Virginia was one of the few states with no limits on gifts to public officials. However, in the wake of well-publicized gift scandals from the prior administration, just moments after being sworn in as Virginia’s 72nd governor on January 11, Governor McAuliffe signed an executive order imposing new gift restrictions on Executive Branch employees and officers and their immediate family members.

The highlights of Executive Order Number 2 include:

  • Executive branch employees and officers cannot accept any gift from lobbyists or the entities that employ or retain lobbyists.
  • Executive branch employees and officers cannot accept gifts valued at more than $100 from any single source (that is not a lobbyist). This limit applies either to single gifts or in the aggregate over course of a year.
  • The term “gift” means anything of value, including provision of services, meals and lodging, stocks or bonds, favors or special privileges, and a promise or offer of employment.
  • However, like most state and the federal gift rules, the definition of gift includes several important exceptions, such as
    • gifts with a value of $25 or less
    • anything of value given on the basis of personal friendship
    • payment or reimbursement of reasonable travel and related expenses incurred in order to engage in an activity that serves a legitimate public purpose
    • campaign contributions; and
    • discounts or rebates made in the ordinary course of business to a member of the public.
  • Creation of an Executive Branch Ethics Commission, comprised of three members appointed by the Governor. The Commission has authority to write opinions, enforce the Order, and recommend revisions to the Order.Present

The Executive Order only applies to individuals that work in Virginia’s Executive Branch. Legislators and legislative employees generally are permitted to accept gifts except in certain circumstances, such as where the donor is seeking a government contract. However, the legislature is expected to adopt its own ethics package in the near future.

Last week Michigan followed several states by increasing both contribution limits and frequency of disclosure from candidates. The bill, which took effect immediately, also includes new identification requirements for persons or groups paying for robocalls while exempting so-called “issue-ads” and their donors from being disclosed in campaign finance reports.  

Contribution Limits and Disclosure

The new law doubles contribution limits from individuals and PACs to candidates and political party caucus committees during an election cycle:

  • From $3,400 to $6,800 to a candidate for statewide office;
  • From $1,000 to $2,000 to a candidate for state Senate;
  • From $500 to $1,000 to a candidate for state House;
  • From $20,000 to $40,000 to political party caucus committees.

The Secretary of State will adjust the limits every four years based on the consumer price index.

Candidates must now file disclosure reports at two different times (instead of just one) in non-election years. The law does not change election-year reporting.

Identifying Information and Robocalls

In an announcement upon signing the bill, the Michigan Governor emphasized a provision regulating automated phone calls, commonly known as robocalls. Under the law, if a robocall expressly advocates for the election or defeat of a candidate or ballot question, the call must Robocallidentify the name, address, and telephone number of the person or organization paying for it. This applies to both candidates and third-party groups.   

Issue Ads and Disclosure

The new law also thwarts an effort by the Secretary of State to increase disclosure of those financing “issue ads” (i.e., ads that do not include words such as “vote for” or “vote against,” but that are related to candidates). In November, the Secretary of State had proposed changes to the definition of what constitutes an “expenditure” to reach not only advertisements that include words of express advocacy (such as “vote for,” “support,” or “oppose”), but also those that are the “functional equivalent” of express advocacy. Notably, the proposed rule would have used a very broad definition of what constitutes the functional equivalent of express advocacy to reach ads that (within certain periods before an election):

  • Refer to the personal qualities, character, and fitness of a candidate;
  • Endorse or condemn a candidate’s position or stance on an issue; or
  • Endorse or condemn a candidate’s public record.

By defining expenditure in such a broad way, those sponsoring such messages would have to report not only what they spent on the ads, but also who made contributions to fund the ads.

The new law undoes this proposed rule by stating that a communication is not an expenditure “if the communication does not in express terms advocate the election or defeat of a clearly identified candidate.” To avoid any doubt about the legislature’s intent, the new law then says that it “restrict[s] the application of this act to communications containing express words of advocacy of election or defeat, such as ‘vote for’, ‘elect’, ‘support’, ‘cast your ballot for’, ‘Smith for governor’, ‘vote against’, ‘defeat’, or ‘reject’.” By limiting the scope of the law to these words of express advocacy, issue ads are not considered expenditures, and therefore no information must be disclosed about the amount spent on the ads or who financed them.

