House Tax Bill Opens Door to Expanded Political Activity By Charities

There is one very important political law provision to watch as the tax bill moves to a final vote in the Senate, and potentially a conference committee reconciles the House and Senate versions.  This amendment will remove the ban on partisan political activities by charitable entities, churches, educational institutions and all other organizations exempt from tax under Section 501(c)(3) of the tax code.  If adopted, this change could have a significant effect on the flow of money in future election campaigns.  Here is a short description of the current state of the law, and why the language in the House bill could have a sweeping impact.

Currently, the IRS can revoke the tax-exempt status of a 501(c)(3) organization, such as a church, school, or foundation, if it participates or otherwise intervenes in a political campaign, which includes statements made by representatives of an organization on behalf of, or in opposition to, a political candidate.  This bright line rule has been in place since 1954.  While President Trump issued an Executive Order in May instructing the Treasury Department “to the greatest extent practicable” not to take adverse action against religious organizations for speech on “political issues,” that discretion must be exercised consistent with existing law.

The original House tax bill contained a modest exception to current law, ensuring that an entity would not lose its status as “exclusively operated for religious purposes” if the content of a “homily, sermon, teaching, dialectic, or other presentation made during religious services or gatherings” contained political content, so long as it occurred in the “ordinary course” of the organization’s regular activities, and resulted in no more than de minimis incremental expenses.

House Ways and Means Committee Chairman Kevin Brady proposed an amendment, which was adopted into the final House bill, that dramatically expanded that exception to include all organizations exempt under Section 501(c)(3), not just religious organizations, in any of their normal operations, again, so long as they did not incur more than de minimis incremental expenses.  There was no similar language in the Senate Finance Committee’s bill released last week.

There are several reasons why the House language, if included in the final bill, would likely result in widespread involvement of 501(c)(3) organizations in political campaigns.

First, having the limits set at “not more than de minimis incremental expenses” will presumably allow these organizations to shift certain existing fixed costs, such as in-house staff, to partisan political activity, for this will not result in any “incremental expenses.”  In addition, much internet advocacy involves only de minimis incremental expenses.  Finally, ambiguities in interpreting what “de minimis” and “incremental” mean will presumably come within the Presidential Executive Order’s directive that “to the greatest extent practicable” the provisions shall be interpreted to favor more political speech.

Second, for donors interested in political spending, politically active 501(c)(3) organizations are vastly preferable to other types of nonprofits, for they contain a double tax advantage: not only is the entity exempt from tax on the income it receives, the donors also may deduct their contributions from their income taxes.

Third, 501(c)(3) organizations, like social welfare organizations operating under Section 501(c)(4), are not required to disclose the identity of their donors.  This makes charities unlike more transparent political entities, such as candidate campaigns, party committees, PACs and Super PACs, which must disclose their donors.

If this provision makes it into law, we should expect to see the rapid growth of 501(c)(3) “educational” organizations with significant political operations, as well as existing churches and charities becoming more active politically.  While the House bill provides for this provision to sunset in 2023, between now and then, if enacted, we would expect significant political activity to move into the charitable space.

Covington attorneys are closely tracking tax legislation as it moves through Congress.  If you think you or your organization may be affected by the proposal discussed herein or any other part of tax reform, please let us know.

House of Representatives Seeks to Strengthen Subpoena Enforcement Dramatically

In late October, the House of Representatives quietly approved a bill that would dramatically strengthen Congress’s procedures for enforcing congressional subpoenas.  In adopting the bill, the bipartisan leadership of the House Judiciary Committee highlighted the challenges that Congress faces in obtaining materials from executive branch agencies.  Significant portions of the bill, however, apply to all congressional subpoenas, including subpoenas issued to private sector individuals and entities.

