With less than one month to go before the 2018 elections, the ground is shifting for major political donors. Developments over the last several years, and especially in the last few months, show that the rules of the road are changing with respect to many of the common election law issues faced by high net worth individuals. These complex rules present an array of compliance traps for the unwary. To help high net worth individuals and their family offices navigate this thicket, Covington today has published an advisory describing steps high net worth individuals can take to ensure compliance with these rules.
Covington Issues Client Advisory Concerning “Earmarked” Contributions To Politically Active Organizations
A perennial compliance issue for corporations, family offices, and individual major donors who are considering contributions to politically active outside groups involves determining whether the contributions will be treated as “earmarked” for a specific candidate or political committee, which can result in legal compliance issues as well as disclosure of the donor’s identity. The new advisory is available here.
FEC Issues New Guidance On Donor Disclosure for Entities Making Independent Expenditures
On September 18, the Supreme Court left in place the district court decision in CREW v. FEC, a case that dramatically increased the disclosure obligations for nonprofits and other entities that spend money on public communications that encourage people to vote for or against specific candidates.
We previously described the anticipated effects of the CREW decision, but guidance issued today by the FEC answers some questions even as it raises others. While the CREW decision and new guidance do not change the reporting requirements for Super PACs and other political committees, they do change the donor disclosure requirements for other groups that pay for independent expenditures, such as trade associations and 501(c)(4) social welfare organizations. The following are key takeaways from the guidance for these types of entities when making independent expenditures:
The following are key takeaways for entities making independent expenditures other than political committees:
- There is no change in filing requirements for these entities whose only independent expenditures were made before September 18.
- For entities making independent expenditure on or after September 18 aggregating to more than $250, the information required to be reported regarding their donors depends, in part, on when they received the contribution:
- Contributions received 7/1/18 – 8/3/18 (beginning of the quarterly filing period through the date of the district court opinion): Identify any person who contributed more than $200 in 2018 for the purpose of furthering the reported independent expenditure, which was the rule prior to the CREW decision.
- Contributions received 8/4/18 – 9/30/18 (the end of the quarterly filing period) and beyond: Identify any person who contributed more than $200 in 2018 if the contribution was intended to influence elections. The filer must separately identify those contributors who gave for the purpose of furthering any independent expenditure.
“In the interests of fairness,” the FEC decided that more expansive disclosure is required only for contributions received on or after August 4 because “no one was on notice” that expanded disclosure would be necessary until after the August 3 CREW decision.
The FEC also provided several important clarifications about which contributions are—and are not—reportable going forward:
- Filers must identify, with a special notation, all donors who contribute over the $200 threshold for the purpose of supporting any independent expenditure (not necessarily the specific reported independent expenditure).
- For other contributions intended to influence elections, there is still considerable ambiguity as to how far-reaching the disclosures must be. The FEC states that such contributions must be disclosed if they were “earmarked for political purposes.” But it does not define when a contribution is “earmarked for political purposes.” What about a contribution that was solicited to influence federal elections, but that was accompanied by written instructions making clear that the recipient could use the contribution for any purpose. Is that contribution “earmarked for political purposes”?
- The guidance also includes an odd quotation from the CREW decision stating that contributions are reportable when “used for other purposes in support or opposition to federal candidates by the organization for contributions directly to candidates, candidate committees, political party committees, or super PACs.” It is not clear if the FEC meant that contributions for other purposes are disclosed only if they are used to support other political committees, or if it referred to such a use as merely an example of a case where contributions must be disclosed even when not made for purposes of furthering independent expenditures.
- Interestingly, the CREW decision may in one respect lead to less disclosure. The FEC’s new guidance indicates that 24-hour and 48-hour reports filed shortly after the public dissemination of an independent expenditure no longer need to disclose the contributors who supported the corresponding independent expenditure. Now, contributors need only be disclosed on quarterly reports, which may mean that disclosure of a contributor could be delayed until months after the independent expenditure was disseminated—and potentially months after the election.
We will continue to closely monitor the evolution of this significant development.