Although campaign finance reports will not reveal information about issue ads and their donors, the law does require issue ads themselves to identify the name, address, and telephone number of the person or organization that paid for the communication when: (1) the communication refers to a clearly identified candidate or ballot question within 60 days before a general election, or 30 days before a primary election in which the candidate or ballot question appear on the ballot, and (2) the communication is targeted to the relevant electorate by television, radio, mass mailing, or robocall.

Looking Ahead in the States

Michigan followed the trend in several other states by increasing contribution limits and disclosure frequency, but it also departed from the recent changes in states like Maryland, Utah, and California that mandate disclosure of donors to 501(c) groups and other organizations that are involved in elections. We expect that in 2014, states will continue to look for ways to adapt to heavy spending by outside groups, including mandatory disclosure of donors and increasing limits on contributions to candidates.

Please join us for a webinar on January 16, 2014, at 1:00pm EST, which will provide a tune-up on government affairs compliance and examine recent trends. We will cover all the major topics you need to be thinking about as you ramp up for lobbying the new Congress and state legislatures and prepare for the mid-term elections:

  • Forming and operating a PAC or Super PAC
  • Federal and state lobbying compliance
  • Gifts to public officials and employees
  • Pay-to-play laws and doing business with state and local governments 
  • Legislating transparency by 501(c) organizations and public companies
  • Enforcement trends 

To register, click here.

Last week, New York’s City Council passed an ordinance amending its lobbying laws. While these reforms largely have gone unnoticed, a close look at the changes, some of which go into effect on January 1, reveals some potentially far-reaching implications.

First, the definition of “lobbying” has been expanded to include attempts to influence “any determination made by an elected city official or an officer of employee of the city to support or oppose any state or federal legislation, rule or regulation.” It is unusual, if not unprecedented, for a city lobbying ordinance to cover attempts to get a city official to weigh in on state or federal policy. 

Second, while the enforcement of lobbying laws in most jurisdictions is aimed at registered lobbyists and their employers, Section 6 of the new law requires the City Clerk to develop a system for proactively identifying individuals who are required to register as lobbyists in NYC but have not done so. The New York City ordinance directs the City Clerk to search for noncompliance by scouring public records, including:

  • State lobbying filings,
  • Notices of appearances compiled by city agencies, and
  • The city’s “doing business database,” which lists individuals and entities doing business with the NYC under the city’s pay-to-play campaign finance rules.

As a related matter, the new law creates an amnesty program for lobbyists or those that employ lobbyists (called “clients”) who were required to register as NYC lobbyists/clients, but never have. Under this program, participating individuals and entities will not be fined or penalized for the failure to register for the period December 10, 2006 to the date the individual/entity files a notice with the City Clerk of his intention to participate.

Finally, the law makes some procedural changes. For example, the reporting periods covered by the periodic reports filed by lobbyists will change. Instead of filing four periodic reports each year, lobbyists will be required to file six periodic reports each year. Also, as of January 1, 2014, the dollar threshold for determining whether registration with the city is required has been increased from $2,000 to $5,000 per calendar year. Therefore, starting in the new year, if a lobbyist earns or incurs $5,000 or more in a calendar year for purposes of lobbying, he will be required to register and report. Keep in mind that starting on May 8, 2014, the definition of lobbying will include attempts to influence NYC officials with respect to state or federal policy (including grassroots lobbying).

The majority of the law’s provisions take effect May 8, 2014. There are, however, some exceptions. Notably, the requirement that the City Clerk develop a system to identify unregistered NYC lobbyists will go into effect when the City Clerk and Department of Information Technology and Telecommunications determine they are capable of implementing the program (or two years after enactment, whichever is earlier). Also, as described above, the new dollar thresholds for registration go into effect on January 1, 2014.

On November 26, the Department of Treasury released proposed regulations billed as “more definitive rules” for when the IRS will treat certain activities by section 501(c)(4) organization as political activity. It is hard to argue that the proposal provides some clarity, but only by classifying a wide variety of activities as candidate-related and therefore not qualifying 501(c)(4) “social welfare” activity. The proposal is thus likely to present tax-exempt status concerns for many organizations. Moreover, nothing is offered to guide 501(c)(4) managers and advisors on what types of activities that relate to candidates or officeholders would qualify as promoting the social welfare.

