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.

Politically Active Nonprofits Face New Donor Disclosure Law in Washington

Yesterday, Washington State Governor Jay Inslee signed into law the DISCLOSE Act, a law that imposes new donor disclosure requirements on politically active nonprofits.

Under the new law, a nonprofit entity—including, but not limited to a charity, educational institution, advocacy group or trade association—may be required to register with the state as an “incidental committee” and disclose the top 10 donors whose contributions aggregate to $10,000 or more in the calendar year if the nonprofit expects to make contributions or expenditures that aggregate to at least $25,000 in any calendar year in Washington state election campaigns, including ballot initiatives.  There is an exception for certain foundations that contract with a nonprofit, so long as the contract prohibits the use of the funds on political activities, and the foundation funds less than 25% of the nonprofit’s budget.

Like similar laws in other states, the DISCLOSE Act is an attempt to combat “dark money”—political contributions where the original source of funding may not be fully disclosed.  However, like many such laws, the “cure” is not perfectly tailored to address the concern.  For example, the law will undoubtedly lead to the disclosure of specific individuals who donated to a nonprofit without any intention that their funds would be used in connection with a Washington state election.  The law may also dampen nonprofits’ fundraising by discouraging donations of $10,000 or more.

Would-be donors to nonprofits now have a few additional questions to consider, including the following:

  • Will my donation place me among the top ten donors, resulting in the disclosure of my identity in a Washington state campaign finance filing? (Possibly, if a person’s donations to a politically active entity will amount to $10,000 or more.)
  • If I live outside the State of Washington, does this law even apply to me? (Yes, if the recipient nonprofit is politically active in the state.)
  • Do I now need to monitor the political plans of the nonprofits to which I donate? (Probably.)

The new law goes into effect on January 1, 2019, so active or would-be donors have until the end of the year to assess the impact of the new law on their giving plans.

For fans of legislative acronyms, “DISCLOSE” is an abbreviation of Democracy Is Strengthened by Casting Light On Spending in Elections.

Covington will continue to monitor this and other developments regarding state donor disclosure laws.

A Review of Pending FARA Reform Bills

In recent months, Congress’s efforts to reform dramatically the Foreign Agents Registration Act (“FARA”) have picked up steam. As we explained in our recent FARA guide, FARA is a complex and broadly worded criminal statute that requires any “agent of a foreign principal” to register with the Department of Justice and file detailed public reports every six months. The breadth of the statute, its criminal penalties, the absence of interpretive guidance, and the growing attention paid to the 1930s era law by federal prosecutors combine to create dangerous and difficult-to-manage risks for multinational companies, lobbying firms, and public relations firms.  FARA reform bills making their way through Congress could introduce new uncertainties and sweep still more companies within the statute’s broad scope.  In a new client alert, Covington provides a summary of the two bills under consideration, describes the current state of play, and reviews the bills’ implications for multinational and foreign corporations and lobbying and public relations firms with foreign clients.

FEC Announces Internet Rulemaking

The Federal Election Commission (FEC) unanimously approved a Notice of Proposed Rulemaking, beginning the formal process of amending the agency’s regulations on internet political disclaimers.  The proposal and the Commissioners’ comments at the hearing reflect a fair amount of consensus on how to refashion rules that have been the source of significant disputes over the past decade.  Here are a few key points about yesterday’s action.

Moderation Won the Day.  While the draft notice contained two proposals for how to revise existing regulations, they share many common points, making a new final rule more likely.  The two proposals more closely resemble variations on solving a common problem than competing agendas.

Slow and Steady Wins the Race.  Publication of the notice will begin a sixty day comment period, and the Commission plans a public hearing on the proposal June 27, 2018.  Consequently, any new rule will be more relevant in the 2020 races.

Updating the Terms in the Regulations.  All Commissioners seem to agree that the regulatory language needs to be updated from simply referring to “Web sites,” to include terms like “internet-enabled device or application.”

The Scope of the Mandatory Disclosure Has Not Grown.  All Commissioners agree that the new rules will only cover communications that contain express advocacy, solicit contributions, or are paid for by a political committee.  Disclosure will remain limited to the identity of the person paying for the communication and whether it was authorized by a candidate.

