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The Federal Election Commission has fined a federal contractor for making $200,000 in contributions to a Super PAC that supported a candidate in the 2016 presidential election. This is the first time the FEC has fined a government contractor for contributing to a Super PAC.

Federal contractors are prohibited from making contributions to federal candidates and PACs, though there has been debate since the Supreme Court ruling in Citizens United as to whether government contractors have the same constitutional right as other corporations to make independent expenditures – or to contribute to Super PACs that do the same.

According to settlement documents released last week, a Boston-based construction company made two $100,000 contributions to a pro-Hillary Clinton Super PAC in June and December of 2015, which the Super PAC refunded in June 2016. The refunds were made after a press report disclosed that the company’s portfolio included federal government facilities and that the company had been awarded more than $168 million in federal contracts since 2008. In paying a $34,000 fine, the company acknowledged that at the time it made the Super PAC contributions, it had a contract with the U.S. Army Corps of Engineers. The FEC found no reason to believe that the Super PAC knowingly solicited the contributions at issue.

The fine is a departure from the gridlock that has plagued the six-member Commission in recent years on a number of major issues. It is particularly surprising given the constitutional uncertainty over the right of federal contractors to make Super PAC contributions. Nonetheless, the fine does not settle the constitutional question, which can only be resolved by the courts.

In the last few years, the FEC and the courts have grappled with the federal contractor ban in other contexts. In 2014, the Commission dodged the issue of whether a federal contractor may contribute to a Super PAC by finding that federal contractor status was not attributable to a corporate parent that had made a Super PAC contribution merely because one of its subsidiaries was a government contractor. A federal appeals court in June 2015 upheld the federal contractor ban in a case filed by individual government contractors but did not comment on whether federal contractors may give to Super PACs.

What lessons does this settlement offer for government contractors?

  • Conduct training, and implement policies and procedures. The FEC settlement notes that after discovering the violations, the company implemented new internal controls, policies, and procedures. To avoid similar problems, government contractors should conduct regular training for key personnel, and implement appropriate policies and procedures regarding political activities, including employees’ use of work hours, corporate facilities, and mailing lists in connection with volunteer work on behalf of a campaign. Such training should also cover gifts to public officials and lobbying registration laws.
  • Vet contributions through experienced campaign finance counsel. The FEC settlement also notes that the construction company is now vetting certain political contributions with outside counsel. This is something all corporations should be doing. Even in states and localities that permit corporate contributions, a wide range of special rules may apply, including rules governing which political committees may accept corporate contributions; blackout periods during legislative sessions; restrictions on contributions by lobbying entities and on assistance from individual lobbyists in delivering or suggesting contributions; contribution thresholds for registering the corporation as a political committee; and in a few states, a requirement of board approval. Experienced counsel can also help flag recipient committees that may present reputational problems for the company and identify risks that can accompany the earmarking of a contribution for a particular use.
  • Beware of state and local pay-to-play laws. The risks are even greater for government contractors. Many states and municipalities have pay-to-play laws that prohibit government contractors, as well as their principal owners, officers, and certain employees from making political contributions. Other states require contractors to register and file disclosure reports with state election boards. Violations of pay-to-play laws strike at the bottom line by disqualifying bids and voiding contracts and can cause significant reputational harm.
  • Consider ways to contribute that do not violate the contractor ban. While state and local laws may restrict political contributions from a contractor’s owners, officers, and employees, the executives of a corporate contractor (though not an individual consultant doing work for the federal government) may make personal contributions to federal candidates. A corporate contractor may also form a federal PAC, which may be funded by donations from employees.

Sound political law and pay-to-play compliance policies are essential for government contractors to avoid serious risks. The starting place is a baseline assessment to help identify major risk areas and develop a compliance plan tailored to the company’s objectives and needs. When violations are discovered, it is critical to assess whether the conduct is isolated or systemic, and consider taking prompt, corrective measures to mitigate possible penalties and help reduce reputational harm.

The rise of politically-active nonprofits – deemed “dark money” groups by their critics – has been a hot-button issue in the last few election cycles. Election laws generally do not require groups operating under section 501(c)(4) of the tax code, commonly referred to as social welfare organizations, to register as political committees or disclose their donors – even when they spend large amounts on election ads. Critics complain that current laws should be applied (or, if necessary, rewritten) to force these groups to be more transparent about their election-related activities, and charge that 501(c)(4)s have sometimes been used as conduits for donors who want to contribute anonymously to PACs and ballot committees.

In the last few years, some states have strengthened their disclosure laws to reach political activity by 501(c)(4) groups and others have ramped up enforcement. The latest effort comes from Massachusetts, where the election board recently settled charges with Families for Excellent Schools (FESA), alleging that the group donated millions of dollars in contributions to a registered political committee advocating for passage of a referendum on charter schools without disclosing the source of its funding. FESA paid a fine of over $425,000, agreed to dissolve, and publicly disclosed its donors. FESA’s charitable arm, a 501(c)(3), also agreed not to fundraise or participate in any Massachusetts referendum or other election-related activity for four years.