After passing the House, the legislation is currently pending in the Senate Judiciary Committee.  The staff of the Senate Judiciary has indicated an interest in enhancing Congress’s subpoena enforcement procedures.  In 2015 and 2016, the Senate engaged in a lengthy legal battle to enforce a subpoena against Backpage, an online forum accused of contributing to sex trafficking, and its CEO Carl Ferrer.  We therefore believe that legislation to strengthen congressional subpoena enforcement is likely, but it is not yet clear whether the Senate will support the House bill or propose its own alternative.

The key provisions of the bill, H.R. 4010, the Congressional Subpoena Compliance and Enforcement Act, include the following:

  • The bill would establish special rules applicable only to civil litigation brought by Congress to enforce a subpoena. Courts would be required to “expedite to the greatest possible extent” the resolution of such cases.  Congress would be permitted to request a hearing before a three-judge panel of the district court, rather than proceeding through the usual district court process.  In such instances, the legislation would eliminate intermediate appeals – any appeal would go directly to the Supreme Court.
  • The legislation would authorize “monetary penalties” against the head of a government agency found by a court to have willfully failed to comply with any part of a congressional subpoena. Importantly, the legislation would prohibit the use of any government funds to pay the penalty, presumably leaving the government official personally on the hook.
  • In a change that has significant implications for companies and individuals that receive congressional subpoenas, the legislation would provide that privileges against responding to a subpoena may be waived if a recipient does not specifically assert the privilege in a detailed privilege log provided to Congress.
  • The legislation also prescribes – with extreme precision – the information that a subpoena recipient must include in a privilege log. The bill would require, for each record withheld, the following:
    • “An express assertion and description of the legal basis asserted for withholding the record.”
    • The type and general subject matter of the record, and the date, author, addressee, and custodian of the record.
    • “The relationship of the author and addressee to each other.”
    • “Any other descriptive information that may be produced or disclosed regarding the record that will enable the congressional committee or subcommittee issuing the subpoena to assess the legal basis asserted for withholding the record.”
  • The legislation would require that subpoena respondents submit electronic information to Congress in the native electronic format.
  • Finally, the legislation reiterates Congress’s longstanding position that it is not bound by common law privileges, including the attorney-client privilege. The bill states that the legislation may not be interpreted “to establish Congress’ acceptance of any asserted privilege or other legal basis for noncompliance with a congressional subpoena.”

Recent disputes between Congress and subpoena recipients – including the Fast and Furious investigation in the Obama Administration and the Senate’s investigation of Backpage – would likely have evolved very differently under the procedures proposed in this legislation.  Indeed, the privilege log requirement may be a direct reaction to issues Congress confronted with Backpage.

Although the legislation was sponsored entirely by Republican Members of Congress, it passed the Judiciary Committee unanimously, and it passed the House under suspension of the rules, which requires a two-thirds supermajority.  Although congressional subpoenas are often the subject of partisan conflict, the wide support for this legislation likely reflects the parties’ shared institutional interests in seeing subpoenas enforced.

Grassley Legislation Would (Re)Impose FARA Obligations on Private Sector Entities

With the Foreign Agents Registration Act in the news and public awareness of this formerly obscure statute at an all-time high, Senator Charles Grassley (R-Iowa) introduced legislation last week to revise the statute significantly, including reversing a decision Congress made in 1995 to remove most private sector reporting from FARA and place it instead under the companion Lobbying Disclosure Act.

The proposed change to private sector reporting has significant implications for anyone engaged in the U.S. political system on behalf of entities based abroad, including U.S. subsidiaries of foreign headquartered businesses, U.S. companies with foreign subsidiaries or affiliates operating outside the United States, foreign individuals who travel to the United States to engage the U.S. political system on matters affecting their businesses, and U.S.-based lobbying, law, public relations, and consulting firms that provide services to individuals and companies abroad.

In a new client alert, Covington provides a summary of FARA’s key registration and reporting requirements for private entities and reviews the implications of Sen. Grassley’s legislation.

California Gov. Brown Signs California DISCLOSE Act into Law

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Avoiding State and Local Lobbying Compliance Violations

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

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