The Commission is Open to Suggestions.  In both the formal notice and at the hearing, the Commissioners made clear they were not wedded to specific proposals, and that constructive advice from the public, especially those steeped in the technology, would be welcome.  They specifically cite to whether “internet-enabled device or application” is an appropriate phrase for current and future technologies, and wonder how this rule will apply as political ads move to wearable devices, the “internet of things” and screenless assistants.

“Stand By Your Ad” on the Internet?  One proposal would add the “stand by your ad” written and spoken disclaimers required in TV and radio ads to include video or audio communications on the internet or other digital media.  An alternative proposal would create distinct disclaimer rules for internet communications, defining what payment and authorization information must be included, and when that information is clear and conspicuous.

What are “Adapted Disclaimers,” “Technological Mechanisms,” and “Indicators”?   The FEC’s disclaimer rules have long exempted political communications that are too small (e.g., an ad printed on a pencil) or too impractical (e.g., sky writing) for a disclaimer.  The Commissioners agree a similar consideration applies to digital technology, and that for certain types of space-constrained communications, an abbreviated “adapted disclaimer” can be used.

But there is not yet consensus for when this abbreviated disclaimer could be used or what information would have to be included.   One alternative is for a bright line test that would permit an adapted disclaimer anytime a full disclaimer takes up 10% or more of the ad.  But should characters, pixels and seconds be the standard of measure, and is 10% too high or too low?  The FEC is curious to know what people think.  Nor has the FEC settled on exactly what the adapted disclaimer must include.  For example, in small space ads, could it be no more than a hashtag, or a well-known group’s initials, like DNC or NRA?

All the proposals envision that an adapted disclaimer would be accompanied by an “indicator” that would guide viewers to the full disclaimer with some form of “one-click” technology mechanism.  The FEC is considering things like hover-over mechanisms, pop-up screens, scrolling text, rotating panels, or hyperlinks to a landing page with a full disclaimer. One proposal envisions ads that are so space constrained that even the adapted disclaimer and indicators would take too much space, and exempts such ads from the regulations.

The Bottom Line.  After many failed attempts to update its internet regulations, the FEC Commissioners seem to have narrowed their differences to a point where it is possible to envision a final rule that brings the agency’s regulations into the 21st Century.  While pitfalls remain, we recommend paying close attention to the next phase of this rulemaking process.

Covington Issues Updated Investigations Manual for House and Senate Chiefs of Staff

Covington today issued the third edition of its Chiefs of Staff manual on handling investigations of Members of Congress and Congressional staff.  The manual was originally published in 2014, but has been updated twice since then.  The new third edition includes some of the latest available statistics and examples.  This manual is intended to advise House and Senate Chiefs of Staff on the steps they should take early in an investigation to help insure the best outcome and to avoid doing any harm.  Much of the advice contained in the manual would be relevant to government investigations in other contexts.  You can read the latest edition of the manual, which Politico posted online earlier today, here.

Fight Against Sexual Misconduct Bringing Regulations, Protections for Lobbyists

As sexual abuse, assault, harassment, and other misconduct have dominated national headlines, state capitols and lobbyists have not escaped scrutiny.  Amidst a spate of allegations and member resignations, some state legislatures and ethics commissions are taking action.  While a variety of measures are being considered, including tightening gift rules, it is apparent that lobbyists and their employers in some states will face new regulations, new protections, or both.  Lobbyists and their employers should watch closely for developments, which may impose training and policy requirements or offer opportunities to report and prevent misconduct.

Illinois, one of the first states to enact a comprehensive program, adopted elements of both regulation and protection.  SB 402 requires many agencies and state officials, including legislators, to adopt sexual harassment prohibition and reporting rules; requires training for state officials and employees; requires training for lobbyists; requires lobbyists and their employers to adopt sexual harassment prohibitions and reporting rules; and adopts a scheme of reporting, investigating, and penalizing sexual harassment by lobbyists and their employers.  Lobbyists and their employers must confirm in their registration that they have adopted the required policy, agree to make it available on request to any individual, agree that any person may contact the registrant’s agent to report harassment, and recognize the state’s authority to regulate in this space.  The state has adopted emergency regulations implementing the new law.

Oregon is also among those states protecting both government employees and lobbyists.  The state is expanding its regular legislative anti-harassment training on a voluntary basis to both the executive branch and lobbyists.