The state’s case arose from a review of the Massachusetts ballot committee’s records. In investigating FESA’s own records, auditors allegedly found a pattern of large contributions to FESA, closely followed by contributions in similar amounts from FESA to the ballot committee. The settlement also noted that contributions to FESA spiked in the run-up to the election, which the board argued showed that FESA was soliciting contributions with the intent to pass them on to the ballot committee. FESA accepted these allegations for purposes of settlement, but contended that it complied with state law, and did not earmark or take direction from donors concerning the way it would use a specific donation.

This settlement should serve as a potent warning to politically-active nonprofits and their donors, and is similar to others we have written about in California and Washington. We expect that auditors and investigators will continue to look for contribution patterns that suggest a 501(c)(4) is being used as a conduit to make contributions to Super PACs and ballot committees in a way that should require the 501(c)(4) to disclose its contributors. Couching donations as “unrestricted” or “general purpose” grants may not be enough to avoid penalties and other sanctions, or to shield the names of campaign donors from the public.

United States and California flagsThe Fair Political Practices Commission – the agency responsible for administering and enforcing California’s campaign finance and lobbying laws – has unanimously approved a rule change intended to force more consultants to register as lobbyists and strengthen the agency’s hand in enforcing state lobbying laws. The rule will take effect September 16, 2016.

FPPC chair Jodi Remke has called this the “first step” in cracking down on “shadow lobbying,” and has indicated that the agency intends to focus on lobbying compliance in the coming year.

California lobbying law recognizes two types of lobbyists: in-house lobbyists, who lobby on behalf of their employer, and contract lobbyists, who lobby for a client. This change affects only contract lobbyists.

Continue Reading California Cracking Down on Lobbyist Registrations

Many issues important to public charities are addressed in the platforms adopted by the political parties. As Republican, Democratic, and Libertarian parties wrap up their conventions and the Green Party meets this week, charities are asking how they can talk about the issues raised in the platforms. Charities can advance their position on the issues that they had been advocating before the platforms were adopted; however, they should consider carefully whether to opine specifically on the positions of candidates and the political parties.

Section 501(c)(3) of the federal tax code strictly prohibits all charities from engaging in activities to support or oppose candidates for public office. However, public charities, in particular, can advance public policy goals—many involving specific legislative solutions that are in the platforms.

The Internal Revenue Service (IRS) and, ultimately, the courts evaluate whether a charity improperly engages in candidate campaigns by considering the context. Could the charity’s statements about policy and candidates or political parties reasonably lead an audience to believe the organization has an opinion on the candidate or party? Facts and circumstances are considered in the context of the statement and the issue.

In considering the statement:

  • Does it identify one or more candidates or parties or express approval or disapproval for positions of a political party platform or candidate?
  • Is it delivered close in time to the election or make reference to voting or the election?
  • Is the timing of the statement instead linked to a specific legislative action by an officeholder who happens to be a candidate?

In considering the issue addressed in the statement:

  • Has the position on the issue been raised to distinguish between parties or candidates?
  • Is the issue part of an ongoing series of communications by the charity on the same issue without regard to the election?

There is a safe zone for a charity that has previously advocated for a policy position that later becomes a political party platform issue or the subject of a candidate’s position.

A charity can:

  • Use earned and paid media to advocate for the charity’s position on an issue;
  • Call for all candidates and parties to support the charity’s position without calling out particular parties or candidates or mentioning the positions they’ve already taken;
  • Send materials to all candidates and party leaders to educate them about the charity’s issues;
  • Invite all candidates in a race to meet with charity leaders to discuss the issue and visit the charity’s facilities or work projects; and
  • Ask its members or the public to educate all candidates on the charity’s issues.

Charities should take care when:

  • Inviting a current officeholder who is also a candidate to a public event of the charity;
  • Naming an officeholder in paid advertising who is up for election, because of federal and state election laws that regulate campaign speech and may be triggered, requiring disclosure and other requirements close in time to the election;
  • Holding panel discussions or debates with candidates; or
  • Providing an “open forum” on social media about issues without careful monitoring or control of comments posted.

Charities should avoid:

  • Publicizing the positions of political parties and candidates on issues on which the charity has taken a position; and
  • Holding debates or developing voter guides limited to a small set of issues, such as environmental topics, on which the charity has taken a position.

Planning and Executing Activities Involving the Candidates, Parties, and Their Positions

Many activities—such as debates, voter guides, and voter registration—can also be considered by a charity on a broad range of issues of interest to the public. The key is to remember that these activities must be nonpartisan, and not favor one candidate over another. In addition, charities should consider their underlying mission and determine whether activities like general voter education are reasonably part of the chartered purpose of the charity.

Unfortunately, the line between prohibited and permissible activities for a 501(c)(3) organization is murky and can easily be crossed if not properly managed. Careful planning, clear communication about the limitations of all involved, and control in executing the activity are critical. Now might be a good time to review the rules that will help your charity stay on the right side of the line while involved in the process.

