantly, the new web-based forms contain new questions.  For example, Exhibit B, where registrants provide information about their contracts with foreign principals now asks whether the registrant has engaged in any political activities prior to the date of registration, as well as the previous query on information about prospective political activities on behalf of a foreign principal.  Because the Department has not yet provided templates for the new web-based forms, the new questions are only visible once a filer begins the registration process and there is not an opportunity to prepare responses prior to accessing the filing system.

Covington will continue to monitor developments and post updates regarding this new system.

California Poised to Adopt Campaign Contribution Limits for City and County Elections

The California legislature passed a new law this week that, if signed by the Governor, would impose campaign contribution limits on city and county elections in the state.  Under current law, cities and counties may adopt their own contribution limits, but most have not.  According to the legislature, this has led to a situation where some local candidates raise 40% or more of their funds from a single contributor.

The new law sets the default contribution limit for city and county offices at the same amount as the limit for contributions to state legislative races, currently $4,700 per election (the limit is adjusted for inflation in odd-numbered years).  However, cities and counties may adopt different limits from this default.  The limits in cities and counties that have already adopted separate limits will not change.

The law also changes some of the rules applicable to all state and local candidates related to accepting contributions after the election, and the limits on contributions to and totals raised for officeholder accounts.

If signed by the Governor, the changes take effect January 1, 2021.

IRS Issues Notice of Proposed Rulemaking on Donor Disclosure Rules in Response to Court Ruling

The Internal Revenue Service today announced proposed regulations to eliminate donor information disclosure requirements for certain nonprofits.  The proposed regulations provide “relief from requirements to report contributor names and addresses on annual returns filed by certain tax-exempt organizations, previously provided in Revenue Procedure 2018-38.”  Once the notice is published in the Federal Register, the IRS will accept comments on the proposal before finalizing the regulations.  The comments will be due 90 days after the date of publication, which is expected to be September 10, 2019.

The new proposed regulations respond to a Montana federal court ruling we reported on this summer that the IRS violated the Administrative Procedure Act when it issued Revenue Ruling 2018-38 without providing a notice-and-comment rulemaking procedure.  The Revenue Ruling had provided that tax-exempt organizations, other than Internal Revenue Code Section 501(c)(3) charities and Section 527 political organizations, were no longer required to report the names and addresses of contributors  to the IRS on Schedule B of the annual information return (Form 990).

Under the proposed regulations, tax-exempt organizations must continue to file Schedule B with an annual return but organizations, other than Section 501(c)(3) charities and Section 527 political organizations, would not include the names and addresses of contributors.  That information must be kept by the organization, in the event of an IRS request.  The proposed regulations would allow tax-exempt organizations to apply the regulations to any annual returns filed after today.

The IRS also issued Notice 2019-47, which exempts any tax-exempt organizations that failed to report donor names and addresses with their 2018 Form 990, based on Revenue Ruling 2018-38, from incurring penalties for following the IRS guidance.

Montana Federal Court Halts IRS Policy that Eliminated Reporting of Donor Information

The Internal Revenue Service (IRS) must adhere to public notice-and-comment procedures before it can relieve certain tax-exempt organizations of the burden of reporting the names and addresses of their donors to the IRS, a Montana federal court ruled this week.  Last year’s Revenue Procedure 2018-38 provided that tax-exempt organizations, other than 501(c)(3) charities, were no longer required to report donor information to the IRS on the annual information return, Form 990.  The U.S. District Court for the District of Montana held that the revenue procedure violated the Administrative Procedure Act (APA) because the IRS promulgated the new rule without adhering to the notice-and-comment procedures required for “legislative rules.”

As we reported last summer the IRS policy change was a significant shift in donor disclosure rules for 501(c)(4) social welfare organizations, trade associations, and other tax-exempts.  For over 50 years, the IRS had required that these tax-exempt organizations report the names and addresses of certain donors on Form 990, Schedule B, but the change in policy eliminated that requirement, even though the information was previously redacted by the IRS and tax-exempt organizations before making a Form 990 public.  In announcing Revenue Procedure 2018-38, the IRS stated that the new policy did not prevent it from demanding donor information from tax-exempt organizations, which was still required to be collected and maintained by the organizations.

