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.

House Tax Bill Opens Door to Expanded Political Activity By Charities

UPDATE:  The provision in the House bill, discussed below, was not included in the final Conference Agreement that became law. 

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.

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 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.