If done correctly, 501(c)(3) organizations can:

  • Help register voters;
  • Conduct get-out-the-vote activities;
  • Publish voter guides on a broad range of issues of interest to the public;
  • Create candidate questionnaires on a broad range of issues of interest to the public;
  • Host candidate appearances that are not debates;
  • Host debates on a broad range of issues of interest to the public;
  • Conduct issue advocacy;
  • Allow leadership and staff (on their own time) to be politically active; and
  • Create an affiliated organization to engage in political activities that they cannot.

Continue reading for more information on prohibited intervention and permissible activities.

Last month, New York Governor Andrew Cuomo announced that he and legislators in the New York State Assembly had agreed on a “5 Point Ethics Reform Plan,” a sweeping proposal to create substantial changes in New York campaign finance law. The reform bill passed out of the legislature in mid-June and is expected to be signed by the governor any day.

Most of the significant changes will become effective 30 days after the governor signs the bill into law, meaning those preparing to get involved in New York state elections this fall will need to become familiar with the new requirements quickly. The changes are particularly important for entities considering making independent expenditures in those elections, as the bill creates a new definition for an “independent expenditure committee” and adds more detail to New York’s definition of “coordination.” Nonprofit organizations exempt from federal income tax under Internal Revenue Code section 501(c)(4) are also targets for further disclosure obligations under this new law. Finally, the bill includes specific registration and reporting requirements for “political consultants” – the first-ever provision of its kind in New York law – which may impact many consultants and other service providers active in the political arena.

Continue Reading New York Imposes New Rules on Super PACs, Advocacy Groups, and Political Consultants

By U.S. Government [Public domain], via Wikimedia Commons
For the rest of the 2016 election season, nonprofits in Arizona can be politically active without registering as a political committee. As long as they meet basic qualifications, nonprofits can run candidate ads, support ballot measures, and even make contributions, all without the burdens of registration, ongoing reports, and disclosure of donors.

Arizona concluded its 2016 legislative session in May with the passage of an important campaign finance law, House Bill 2296. This bill mirrors one passed earlier in the session, Senate Bill 1516. Both bills exempt certain nonprofit organizations from Arizona’s definition of a political committee, but SB 1516 would have only taken effect starting in 2017. HB 2296, on the other hand, makes these rules effective in time for the 2016 election. As of June 1, 2016, nonprofits active in Arizona elections will not have to register as a political committee and will be free from the regulatory obligations that come with being a political committee.

Continue Reading 2016 Election: New Rules for Nonprofits in Arizona

Interested in what it takes to set up a federal Super PAC? Take a look at Venable’s recently released white paper summarizing the key rules of the road, including:

  • Steps for creating a federal Super PAC
  • Avoiding illegal coordination with candidates
  • FEC and IRS reporting obligations
  • Advertising disclaimers

For those interested in Maryland elections, please also see our white paper summarizing the rules of the road for setting up and operating Maryland Super PACs.

With extensive experience advising federal, state, and local Super PACs and their donors, Venable’s Political Law Practice Group is ready to assist with all of your Super PAC legal needs in the 2016 election cycle and beyond.

Please Join Venable LLP for a Complimentary Webinar (CLE Available*)

Wednesday, June 8, 2016
12:00 p.m. – 1:30 p.m. ET – Webinar

The 2016 election cycle is in full swing, and major changes to the financial services regulatory landscape, including the Dodd-Frank Act and the Consumer Financial Protection Bureau (CFPB), could turn on the outcome of the election. Whether your company wants to play a role in the election or your executives are personally supporting candidates, it’s important to understand the rules.

Continue Reading Election-Year Political Activity: A Primer for Financial Services Providers

nomoneyThe Federal Election Commission recently concluded an investigation into contributions from a Canadian citizen to a candidate for governor. Why would the FEC investigate a state contribution? Because the ban on contributions from foreign nationals applies not just to federal candidates, but to state and local candidates as well.

The FEC dismissed the case because the state candidate did not know the contributions were illegal. In fact, he had checked with state election officials, who told him there was no issue under state law. There wasn’t, but there was an issue under federal law.

Foreign nationals are individuals who are not U.S. citizens or non-citizens who do not have permanent resident (i.e., green card) status, as well as any companies incorporated, organized, or located abroad. U.S. citizens living in other countries are permitted to contribute.

Continue Reading Don’t Forget: Recent FEC Case Is a Reminder That Federal Law Prohibits Contributions at the State and Local Levels Too

As we get closer and closer to the elections, candidates will be working harder and harder to raise money. One tried and true method is the fundraiser: an individual agrees to put together an event where his or her closest friends will make substantial contributions to the candidate, attend a breakfast, lunch, cocktails, or dinner, meet the candidate, and, if they contribute enough, get a picture with the candidate. While this may seem simple and straightforward, companies often get into trouble when they use their corporate resources to help put on fundraisers.

The largest fine in FEC history ($3.8 million) came as a result of corporate facilitation back in 2006. Others have followed. The FEC just unveiled an enforcement case involving a Nevada architectural firm that paid a substantial fine for using corporate resources to hold a fundraiser. The settlement provides a good example of how not to fundraise for federal candidates.  Continue Reading Hosting Fundraisers: One Company’s Example of How Not to Do it