Understanding Political Activity Rules of the Road: How to Steer Clear of Risks this Election Year

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1 Understanding Political Activity Rules of the Road: How to Steer Clear of Risks this Election Year By: James A. Kahl Womble Carlyle Sandridge & Rice, LLP This election season many corporations have to be politically active because so much is at stake in Washington, in state capitals, and in cities and counties around the country. Decisions by federal, state, and local officials on a host of issues can mean the difference between success and failure for your company. At the same time, the rules governing political activity at the federal and state levels are in a constant state of flux. While the Supreme Court has enhanced corporate political speech rights, stricter rules govern a variety of other political activities and can pose traps for the unwary. Some political activities once considered just a part of doing business can present a high-stakes compliance challenge for any organization. Does your company know the political activity rules of the road? Here are some key political activity compliance tips that can help your company steer clear of trouble this election year. 1. Corporations Can Sponsor Political Ads, But Disclosure May be Required In its January 2010 decision in Citizens United v. Federal Election Commission, the Supreme Court ruled that corporations cannot be prohibited from sponsoring communications that expressly advocate the election or defeat of political candidates. As a result, corporations, associations, and many tax-exempt organizations are free to fund radio, television, and other communications supporting or opposing the candidates of their choice. However, the Court made clear that since these communications must be independent, their content, timing, and placement cannot be coordinated with candidates and their campaigns. Under federal and state campaign finance laws, the sponsors of these ads have to disclose their expenditures in reports available to the public. So it s not surprising that relatively few corporations have sponsored ads supporting or opposing candidates. For companies that sell directly to consumers, such ads could alienate much of their customer base. As a result, most corporate independent advocacy has been conducted thorough trade associations and other intermediary groups. The intermediary s spending on these communications will appear in publicly available reports. However, federal and state laws vary widely as to whether and when the persons and corporations providing the funds for the communications have to be disclosed. Significant media attention has focused on Super PACs a new type of political committee that can accept unlimited corporate and individual contributions to support independent advocacy. Despite popular commentary suggesting that these PACs are secretive entities, all contributions to federal Super PACs are fully disclosed in Federal Election Commission (FEC) reports. Any corporation contemplating a contribution to a group sponsoring independent political communications should familiarize itself with relevant federal, state, or local campaign finance rules to determine if it will be identified as a donor. In some instances, disclosure can be

2 avoided, depending on how funds are requested by the intermediary group and which funds the intermediary uses to finance the communications. 2. More Rigorous Disclosure Requirements May Be Coming In Citizens United, the Supreme Court spoke forcefully about the importance of transparency in corporate political spending, and eight of the justices voted to uphold the federal law s requirements that political ads must identify their sponsors. But many of the current disclosure regimes were enacted before corporate political expenditures were permitted and, thus, often do not encompass the flow of corporate spending through advocacy groups and other third parties. Some states have already revised their laws, and several pending proposals at the federal level may result in more rigorous disclosure obligations on independent political spending by corporations. For example, Rep. Chris Van Hollen (D-Md.) has introduced the DISCLOSE 2012 Act, which would impose new disclosure requirements on corporations, tax-exempt organizations, and PACs that make disbursements for campaign-related ads. Among other things, the proposal would require the organization to certify that its disbursements are not coordinated with a candidate or a political party, identify its contributors in FEC reports, and disclose the top contributors in its TV and radio ads. Similarly, the Securities and Exchange Commission is considering a rulemaking petition that would require corporations to disclose all political spending to their shareholders. As a result of a recent federal court ruling, virtually all persons or entities that contribute $1000 or more to help air so-called electioneering communications radio and TV communications that depict clearly identified federal candidates in a certain time period before an election will now have to be listed in FEC disclosure reports. The court found that the FEC s reporting rules did not comply with federal campaign finance laws because they allowed certain contributors to avoid disclosure. It is possible that new federal disclosure laws or regulations many not be put in place until after the November general election. Still, given the great fluidity in this area, corporations should follow these developments closely so they remain current on the scope of their disclosure obligations. 3. You Still Need Traditional PACs While the Supreme Court has opened up new avenues for independent corporate political communications, it did not overturn existing prohibitions on corporate political contributions to candidates and political parties. Therefore, under federal law and the laws of many states, corporations still cannot use their general treasury funds to make political contributions to campaigns or political parties. As a result, traditional PACs, which solicit contributions from eligible individuals, are as important as ever. In jurisdictions where corporate political contributions are prohibited, PACs remain the best way to support a candidate or political party in a way that is associated with the company. While PACs are relatively easy and inexpensive to form, they are governed by detailed (and sometimes confusing) rules regarding the solicitation and use of funds, the reporting of contributions and disbursements, and the proper management of PAC funds. Nonetheless, PACs 2