The federal court ruling invalidated Revenue Procedure 2018-38, effectively reinstating the requirement that tax-exempt organizations report their donors’ names and addresses to the IRS on Form 990, Schedule B.  After finding that the plaintiffs—Montana Governor Steve Bullock, the Montana Department of Revenue, and the state of New Jersey—had standing to challenge the policy change, the judge held that the policy was invalid.  Current Treasury regulations require tax-exempt organizations to “file an annual information return” that includes “[t]he total of the contributions, gifts, grants, and similar amounts received . . . and the names and addresses of all persons who contributed, bequeathed, or devised $5,000 or more . . .”  26 C.F.R. § 1.6033-2(a)(ii)(f).  The court concluded that the IRS abolished the requirement to report donor names and addresses, which “effectively amended” the regulation, without adhering to notice-and-comment procedures.

The IRS had argued in the case that Revenue Procedure 2018-38 merely concerned a matter of agency practice or procedure and was therefore an “interpretive rule” that does not require notice and comment.  However, the court rejected this contention, on the basis that an interpretive rule must be “consistent with the regulation that it seeks to interpret.”  Here, the court found, the new policy conflicted with the existing regulation, which affirmatively requires tax-exempts to report donor information.  Accordingly, the court found that the new procedure was a “legislative rule” that would have the force of law, not an interpretive rule, and must therefore undergo the public notice-and-comment procedure.

The court made clear that the plaintiffs did not challenge “the substance of the IRS’s decision or whether substantial-contributor information must be disclosed,” but rather that the IRS failed to follow the required notice-and-comment procedure.  Nothing in the court’s order would prevent the IRS from eliminating the requirement that tax-exempts report their donors.  If the ruling stands, then, per the court’s order, the “IRS must follow the proper notice and comment procedures pursuant to the APA if it seeks to adopt a similar rule,” and may not, as the court put it, “attempt to evade the time-consuming procedures of the APA.”

We will monitor closely whether the IRS will attempt to repeal the donor reporting requirement for certain tax-exempts through a public notice-and-comment procedure, or whether the agency will appeal.

New Jersey, Colorado Join Growing List of States Regulating “Dark Money”

So-called “dark money” — political contributions and spending by groups that do not have to disclose their donors — continues to draw the attention of state legislators, with Colorado and New Jersey recently adopting laws that attempt to force some donor disclosure from the groups.  They join other states, including Washington and California, that have passed similar laws.  We expect this trend to continue.

Colorado

In Colorado, the “Clean Campaign Act of 2019” requires disclosure by corporations (including nonprofits), labor organizations, and groups making independent expenditures that contribute, donate, or transfer $10,000 or more per year that is earmarked for either:

  • making independent expenditures or electioneering communications or
  • for the recipient to make a contribution, donation, or transfer to pay for an independent expenditure or electioneering communication.

Nonprofits covered by the law must disclose the name of any person giving the organization $5,000 or more earmarked for making independent expenditures or electioneering communications in the 12 months before either the independent expenditure or electioneering communication is transmitted or the funds are transferred, whichever is earlier.  If, in turn, a disclosed donor meets the above criteria, then the disclosure must include the same information about the donor.  For-profit companies must disclose ownership and control information.

The law becomes effective August 2, 2019, unless a referendum petition is filed before then.  New regulations will likely clarify the meaning and impact of this law.  The law also makes changes to political advertisement disclosures; laws against foreign interference in state elections; independent expenditures; and the state’s “small-scale issue committee” rules.

New Jersey

Two law changes in New Jersey increase the disclosure required of some nonprofit organizations operating in the state.

