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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.

But, there are a lot of ways to improve PAC fundraising.

A Florida-based trade association voluntarily came forward to the FEC to disclose that it had reimbursed travel expenses for PAC contributors and was fined $9,000. The FEC found that the group developed a schedule for reimbursing travel expenses based on the amount given or pledged to the PAC. Under that system, the association reimbursed approximately $55,000 in travel expenses over the course of four years. Because of those travel reimbursements, the FEC concluded that the association had, in effect, reimbursed the PAC contributions. As such, it made impermissible corporate contributions and contributions in the name of another.

The reimbursement formula depended on the amount given or pledged to the PAC. Those who gave $1,000 per year, would get $750 in travel for each of two meetings, or a total of $1,500 per year. $100 contributors got $150 per meeting, or $300 total. If the association had reimbursed all directors for travel regardless of PAC contributions, that would have been fine. The problem was that the reimbursements were tied to the PAC contributions.

The FEC has said that the method for reimbursement does not matter. Bonuses, expense reimbursement, etc. are all impermissible. There are, however, permissible ways to incentivize PAC giving:

Continue Reading Don’t Reimburse Contributions. Period.

Overview

Pay-to-play laws restrict or prohibit businesses, as well as their owners, officers, and in some cases, their employees, from making political contributions (the “pay”) if they have been awarded or are trying to obtain government contracts (the “play”). These laws, which are found at the federal, state and local levels, are an outgrowth of government contracting scandals and can strike at a company’s bottom line by disqualifying bids and voiding contracts. Violations also can result in fines, damaging publicity, and even jail.

Government contractors should have a pay-to-play compliance plan that takes into account the jurisdictions where covered owners, officers, and employees are located, and where the company does or seeks to obtain business with government agencies. In addition, contractors should have a process for training covered employees, a mechanism for pre-clearing contributions, and protocols for meeting registration and ongoing reporting requirements.

Here are a few questions to help determine whether pay-to-play laws pose a risk to your business:

  • Do pay-to-play laws apply to my business activities?
  • If so, which affiliated individuals and entities are subject to the law?
  • What are the consequences for covered individuals and entities (prohibitions, reduced contributions limits, reporting, other)?
  • What are the penalties for violating applicable pay-to-play laws?

Continue Reading Pay-to-Play Law Update: Political Activity Can Put Government Contracts at Risk

Since the Bipartisan Campaign Reform Act was passed in 2002, the Federal Election Commission (FEC) indexes contribution limits based on inflation every two years. For the first time, the FEC did not increase the individual (and non-multicandidate PAC) limit to candidates because inflation was running so low. Individuals are still allowed to give $2,700 per election to candidates. Some of the other higher limits to party committees from individuals (and non-multicandidate PACs) were adjusted slightly:

  • Individual contributions to national party committees were increased $500 from $33,400 per year to $33,900 per year.
  • Individual contributions to party accounts for presidential nominating conventions, legal and election recount expenses, and building funds were increased by $1,500 from $100,200 to $101,700 per year.

For a detailed chart of the contribution limits for the 2017 – 2018 cycle, the FEC reporting deadlines for 2017, and the federal lobbying reporting deadlines for 2017, please click here.

Maryland has had a pay-to-play law for many years, which requires government contractors to register and file reports concerning political contributions to state and local candidates. Since 2015, the law has been in a state of flux as legislators and regulators have written and re-written the requirements, creating a complex reporting system.

The law is triggered when a business receives a contract from a Maryland state or local government body with a total value of $200,000 or more. The parent company of the business holding the contract must register with the State Board of Elections, and then keep the registration up to date with new contracts it and its subsidiaries receive. Every six months, the parent company must disclose certain contributions made by it and each of its subsidiaries, as well as contributions by each of those entities’ officers, directors, and partners. In addition, it must disclose contributions made by other individuals, such as employees and lobbyists, if they make contributions at the “direction or suggestion” of these officers, directors, or partners.

With the next report due Wednesday, November 30, covering the period from May 1 through October 31, it is a good time to review some of the most recent changes.

Extended Registration Deadlines

The State Board of Elections has extended the deadline for a filer to update its registration statement to include a new contract.

  • Contracts with the same jurisdictions: If any additional contracts are awarded from a jurisdiction with which a filer already has a registered contract, the filer has 30 business days to update the registration statement to include the new contract. 
  • Contracts with new jurisdictions: If a contract is awarded by a jurisdiction in which the filer does not hold a registered contract, the registration must be updated within 15 business days of the award to reflect the new contract. Additionally, the filer must submit an “initial report” within 15 business days of updating the registration, disclosing contributions made to (or “for the benefit of”) officials and candidates for office in that jurisdiction in the preceding 24 months.