Background

Organizations that are exempt under section 501(c)(4) of the Internal Revenue Code are required to engage primarily in activities that promote social welfare. This requirement has often been interpreted to allow an organization to engage in political activities as long as those activities are not the primary activities of a 501(c)(4). In recent years, many 501(c)(4) organizations have engaged in a substantial amount of political advocacy, while taking care not to appear to be engaging primarily in such activity. 

The IRS scandal that broke earlier this year centered on the agency’s handling of (for the most part) 501(c)(4) tax-exemption applications that suggested the possibility of extensive political activities. Many commentators have noted that the growth in 501(c)(4) political activity has presented a difficult problem for the IRS because it has such few rules in place to enforce the “primary” standard. 

Proposed Regulations

It is amid this backdrop that Treasury released its proposed regulations (which would amend portions of Treas. Regs. § 1.501(c)(4)-1). In substance, the proposal would create an “unsafe harbor”—a category of activity, specifically focused on 501(c)(4) organizations, that is termed “candidate-related political activity.” This category of activity would be included among other types of activities that are not consistent with the promotion of social welfare and, as such, that are not permitted to be a primary activity of a 501(c)(4) organization. The definition of candidate-related activity is quite broad and goes beyond what is commonly understood to be campaign activity. Among the more types of activities that are alarmingly included among the list of candidate-related political activity:

  • Conduct of a voter registration or “get-out-the-vote” drive, even if nonpartisan;
  • Hosting an event within 30 days of a primary election or 60 days of a general election where one or more candidates appear as part of the program; and
  • The payment of money to any organization described in section 501(c) that itself engages in campaign-related activity (and the presumption here appears to be that such recipient organization does engage in campaign-related activity unless a written representation is obtained from the recipient and a written restriction on the contribution is given by the 501(c)(4)).

There are many more aspects of this proposed rule and many more categories of activities that would fit into the “campaign-related” category. Interestingly, the proposal borrows from existing federal election law concepts like electioneering communications and express advocacy. Also, it should be noted that the Treasury Department has identified a number of specific areas where it is requesting comments—including whether any rules on this topic should also apply to 501(c)(5) and 501(c)(6) organizations, whether to adopt a similar approach to define impermissible campaign intervention under section 501(c)(3), and whether the rules should address how one determines whether an activity is at such a level that it becomes a “primary” activity of the organization.

Comments will be due in late February. Judging from the initial response, there are sure to be plenty of submissions.

The maximum contribution to Florida candidates has jumped from $500 to $3000 per election for candidates in statewide elections and from $500 to $1000 per election for state legislative candidates. The new limits took effect on November 1, part of a sweeping overhaul of the state’s campaign finance and ethics laws signed into law in May.

The new law also eliminates the $500 limit on contributions to “political committees,” which are groups formed to make contributions in state elections or finance expenditures that expressly advocate the election or defeat of a candidate, or the passage or defeat of a ballot measure. Such groups may now accept unlimited donations. Political committees are likely to emerge as a potent force in statewide elections and closely fought legislative races.   

While more money is expected to flow into Florida elections, reporting requirements under the new law are much more stringent. As of November 1, candidates and political committees must file monthly reports, rather than the quarterly reports required under the old law. Weekly reports are required beginning on the 60th day before a primary election up until the 10thday before the general election. Daily reports are then required up until five days before the general election.

In theory, increased reporting means increased transparency. But in practice it is also likely to mean more errors as committees struggle to capture information and report it accurately in such short reporting windows. It bears watching to see whether and how fines are assessed when committees are compelled to file amendments correcting the inevitable mistakes.

The new law presents many traps for the unwary. Indeed, Florida election officials acknowledged in a suit decided over the summer that the state’s campaign finance laws are complex, “and that state officials newly working with the laws need months of study to become comfortable with them.” Because violators face hefty fines and criminal penalties, it is essential that anyone involved in Florida election spending – whether political committee, candidate, or contributor – be careful to comply with the law’s many requirements.

The California Fair Political Practices Commission (“FPPC”) issued its largest fines ever on October 24, 2013, against two groups that allegedly served as conduits for millions of dollars spent on California ballot measures in 2012. Together, the groups have been tagged with a combined $1 million fine, and the PACs that received some of the funds have been ordered to disgorge a total of $15 million (although one organization has been terminated and the other has just shy of $1 million in the bank, so it is not clear how they will disgorge $15 million).