California Social Media DISCLOSE Act Becomes Law, Takes Effect 2020
Earlier this week, California Gov. Jerry Brown approved the Social Media Disclose Act, to take effect in 2020. We previously blogged about the Social Media DISCLOSE Act, which will place new disclosure obligations on social networks like Facebook and Twitter; advertising platforms like Google; and anyone who engages in online political advertising. Covered platforms in particular should start thinking now about how they will comply with the law, or else risk being caught flat-footed when it kicks in just in time for the 2020 state elections.
Donor Disclosure Requirements Expand After Supreme Court Order
In a startling turn of events that will alter election spending decisions in the run-up to the general election, and after, the Supreme Court reversed a temporary stay issued by Justice Roberts on Friday, and left in place a district court decision that dramatically increased the disclosure obligations for entities spending on public communications that encourage people to vote for or against specific candidates. The exact effects of this decision are hard to predict because political actors may adjust their behavior to accommodate for it. Nevertheless, here are a few key points.
What the decision does. As we described more fully in a client alert in August, the trial court struck down a Federal Election Commission (FEC) regulation that stated that, when making an independent expenditure of over $250 in support of or opposition to a federal candidate, entities that are not registered with the FEC need only disclose those donors who gave to the group for the purpose of funding the specific ad that was being reported. Instead, the court concluded that these groups must (a) disclose the identity of all donors who gave over $200 to the group for the purpose of influencing a federal election, and (b) identify which of those donors gave for the purpose of funding any of the group’s independent expenditures.
What this will mean going forward.
- Many outside groups that have made independent expenditures in the past will stop. These groups rarely anticipate disclosing donors, and many of their donors rely on that. A similar court decision in 2012 expanding disclosure of donors to groups funding electioneering communications led to an almost complete stop to those types of ads until it was reversed on appeal.
- Some of these groups will shift from spending on independent expenditures (which encourage people to vote for or against a particular candidate) to spending on electioneering communications (broadcast ads that mention a candidate shortly before an election, but don’t explicitly tell you to vote for or against the candidate) or other less regulated forms of political speech.
- This decision does not affect Super PAC spending. While many people don’t realize it, Super PACs already disclose their donors. So spending by these groups won’t be affected by the court’s rulings.
- The success of reform groups and state regulators in litigating disclosure provisions is not limited to this case. The ruling by the D.C. Circuit in this case when denying the request for a stay, and the Supreme Court’s ruling today, will likely embolden those willing to litigate over disclosure.
Donors and groups with active political spending programs will need to be mindful of this decision, and its implications going forward. While rulings on a request for stay are different from a dispositive ruling on the underlying claims, they are related, and the decisions discussed here point to a period of increased emphasis on disclosure of those who fund a broad range of political speech.
California’s New “Social Media DISCLOSE Act” Regulates Social Media Companies, Search Engines, Other Online Advertising Outlets, and Political Advertisers
California’s new “Social Media DISCLOSE Act” takes on the trending topic of online political advertising disclosure. Assuming Gov. Jerry Brown signs the bill, then come 2020, social media networks like Twitter and Facebook, as well as Google and similar tools, may face burdensome new obligations related to California political advertising. Political advertisers themselves will also have to make additional disclosures. The law targets advertisements that often appear as “sponsored content,” and places the disclosure burden on the online platform.
The law applies to “online platforms” and certain persons who are registered political committees placing California political advertisements on those online platforms. “Online platform” is defined to include websites and web or digital applications that sell advertising directly to advertisers, but not websites or apps that only display advertisements sold via another platform.
Under the Act, the platform must include with each advertisement a disclosure of who paid for the ad, or a link to the sponsor’s page on that platform or another page disclosing sponsorship information. The platform also must maintain records of the advertisements disseminated via the platform and make them available to the public online, including via a link on the advertiser’s profile or similar page on the platform. The records must include the first and last date the ad ran; the total impressions of the ad; the rate charged or amount spent on the ad; and information about who paid for the ad.
The advertiser, meanwhile, must notify the platform that the advertiser is placing a political advertisement, and provide the platform with the advertiser’s name as well as the name of the candidate or measure to which the advertisement refers.