Suggesting that Someone Make a Contribution

Under the new regulations, a communication to an employee, agent, or other affiliated person is considered a “suggestion” for a contribution if a reasonable person would understand it that way. The Board of Elections provides the following examples to help guide that determination:

  • If the filer, or an officer, director, or partner of the filer, forwards an email containing a fundraising solicitation to an employee or agent (e.g., a state lobbyist), a contribution that results from this “suggestion” must be reported by the filer.
  • An expression of public support – on social media, for example – is not, by itself, considered a “suggestion” for a contribution, and thus contributions made in response to such postings do not have to be reported.

Thus, officers and directors must be very careful about fundraising from employees, company lobbyists, and others. Simply forwarding an email containing a fundraising invitation can significantly expand the number of reportable contributions.

CEO’s Duty to Request Information from Covered Persons

In order to complete the report, the law requires a filer’s CEO, or his or her designee, to ask covered persons if they have made any covered contributions during each reporting period and obtain information about the date and amount of the contributions. Although the law does not impose a specific date by which the request for information must be sent, covered persons must provide information to the filer within 5 business days after a reporting period ends. For the upcoming report, the CEO or designee must request that covered persons provide the necessary information by November 7, 2016 (covering the period from May 1 – Oct 31).

If a filer requires that covered persons must preclear contributions through a corporate legal or compliance department, no separate notice is required. The preclearance policy must be in writing and annually reviewed by covered personnel.

A filer may also dispense with notice to officers, directors, partners, or employees of a subsidiary if (1) the subsidiary does not hold contracts in Maryland; (2) the subsidiary has “a written and well-publicized policy” prohibiting contributions in Maryland, which is annually reviewed by covered personnel; and (3) the filer annually submits the policy and related information to the Board of Elections. This written policy will be available to the public, but the Board of Elections has not yet determined whether it will be posted online.

If you need any assistance determining your obligations under these rules or filing reports, the Venable Political Law Practice can be of assistance. For more information on developments in federal and state campaign finance, lobbying, and ethics laws, please visit Venable’s Political Law blog at www.PoliticalLawBriefing.com.

dollar signIt was the best of times, it was the worst of times. For investment advisers and others subject to the pay-to-play rules, that is. Although both vice presidential picks have gubernatorial experience, because Mike Pence is a sitting governor and Tim Kaine is a former governor, there are certain pay-to-play rules that apply to contributions to Trump/Pence that do not apply to Clinton/Kaine. Thus, the Pence pick has important implications for many companies and firms engaged in the financial services industry.

As reported by various news outlets, Governor Pence’s role with the Indiana Public Retirement System subjects contributions to the Trump/Pence ticket to the SEC’s and other pay-to-play rules. Violations of these rules can carry significant penalties. And the shadow of the pay-to-play fundraising restrictions has even caused some to speculate that Pence should resign as governor.

Continue Reading A Tale of Two Vice Presidents: Pay-to-Play and the Running Mates

The question of when a politically-active, nonprofit 501(c)(4) group must publicly disclose its donors has been on the front burner in various states—most, like New York and California, have called for greater regulation, while others like Arizona have loosened the reins. At the federal level, silence has been the norm because the statute is generally read as only requiring disclosure by a 501(c)(4) (or other nonprofit such as a 501(c)(6)) if a donor contributes for the purposes of funding a particular ad. The FEC has consistently deadlocked on complaints alleging either that a donor gave for the purpose of supporting an ad or that a 501(c)(4) should be treated as a political committee and disclose all of its donors.

Last week, however, details were released from an FEC enforcement matter that met this stringent test and, as a result, the Commission levied fines totaling $233,000 against three nonprofit groups for failing to identify donors behind specific advertisements. These three settlement agreements, released as a group, provide significant guidance to nonprofit 501(c)(4)s and other actors as to what type of conduct will trigger donor disclosure at the federal level.

Continue Reading The FEC Levels Fines on Nonprofits over Donor Disclosure

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Wednesday, June 8, 2016
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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

Long before Citizens United allowed corporations to fund independent expenditures to support candidates, the Supreme Court allowed corporations to contribute to ballot measure committees. Until recently, disclosure was a fairly straightforward matter: give to the official committees supporting or opposing the measure and the contribution would be disclosed; give to other entities (like a nonprofit) that give to the official committees, and the corporation’s contribution would not be disclosed. After Citizens United, however, states’ fear of corporate involvement in candidate races led many states to require disclosure of “upstream” contributions. Those changes often applied not only to contributions for candidate independent expenditures, but also to contributions for ballot measures.

We have written about California before. Recently, Washington State has focused on the intermediary issue of when a nonprofit must disclose its donors. A trial court in Washington State ruled that a trade association should have registered itself as a ballot measure committee based on a special project it undertook to challenge state initiatives about food labeling. The result of this decision is that member companies had to disclose their contributions to the association for the special project. Continue Reading Ballot Initiative Disclosure