3 are well-established vehicles for political giving, and they serve as a way for a corporation to channel its political activities through an entity that presents limited risks. 4. Be Careful How You Use the Federal PAC Corporations frequently support both federal and state candidates with PAC contributions. How many PACs are needed to support both federal and state efforts? Can all of the activity be run through the federal PAC? Or do you also need one for each state? Unfortunately, the answers to these questions vary from state to state. In many cases, federal and state political contributions can be handled by the federal PAC. In some states, the federal PAC only has to file a copy of the federal report reflecting the state contributions, file an abbreviated state report, or in some instances file nothing at all. In a few states, the federal PAC must file the full range of reports required for state PACs, or may even have to establish an entirely separate PAC with its own bank account. It is essential to review state campaign finance laws before making a contribution to a state candidate with federal PAC funds. Failure to do so may result in one small state or local political contribution subjecting the federal PAC to rigorous, ongoing state reporting requirements. 5. Be Sure to Follow the Rules for Helping Your Trade Association Trade and professional associations regularly seek the help of their corporate members on a wide range of political activities, including the growth of the association PAC. How can corporate association members help? A corporate member can permit the association PAC to solicit its restricted-class employees. The corporate member can even use its payroll-withholding system to collect and forward contributions to the PAC. However, the association must obtain annual written permission from the corporate member to solicit its employees, and the corporate member can only authorize one trade association to solicit its restricted class per year. A corporate member also can provide other support for the association PAC. For example, while the corporate member may not generally pay the costs of PAC fundraising events, it may donate funds over and above its membership dues, which may help the association pay for PAC solicitation or fundraising activities. In addition, corporate members may donate raffle items, door prizes, and the like for PAC fundraising events. 6. State and Local Pay-to-Play Laws Present Risks for Public Contractors Corporations that sell goods or services to or otherwise contract with states and localities need to address the risks posed by so-called pay-to-play laws. These state and local laws take aim at perceived abuses in the public contract arena by banning or severely limiting campaign contributions by state and local contractors, their top executives, and in some instances, the executives spouses and dependents. The stakes for noncompliance by incumbent and prospective contractors are high. Businesses that violate these laws may face the immediate cancellation of existing contracts, debarment from future contracts, monetary fines, and even criminal penalties. Pay-to-play laws are complex, and vary widely from state-to-state, and city-to-city. These laws have been adopted by over 25 states and hundreds of cities and counties. They may 3

4 apply to contributions to executive officials and legislators, as well as to officials of quasigovernmental bodies such as commissions and school boards. In addition to the contribution restrictions, some pay-to-play laws require contractors to register and identify all affiliates, employees, and family members who are subject to contribution restrictions. Other laws require bidders and contractors to file reports listing campaign contributions by company employees. While pay-to-play laws are highly intrusive and impact the rights of individuals to make personal political contributions, with limited exceptions they have been upheld by federal and state courts. Public contractors should ascertain which pay-to-play laws pose the greatest risks to their contracts, and inform their officers, directors and senior managers of the steps they need to take protect the company s public sector business. 7. Gift-Giving and Lobbying Restrictions Are Getting Tougher In Washington, DC, and in states across the country, greater restrictions are being imposed on gift-giving to public officials, and lobbying activities are being subjected to higher levels of regulation. At the federal level, President Obama signed an executive order during his first week in office that greatly restricted gift-giving by federal lobbyists to his political appointees. More recently, the Office of Government Ethics issued draft regulations that would effectively apply these restrictions more broadly to the career federal work force. Meanwhile, some states have adopted draconian gift restrictions that prohibit legislators from accepting even a cup of coffee from a private party. And it is common to see states imposing more onerous gift restrictions on lobbyists and their employers. Fortunately, there are exceptions to virtually all gift rules, affording a degree of flexibility to those who follow the rules carefully. On the lobbying front, many states are expanding the definition of lobbying activity and subjecting a wider range of conduct to registration and reporting requirements. For example, in some jurisdictions, goodwill lobbying activity that entails getting to know a legislator even though no legislation is discussed triggers lobbying registration obligations. Similarly, a growing number of states and municipalities treat a public contractor's sales professionals as "procurement lobbyists," requiring them to register and file periodic reports. Corporations should be aware that incidental discussions with public officials, and furnishing public officials with even token gifts, may give rise to sanctions and adverse publicity. With advance planning in consultation with counsel, organizations can engage effectively with public officials and avoid the risks posed by lobbying and gift rules. 8. Corporations Need an Effective and Tailored Compliance Plan It is essential for any politically active corporation to implement an effective and ongoing political law compliance program that is tailored to the risks facing the company. PAC, lobbying, and gift-giving activity should be audited periodically. Appropriate policies and procedures should be adopted to guide employees, and employees must know whom to consult when questions arise. Key employees should receive training on federal and state campaign finance, gift, and lobbying rules. And strong record-keeping procedures should be in place whenever reporting is required. 4

5 Such attention to compliance can head off problems before they ripen into troublesome external audits or investigations. Indeed, the mere fact that a company provides periodic training tends to soften a regulator s stance when considering punitive action. This election year, opportunities will abound to support and engage with public officials to promote the public policy goals of your company. Understanding the rules of the road will ensure that violations of campaign finance, lobbying and gift laws do not undermine your efforts. * * * * * James A. Kahl is an attorney in the Washington, D.C. office of Womble Carlyle Sandridge & Rice, LLP, where he advises clients in connection with federal and state campaign finance, lobbying and government ethics matters. Jim previously served as Deputy General Counsel at the Federal Election Commission from 2002 to He is a frequent speaker and writer on political law and related compliance issues. 5