The FPPC chair, who is now a Commissioner at the FEC, said the “case highlights the nationwide scourge of dark money nonprofit networks hiding the identities of their contributors.”

The FPPC went to court right before the 2012 election to force Americans for Responsible Leadership (“ARL”) and the Center to Protect Patients’ Rights (“CPPR”) to disclose its donors under a regulation the FPPC adopted in May 2012. This regulation requires disclosure of donors in a number of situations where the donations will be used for independent expenditures that support or oppose a candidate or a ballot measure.

As set forth in the settlement document, there were two sets of contributions at issue in the case. Both originated with a 501(c)(6) entity known as Americans for Job Security (“AJS”). AJS raised approximately $29 million from 150 donors to engage in a variety of issue advocacy efforts. As the settlement makes clear, AJS was not required to register or disclose anything with the FPPC because it raised its funds for issue ads that did not expressly advocate the support or defeat of a referendum. AJS then gave a total of just under $25 million to CPPR, which is a 501(c)(4) organization, during September and October.

First Contribution: On September 11, CPPR gave $7 million to Americas Future Fund (“AFF”). AFF then gave the California Future Fund for Free Markets (“CFF”) just over $4 million. CFF was a registered political committee in California, and disclosed receiving the contribution from AFF. AFF also disclosed making the contribution to CFF. Neither AFF nor CFF disclosed that the money had come from CPPR.

Second Contribution: In mid-October, CPPR gave ARL $18 million. On October 15, ARL gave $11 million to the Small Business Action Committee (“SBAC-PAC”), which is an independent expenditure committee that opposed Proposition 30 and supported Proposition 32 (Prop 30 passed and Prop 32 failed). Both SPAC-PAC and ARL disclosed the contribution, but did not disclose CPPR as the ultimate source of the contributions.


Chart of Money

 

The Key Regulation: The FPPC’s regulations provide that if a 501(c)(4) makes a contribution from its general treasury funds to support or oppose a ballot measure, it must disclose those donors who request or know that their payments will be used to make a contribution to support or oppose a ballot measure. A donor knows its donation will be used to make a contribution if the payment is made in response to a message or solicitation indicating the organization’s intent to make a contribution.

The Violations: The FPPC alleged that under the regulations AFF and ARL should have disclosed CPPR as the source of the funds they used to donate to CFF and SBAC-PAC, respectively. In the settlement, the FPPC makes clear that these were inadvertent or “at worst negligent” and were not knowing and willful violations. The FPPC also determined that neither AFF nor ARL needed to register themselves as political committees.

Not Subject to Disclosure: The FPPC explained in the press release that some of the transactions involved did not have to be disclosed.

  • First, the FPPC said that AJS (the entity at the top of the chart) raised its money for the purpose of funding issue ads that did not expressly advocate for or against a ballot measure. As such, the sources of the funds it raised were not disclosable.
  • The FPPC also said that the money AJS gave to CPPR was not earmarked for specific ballot measure, so it too was not disclosable.

Indeed, the FPPC made the remarkable statement that, “ARL’s disclosure of AJS as the source of the contribution prior to the election [as the result of the FPPC’s lawsuit] was erroneous.” In other words, during litigation brought by the FPPC on the eve of the election to determine the source of ARL’s funds, neither ARL nor CPPR was required to disclose AJS as the source of their funds!

Takeaways: This case demonstrates that the FPPC is going to be tenacious with respect to contributions that pass through nonprofits. It seems to be willing to engage in extensive litigation in order to force disclosure even when disclosure is not ultimately required. Moreover, it is willing to disparage defendants in its press releases even when the settlement documents make clear that the reporting violations were at worst negligent. Bottom lines:

  • If you donate to entities that may contribute to California campaigns, be aware that your contribution may be disclosed.
  • If you are an entity giving to a California campaign, be prepared for litigation with the FPPC.
  • If giving to a California campaign, if possible, set up procedures and keep records to demonstrate that sources of funds do not have to be disclosed so that you can response to the FPPC.
  • Consider whether over-disclosure at one level might make litigation less likely and result in less disclosure from initial sources.