First, a new campaign finance and lobbying disclosure law creates an expansive new category of political committee under state campaign finance law called an “independent expenditure committee,” and then requires disclosure by such committees.  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.

An independent expenditure committee must file quarterly disclosures of all contributions it receives in excess of $10,000 and all expenditures it makes in excess of $3,000 for influencing elections or influencing a public question, legislation, or regulation.  The committee also must file a registration disclosing, among other information, the names of the individuals who control it.  Candidates and public officials may not establish or control an independent expenditure committee.

The law is scheduled to take effect October 15, 2019, but this may not be its final form — the governor and legislature have indicated a desire to refine the law, particularly the portions related to influencing legislation or regulations.  The law also makes other adjustments to political committee registration and other campaign finance rules.

Second, a rule change by the New Jersey Department of Consumer Affairs will affect IRC § 501(c)(4) organizations and other groups that must register as charitable organizations under the state’s charitable solicitation law.  Such groups are now required to disclose to the state every contributor who gave the organization $5,000 or more in the tax year.  While the information is not supposed to become public, unintended public disclosure due to lawsuits, leaks, and errors have occurred in other states with similar laws.  The U.S. Treasury Department eliminated a similar federal disclosure requirement, with respect to the names of donors, for 501(c)(4)s and some other organizations last year.

In Major Blow To Its Opponents, SEC Pay-to-Play Rule Survives D.C. Circuit Challenge

The U.S. Court of Appeals for the D.C. Circuit yesterday issued a long-awaited opinion upholding, on the merits, a recent update to the SEC’s pay-to-play rule.  While the case involved only a narrow piece of the rule, the decision’s logic is worded more broadly and could apply to the SEC rule as a whole, making future challenges to the rule much more difficult, at least in the D.C. Circuit.

For years, opponents of the SEC pay-to-play rule have tried to obtain a court ruling declaring the rule unlawful or unconstitutional.  Until now, those challenges had been stymied on procedural grounds.  Yesterday, these opponents to the rule narrowly overcame these procedural obstacles only to be a dealt a substantive, precedent-setting defeat.

Background: 25 Years of Challenges To Pay-to-Play Rules

To understand the significance of yesterday’s opinion, we need to travel back to 1994, when the Municipal Securities Rulemaking Board (“MSRB”) adopted a “pay-to-play” rule to reduce the role of political contributions in the awarding of municipal securities business.  The rule effectively restricted broker-dealers and those affiliated with them from making certain political contributions.  The rule was challenged shortly thereafter but, in an important case called Blount v. MRSB, the D.C. Circuit rejected a constitutional challenge to this rule on the merits.

Having survived a constitutional challenge, the MSRB rule became the predicate for the well-known pay-to-play rule for investment advisers, adopted by the Securities & Exchange Commission (“SEC”) in 2010.  That rule, among other things, prohibits investment advisers from providing paid investment advisory services to a government entity within two years of a political contribution to certain government officials by the adviser and certain “covered associates” of the adviser.

In 2015, the Financial Industry Regulatory Authority (“FINRA”) adopted a similar pay-to-play rule for FINRA members.  Pursuant to the rule, FINRA members may not “engage in distribution or solicitation activities for compensation with a government entity on behalf of an investment adviser that provides or is seeking to provide investment advisory services to such government entity within two years after a contribution to an official of the government entity is made by a covered member or a covered associate” of the FINRA member.  The rule also prohibits FINRA members and their covered associates from “solicit[ing] or coordinat[ing] any person or political action committee” to make any contributions to a covered official or certain political parties.  As a result of the rule, certain individuals affiliated with FINRA members are effectively barred from making or soliciting certain political contributions, even if their motive for making the contribution or solicitation was purely ideological and unrelated to their work for FINRA members.

The SEC approved the FINRA rule in 2016 and two state Republican parties then challenged that SEC order in the 11th Circuit.  The 11th Circuit transferred the case to the D.C. Circuit.  In a consequential decision, instead of dropping the case, the parties decided to pursue the challenge in the D.C. Circuit, notwithstanding the bad, on-point precedent in Blount.