The law includes an exception for video, audio, and email ads; and for ads that consist of images linking to a website. These ads already carry significant disclosure obligations imposed in the original California DISCLOSE Act and elsewhere in state law.
The law also makes minor adjustments to disclosure of other online advertisements. The law takes effect January 1, 2020.
PLI Current Highlights New Wave of FARA Enforcement
As the Foreign Agents Registration Act continues to receive national attention, an article in this quarter’s PLI Current journal describes the Justice Department’s increased focus on the statute. The article, authored by Covington’s Rob Kelner, Zack Parks, and Alex Langton, discusses the shifting FARA enforcement landscape, analyzes how the statute works, and addresses pending FARA reform legislation. As the article notes, because “both the Department of Justice and Congress have signaled a clear intent to strengthen FARA and to clamp down on enforcement,” the time has come to “reevaluate previously accepted axioms regarding FARA.”
Covington has one of the nation’s most experienced and long-standing FARA practices, which includes attorneys in our Election and Political Law and White Collar Defense practice groups. The firm routinely advises U.S. and international clients on compliance with FARA, obtains advisory opinions from the FARA Unit, represents clients in FARA audits and internal investigations, and defends clients accused of violating FARA. For questions on FARA enforcement or compliance matters, please reach out to any member of Covington’s Political & Election Law Practice Group.
Survey of the Pay-to-Play Laws of the United States
Companies doing business with state and local governments or operating in regulated industries are subject to a dizzying array of “pay-to-play” rules. These rules effectively prohibit company executives and employees (and in some cases, their family members) from making certain personal political contributions. Even inadvertent violations can be dangerous: a single political contribution can, for example, jeopardize the company’s largest public contract.
To ensure compliance with these rules, some companies have adopted pay-to-play policies that require employees to obtain pre-approval from the legal or compliance department before making certain political contributions. But it is not always easy to determine whether a particular contribution should be pre-approved. Analyzing how the rules apply to a contribution and identifying the universe of applicable pay-to-play rules is a daunting challenge.
To help in-house lawyers and compliance professionals with making these decisions, Covington annually updates a detailed survey of the pay-to-play laws of the 50 states and multiple cities and counties. This over 300-page survey:
- Details all statewide pay-to-play rules.
- Describes over one hundred “specialty” pay-to-play rules that apply to contractors doing business with certain agencies or companies operating in certain regulated industries, including those that apply to investment firms that manage state or local public funds, lottery and gaming companies, public utilities, redevelopment contractors, and insurance companies.
- Lists numerous localities that have adopted their own rules.
The survey also includes user-friendly charts and legal citations answering questions such as:
- Which donors are affected?
- Which contributions are restricted?
- Is there a de minimis exception? What are the other exceptions?
- Which types of contracts are covered?
- How long after a contribution does the restriction run?
- Does the rule restrict political fundraising and other solicitations?
- Are there reporting and disclosure requirements?
- What are the penalties?
Covington is pleased to be able to offer the survey for purchase in its entirety. Alternatively, individual states or groups of states may be made available at discounted rates. For questions or to purchase the survey, please contact paytoplaysurvey@cov.com.
IRS Announces Major Change To Nonprofit Donor Disclosure Requirements
In a significant and unexpected development, the U.S. Treasury Department announced yesterday that certain nonprofits — including trade associations and 501(c)(4) social welfare organizations — would no longer be required to disclose the names and addresses of their donors on the annual “Form 990” they file with the Internal Revenue Service. Although the IRS already redacts this donor information before making a Form 990 public, these groups will now no longer need to disclose this information to the IRS in the first place. In this advisory, we discuss the background and implications of this development, which is an important one for trade associations, social welfare organizations, and major donors.
Why Did Treasury Make the Change?
In making the change, the Treasury Department emphasized that donor disclosure for organizations other than 501(c)(3) charities and 527 political organizations is not statutorily mandated. Further, in the press release announcing the change, the Treasury Department explained that the previous policy, which required the IRS to redact donor names and addresses, was not a prudent use of taxpayer dollars and that disclosure of donor names and addresses was not necessary because “the IRS makes no systematic use of Schedule B with respect to these organizations in administering the tax code.” In addition, the government emphasized that the “new policy will better protect taxpayers by reducing the risk of inadvertent disclosure or misuse of confidential information,” acknowledging that the IRS “has accidentally released confidential Schedule B information in the past” and that certain tax-exempt groups had previously received “inappropriate” government inquiries “related to donors.”