It looks like at least one Super PAC will be active in the New York City mayor’s race after all. An appeals court has reversed a lower-court’s decision refusing to enjoin the New York law barring unlimited contributions to a political committee that makes only independent expenditures and not direct contributions to candidates.

The appeals court said that “[f]ew contested legal questions are answered so consistently by so many courts and judges.” The court cited 11 cases upholding the right to make unlimited contributions to independent expenditure committees.

The appeals court then criticized the lower court for focusing on the hardship to the electoral system and ignoring the harm to the Super PAC and its donors. The court explained that “[e]very sum that a donor is forbidden to contribute to [the Super PAC] because of this statute reduces constitutionally protected political speech.” As such, the court held that the harm to the plaintiffs was far greater than changing the contribution rules just before an election.

The ruling applies only to the named plaintiff, New York Progress and Protection PAC. It will be interesting to see whether the New York authorities announce that they will allow Super PACs to operate pending the final outcome of the case or whether they will seek an emergency appeal. Other organizations could also choose to rush into court to obtain their own injunctions or may simply start raising and spending money and take their chances.

In March 2010, following the Supreme Court ruling in Citizens United, a federal appeals court ruled that that a political committee making independent expenditures (i.e., not direct contributions or coordinated expenditures) has a constitutional right to receive unlimited contributions. The ruling triggered a proliferation of so-called Super PACs that have been active in federal and state elections. As we have previously discussed, however, not all states have followed suit, including New York. With the race for mayor of New York City just weeks away, a Super PAC that wanted to make independent expenditures in support of one of the candidates sued, arguing that its fundraising should not be subject to state limits on corporate and individual contributions. 

The court refused the request, finding that it was too close to the election to make a change. The court found that the record submitted by the plaintiff—all of five pages—was simply not a strong enough foundation for the court to strike down the law right before an election. Rather, the court held that the state should have the opportunity to develop and present its own record to defend the application of state contribution limits to independent expenditure groups. The court also was concerned with the limited scope of its authority. If it struck down the law with respect to the named plaintiff, would other independent expenditure groups be allowed to accept unlimited contributions too? The court cited other cases suggesting that a decision in favor of the plaintiff might not afford other parties the same relief, which would result in an unfair situation. Of course, this presumes that state regulators would not agree to apply the court’s decision to similarly situated groups and that another court would refuse to grant an injunction for another group.

The court chastised the plaintiff for waiting until the last minute to bring this case. In reality though, the primary election was held in mid-September, so a person would not have known for certain whom the candidates would have been until then. Moreover, an earlier challenge to the law is still winding its way through the courts, and the court appears to be waiting for the Second Circuit to decide a different case dealing with a similar issue. At least in New York and the Second Circuit, it seems that those challenging the laws are stuck if they try to challenge the law early and stuck if they try to use an expedited approach with the courts.

Emergency appeals have been filed, but unless Superman steps in to turn back time for the Super PAC, the likelihood that this case will be decided in time to make a big difference in the New York City election gets slimmer by the day.

 

Buried in the recently‐enacted and controversial North Carolina Voter ID law is an additional restriction on political activity by lobbyists. North Carolina already prohibited lobbyists from making personal political contributions at any time, and from collecting and transferring contributions from multiple donors (known as bundling). Starting October 1, lobbyists will be prohibited from collecting and transferring even a single political contribution from one individual to a candidate or campaign committee. Although the new restriction clearly applies to physically collecting and transmitting contributions to candidates and campaign committees, the impact on the mere solicitation of contributions remains unclear.  

This latest restriction serves as a reminder that many jurisdictions heavily regulate political activity by lobbyists. Federal law imposes complex bundling regulations that are often difficult to navigate for both the lobbyist and campaign committee. State and local laws vary. Some prohibit lobbyists from serving as treasurer of a political committee (Maryland), prohibit contributions from lobbyists during legislative sessions (e.g., Wisconsin), or impose lower contribution limits on lobbyists (New York City). Many jurisdictions that do not restrict or prohibit lobbyist activity impose disclosure requirements on both the lobbyist and the entity that employs them when the lobbyist or employer contributes to candidates or committees (Maryland, California, Washington State).

Before lobbying in a new state, lobbyists and their employers are well-advised to check on these restrictions and disclosure requirements. Apart from the potential fines and other sanctions, an inadvertent violation can undermine a lobbying effort and tarnish the reputations of all who are involved.