Sitting state office holders often run for federal office. As a recent decision from the FEC reminds us, it is important that resources from the state campaign not be used in the federal campaign, unless the federal campaign pays fair-market-value for those resources. Indeed, this same principle applies when other types of related organizations seek to share funds and other assets, whether that might be a 501(c)(4) and related political organization, a candidate committee and leadership PAC, or other organizations identified with a single cause or individual. Absent arms-length agreements, sharing resources can be result in a “contribution,” subject to applicable limits and source prohibitions, as well as reporting requirements.

Background of the Complaint

Josh Mandel, the Treasurer of Ohio, ran for the U.S. Senate in 2012. A complaint filed against him alleged:

1.) That his Senate campaign took over his state campaign’s website without compensation;

2.) That his state campaign impermissibly paid for travel relate to his Senate campaign; and

3.) That his Senate campaign used a state campaign email list without proper compensation.

The FEC accepted Mandel’s explanations for the first two, but deadlocked as to whether the
state campaign properly compensated for the email list (the net result is the same: the case was closed). The FEC also rejected a fourth allegation that the State of Ohio had provided an excessive in-kind contribution to the Senate campaign.

The FEC’s analysis of these issues provides a good roadmap for how a state candidate can avoid giving his or her federal campaign impermissible contributions.

Transferring the Web Site

Mandel’s state campaign used a very logical domain: www.joshmandel.com. His Senate campaign thought it would be a good domain as well. The complaint alleged the transfer from one campaign to another was done without properly compensating the state campaign for the fair market value of the web site.

Mandel explained that in reality, the Senate Campaign hired a web development company to take over hosting and development for the site and to coordinate an arm’s length deal with the company that had been running the site for the state campaign. Payments to the new vendor were all clearly disclosed as being made by the Senate campaign. The FEC said it had no information to suggest that the transfer was done at less than fair-market-value, and accepted this arrangement.

Compliance Tip: Hiring a new company to handle the arm’s-length transaction is a good idea. If you want to keep the same web company, then you should clearly document the payment from the federal campaign to the state campaign for the web site. This cost should include the domain itself and any IP from the state campaign that the federal campaign will use (such as photos, web applications, code, etc.).

Travel

Mandel made a number of trips outside of Ohio just before announcing his Senate candidacy and paid for the travel with his state campaign funds. The total cost for this travel was about $20,000. The complaint alleged that these trips were related to “testing the waters” activities and needed to be funded from federally-permissible sources (i.e., individual contributions subject to the then-applicable limit of $2,500 per person). The complaint argued that since he made these trips just before announcing his candidacy and received contributions from these states shortly after he announced his candidacy, it was clear that the travel was related to his campaign.

Mandel provided information to the FEC about the purpose of the trips (a National Association of State Treasurers meeting, a pension policy meeting, and a leadership retreat) and argued that they all involved official state business. He paid for them with state campaign funds – rather than official state funds – to avoid any question that they might be considered state political activities, as opposed to official state business. The FEC accepted this explanation, and rejected the complaint’s theory that the timing and future contributions were enough to prove he was testing the waters.

Compliance Tip: Be careful to avoid using state campaign funds to test the waters. This could include travel, polling, focus groups, or other expenses related to forming a federal campaign. Document state campaign purposes for any activities, and do not use the deliverables unless the federal campaign pays fair-market-value for them.

Email Lists

The FEC deadlocked on the issue of the email list that the state campaign provided to the
Senate campaign. Mandel argued that he had an arm’s-length agreement that was typical for lists. First, the state campaign would provide the Senate campaign with its list. In exchange, the Senate campaign would provide the state campaign with an updated list in the future, based on names the Senate campaign acquired.

The FEC’s General Counsel accepted this arrangement as consistent with prior advisory opinions dealing with traditional mailing lists. It is not clear why two Commissioners rejected this approach, but presumably they will publish an explanation at some point.

Compliance Tip: Carefully document any list exchanges so that there is a clear record of a fair-market exchange. Given the uncertainty as to why two Commissioners do not think the email list exchange is the same as a traditional mailing list exchange, it may be prudent to seek an advisory opinion or even to make a payment for the list.

Use of State Resources

The complaint also alleged that the Senate campaign used a newsletter prepared by the Treasurer’s official office (the newsletter appeared on the official Treasurer’s website and the Senate campaign site). The complaint alleged that this newsletter was an impermissible in-kind contribution from the State of Ohio. Mandel responded that the two-page newsletter was prepared by employees on their personal time. The FEC accepted this explanation, and, because creating a two-page newsletter would not take much time, exercised its prosecutorial discretion to dismiss that allegation.

Compliance Tip: Be very careful not to use any resources from your government office for either your state or federal campaign. State law here may actually present a bigger problem than the federal law. Similarly, be cautious of state laws that may prohibit asking subordinates to do “volunteer” campaign work for you.

Don’t Forget Pay-to-Play

Finally, it is worth noting that as the Ohio Treasurer, Mr. Mandel was a covered official under the SEC’s pay-to-play rule. Therefore investment advisors doing business with Ohio (or who plan to do business with Ohio) should be careful not to allow certain executives to contribute to the federal campaign. More information about the SEC’s rule can be found here,
here, and here. Many states also have pay-to-play laws, but these do not affect federal candidates because they are preempted
by the Federal Election Campaign Act.

Compliance Tip: If you are covered by the SEC’s pay-to-play rule, provide notice of this to potential contributors so that they are not enticed into contributing in violation of the rules. If you are an investment advisor, be certain that you have all of the necessary policies and procedures in place to avoid making a prohibited contribution.