Which Groups Are Now Exempt From Disclosing Donor Names?
Once the policy becomes effective, “tax-exempt organizations required to file the Form 990 or Form 990-EZ, other than those described in 501(c)(3), will no longer be required to provide names and addresses of contributors on their Forms 990 or Forms 990-EZ and thus will not be required to complete these portions of their Schedules B.” Thus, the new policy exempts 501(c)(4) social welfare organizations, 501(c)(5) labor organizations, 501(c)(6) trade associations, and lesser-known nonprofits such as social clubs, volunteer fire departments, and fraternal benefit societies.
Which Groups Are Not Exempt From the Change?
As noted, 501(c)(3) charities are still required to disclose donor names and addresses on the Schedule B, unless they qualify for a separate exemption, such as the exemption available to churches. Similarly, 527 political organizations that file a Form 990 (such as the Democratic Governors Association and the Republican Governors Association) will still be required to disclose donor names and addresses.
Does This Change What the Public Sees?
No. Even under the current regulations, donor names and addresses on the “Schedule B’s” filed by the now-exempted nonprofits were redacted by the Internal Revenue Service or by the nonprofit before they were made public.
Is Schedule B Gone?
No. Even though many nonprofits will no longer be required to include donor names and addresses on the Schedule B, it appears they still must complete the Schedule B, itemizing the amounts of contributions from donors who give $5,000 or more in a year. But they would no longer be required to include the names and addresses of donors on this schedule.
When Does The Change Become Effective?
The revised reporting requirements apply to returns for taxable years ending on or after December 31, 2018.
Does This Mean That the IRS Will Never Be Able to See 501(c)(4) and 501(c)(6) Donor Information?
No. The new guidance makes clear that the IRS could conceivably still review this information in connection with an audit or enforcement proceeding: “Organizations relieved of the obligation to report contributors’ names and addresses must continue to keep this information in their books and records in order to permit the IRS to efficiently administer the internal revenue laws through examinations of specific taxpayers.”
Does This Mean That These Groups Will Not Be Required to Disclose Their Donors At The State Level?
It depends. There are several states, including New York and California, that require certain 501(c)(4) social welfare organizations to register as charitable organizations with the state and file detailed reports that include unredacted versions of the Form 990 donor list. Once this policy becomes effective, the Form 990s submitted by 501(c)(4) organizations in these states will no longer contain the names and addresses of donors, which represents a significant shift in those states. However, because this policy does not affect 501(c)(3) charities, similar state-level filings by these public charities will go unchanged.
In addition, we have highlighted in previous client advisories and on our Inside Political Law blog how states are increasing their efforts to compel nonprofits to disclose their donors. Whether it is the DISCLOSE Act in Washington or an Executive Order in Montana, states are finding innovative ways to obtain donor information from nonprofits. These targeted state-level efforts should not be affected by this policy change at the IRS. After this policy change, however, we expect that regulators in states that promote donor transparency will use the opportunity to occupy this space and push for new donor disclosure laws or regulations. Covington will continue to monitor the response at the state level.
Covington Publishes Update on Recent FEC Enforcement Activity
After a surprisingly active 2017, the Federal Election Commission’s enforcement efforts have slowed noticeably in the early months of 2018. In February, former Commission Lee Goodman’s departure from the agency left the Commission with only four members. While the remaining Commissioners can still form a quorum, unanimity is required for all official agency action. Perhaps unsurprisingly, then, the Commission’s enforcement activities have declined during the first half of 2018. Still, while it may be tempting to conclude that the FEC has gone entirely idle, the Commission has pursued a number of recent cases that point to continued areas of enforcement risk. In a newly published client alert, Covington provides an overview of recent FEC enforcement trends and identifies areas of active enforcement at the four-member Commission.