The D.C. Circuit’s Decision

Yesterday’s decision, authored by Judge Ginsburg, reached the merits of the challenge for the first time.  The court found that the political parties had standing because they had submitted an affidavit from a regulated placement agent stating that he would have solicited friends and family to donate to the parties but for the rule.  This possible loss of future contributions was sufficient to establish injury-in-fact and standing, in the court’s view.  (Judge Sentelle dissented, arguing that any such injury was too speculative and that parties had therefore not established standing.)

Turning to the merits, the court dismissed the parties’ legal arguments one-by-one.  First, the court concluded that the rule fell “within the authority of the SEC to reduce distortion in financial markets.”  It concluded that, notwithstanding Congress’s choice to set contribution limits directly in the Federal Election Campaign Act (“FECA”), Congress did not “reserve[] to itself the authority to determine when a political contribution poses a risk of corruption”: “In our view, that the Congress has increased the contribution limits to keep pace with inflation and that it has prohibited certain groups from making contributions is not evidence of a ‘clear congressional intention’ to preclude the SEC from limiting campaign contributions that distort financial markets.” The court also held that FECA and the SEC pay-to-play rules “can peacefully coexist” notwithstanding an earlier (and arguably later-superseded) D.C. Circuit opinion invalidating a postal regulation that imposed political mail disclosure requirements beyond those imposed by FECA.

The court next rejected the claim that the pay-to-play rule was arbitrary and capricious in violation of the Administrative Procedure Act because the rule was a reasonably-drawn “prophylactic” attempt to reduce corruption or its appearance.  Further, because the court concluded that the rule was “closely drawn to serve a sufficiently important governmental interest” — preventing corruption and its appearance — the parties’ First Amendment arguments also failed.  In reaching this constitutional decision, the Court relied heavily on Blount, which, as noted above, upheld the very-similar MSRB rule against constitutional challenge.

 

Recognizing that the pay-to-play rules impose another federal limit on contributions to candidates on top of the per-candidate limits, the parties argued that the Supreme Court undermined Blount in the McCutcheon case, a case in which the Court struck down aggregate contribution limits, criticizing the then-existing overlap between per candidate and aggregate limits as a “prophylaxis-upon-prophylaxis approach” to reducing corruption and its appearance.  The D.C. Circuit rejected this argument, concluding that Blount was still good law.

It also rejected perhaps the best argument of petitioners — that the pay-to-play rule has a “disparate impact … on candidates running for the same seat,” “where one candidate is a covered official and the incumbent (or another candidate) is not.”  The court simply concluded that, even though there is a disparate impact, it is justified by the interest in preventing corruption and its appearance.  Curiously, the court described this “disparate effect” “as a feature, not a flaw” of the rule.

What Comes Next?

So, what’s next for pay-to-play rule challenges?  While opponents of the pay-to-play rule have faced a string of defeats, this merits decision is the worst loss yet for the rule’s opponents as it rejects their substantive arguments and sets a precedent from a highly-regarded appellate court, in an opinion supported by judges appointed by Presidents from both parties.

As next steps, the political party committees may seek en banc review or petition the Supreme Court to take the case, but the absence of a circuit split and the composition of the D.C. Circuit panel may make both options difficult.  A challenge to the rule could be pursued in another circuit, although the likelihood of success for such a challenge has decreased with yesterday’s D.C. Circuit opinion.  Opponents might instead try a more targeted attack on the rule.  Instead of seeking the wholesale abandonment of the rule, opponents might decide to bring a tailored challenge to the most constitutionality vulnerable parts of the rule, such as the extremely broad definitions of covered “officials” and “covered associates,” the low de minimis thresholds, or the ban on solicitations, which restricts direct political speech.

Regardless of what happens next, for opponents of the SEC rule, the hill got much steeper yesterday.

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