Some states remain more focused on protecting lobbyists from harassment and coercive situations.  After reports of legislators harassing and abusing lobbyists in Minnesota, state legislators are pushing for a formal reporting system to be used by lobbyists and others, with an independent investigative body.  California is also working on this aspect of the issue, where the legislature is considering parallel efforts to protect legislative staff and lobbyists from harassment by lawmakers.

Other states have focused more on regulation.  New Mexico has offered trainings for lobbyists, and will be asking lobbyists to disclose whether they have sexual harassment policies in place and if they have attended the training.  The Secretary of State plans to push to make the training mandatory.  While Utah rejected a proposal to require anti-harassment training for lobbyists late last year, there are plans to introduce a bill on the topic in this session.

The issue has also rekindled a proposal that North Carolina and Missouri have previously rejected — whether sex between legislators and lobbyists is a “gift” regulated by state ethics laws.  Florida is now the latest state to consider the question, anticipating that, along with a contemplated sexual harassment claims panel and other changes, defining sex as a prohibited lobbyist gift will disrupt an allegedly hostile culture in Tallahassee.

Revisions to the Department of Defense “Revolving Door” Rules

Buried in the 2018 National Defense Authorization Act (NDAA) is an obscure, and quite significant, change to the post-employment restriction on U.S. Department of Defense (DoD) civilian and uniformed personnel. This new provision could have a substantial impact on defense contractors and others who recruit DoD personnel to work on policy and procurement matters before the DoD or the Executive Branch.

What Is Prohibited?

As of December 12, 2017, Section 1045 of the 2018 NDAA prohibits certain former DoD military officers and civilian officials from engaging in either “lobbying contacts” or behind-the-scenes “lobbying activities” with respect to the DoD. Both terms derive from the Lobbying Disclosure Act. While these officers and senior civilian employees have long been covered by a restriction on certain contacts with their former employer, this change also appears to bar “behind-the-scenes” work that had previously been specifically permitted, expands the period of coverage for some officials, and for those presidential appointees who signed the Trump ethics pledge, it converts those terms from a contractual agreement to a statutory bar. Of all of these changes, the most consequential will be the prohibition on these former government officials and officers engaging in preparation and planning activities, research, and other background work that is intended, at the time it is performed, for use in lobbying contacts.

In addition to the prohibition on behind-the-scenes activity, Section 1045 is broader than the existing criminal revolving door statute, 18 U.S.C. §207, because it covers activities with respect to the entire DoD, rather than the DoD component in which the former officer or official worked.

However, Section 1045 is not a complete ban on all lobbying activities. Covered former personnel may still lobby and participate in behind-the-scenes work related to lobbying Congress, as well as certain non-DoD Executive Branch officials.

To Whom Does the Ban Apply?

This new lobbying activities ban applies to former officers in grade O-7 or O-8, as well as their civilian equivalents for one year, and to former officers in grade O-9 and above, and their civilian equivalents for two years after leaving service. The statute does not provide clear guidance on who is a “civilian equivalent” under the ban, though we anticipate the DoD will shortly issue guidance to clarify this question.

Section 1045 also does not address whether the restrictions apply to covered military officers and civilians who terminated service before the ban took effect on December 12, 2017, but who remain in the one and two year periods where certain conduct is prohibited. There are strong arguments that this provision should not be applied retroactively, and we anticipate the DoD will also issue guidance on this point shortly.

Congress left no legislative history or enforcement mechanism, and used several undefined terms, so there will be a fair amount of interpretive advice to come. Covington is closely monitoring developments.

The Foreign Agents Registration Act (“FARA”): A Guide for the Perplexed

Eighty years ago, Congress enacted the Foreign Agents Registration Act (“FARA”), requiring “foreign agents” to register with the Attorney General. As amended over the years, it applies broadly to anyone who acts on behalf of a “foreign principal” to, among other things, influence U.S. policy or public opinion. Until recently, it was a backwater of American law—and a very still backwater at that, with just seven prosecutions over the last half century.

That is changing now. Like the once obscure Foreign Corrupt Practices Act, which prosecutors revived from hibernation a decade ago, FARA may be ready for its close-up. In this guide, we identify the key points and provide a detailed primer on FARA registration, highlighting the ways in which it is now relevant to a broad cast of characters, including multinational corporations.