Political GPS: With only 7 days and counting as we post this entry, here are this week’s thoughts on political law developments.

FEC DEADLOCKS OVER PROPOSED ISSUE ADS: DOES THIS SIGNAL A SHIFT TO MORE PARTISANSHIP ON THE COMMISSION?

The Federal Election Commission deadlocked last Thursday over whether a non-profit group’s proposed radio ads can only be read as urging the defeat of Senator Barack Obama. The split on the six-member Commission, along party lines, was the first test of new FEC rules that the agency claimed in December 2007 would “provide guidance to organizations as to the permissible funding... required for communications broadcast within the EC periods” – shorthand for the 30 days before a primary and 60 days before a general election.

The FEC is grappling with this issue because of a Supreme Court ruling last year, holding that corporations (including non-profits) and unions may air ads during the EC periods so long as they do not expressly advocate the election or defeat of a candidate. The Court’s ruling was a blow to the McCain-Feingold law (and many state law imitators) that banned corporations from financing such ads merely for referring to a federal candidate. The Court did, however, leave in place the blackout for corporate-funded ads which are the equivalent of express advocacy – that is, ads that can be viewed only as calling for the election or defeat of a candidate. This is the Constitutional test that the FEC rules were intended to flesh out.

Does this deadlock portend “a new era of partisanship on the Commission,” as suggested by FEC-watcher, Professor Richard Hasen? We think not. First of all, deadlocks over the “express advocacy” test have been common for years, though frequently hidden from view because enforcement matters are discussed by the FEC in private sessions. When such matters become public, there is often no record of the ads that Commissioners disagreed about; there is simply a record as to those where four or more could agree.

Second, the split vote in this case is about a core concept of election law: government regulation of ads that are at least arguably issue-based. Historically, the Democratic Commissioners have supported a broader reading of the express advocacy test than have the Republicans. While there is certainly a history of partisanship at the FEC, the dispute in this case strikes us more as a matter of ideology, rather than sympathy for the group asking for a legal opinion.

Third, there has been a lot of recent turnover on the Commission. Commissioners are still taking the measure of their colleagues and staking out positions on key issues. Unfortunately, neither of the alternative drafts that the Commission considered last week offered a promising path to resolution. The draft from the Office of General Counsel cited the “tone” of one ad as evidence of express advocacy – a test found nowhere in recent analyses of express advocacy by the courts or the FEC’s new regulation, and that advertisers would find virtually impossible to apply. Similarly, but reaching the opposite result, the draft presented by the FEC Chairman argued that the “central focus” of the proposed ads is not electoral, going to some lengths to find five different ways these brief radio ads might be interpreted.

A resolution might be aided by consideration of the Commission’s findings of law in recent enforcement matters, most notably the settlements with some of the 527 groups from the 2004 elections. But neither of last week’s drafts mentions the FEC’s enforcement experience with the concept of express advocacy. Indeed, perusing the drafts gives the impression that this is the FEC’s first application of the express advocacy test since FEC v. Furgatch, a case decided by the Ninth Circuit in 1987.

Fourth, it must be said that the test fashioned by Chief Justice Roberts made such disagreements inevitable. Three Justices who concurred in the outcome but would have preferred to ditch the ad blackout entirely, wrote that the Court test left “ample room for debate and uncertainty.” Even Justice Alito, the lone Justice to join the Roberts opinion, fretted that the Court’s new test might fail the test of time.

Finally, while Chief Justice Roberts wrote that in close calls “the tie goes to the speaker,” the FEC’s rules implementing the Court’s decision create a “safe harbor” only for ads that are indisputably about issues. As to everything else, there are no clear markers.

So the stage was set for gridlock: a loosely-worded Supreme Court test, FEC rules that failed to set down clear guidelines, new Commissioners on the scene, and draft rulings that may have made it difficult to reach agreement.

We hope that Commissioners will return to last week’s request and resolve how to apply the FEC rules for distinguishing issue ads from campaign ads. Political advertisers are entitled to know when ads can be funded by corporate or labor sources, and when such funding exposes them to investigations, fines, and other sanctions.

BRAVE NEW WORLD – FINANCIAL SERVICES IN THE CROSSHAIRS

In the October 1 Political GPS we discussed the brave new world of regulation that has been ushered in by the current economic crisis. And from what we can see, “Joe the Hedge Fund Manager” should have as many concerns as “Joe the Plumber.” In short, the financial services industry will need to shift its government relations and PAC efforts into overdrive in order to outrun the regulatory tsunami headed its way.

As we have mentioned before, in attempting to put out some of these legislatives fires, new players in the halls of Congress should be careful not to start another one. The regulation of federal lobbying itself has undergone vast changes in the past year, with stepped-up reporting, random audits, and potential for criminal investigations and prosecution. More than ever, an effective lobbying program should include systems for effective lobbying compliance. And political fundraising -- through a PAC or by company executives -- requires careful attention to complicated federal regulations.

So what’s on the horizon? Rep. Henry Waxman, Chairman of the House Committee on Oversight and Government Reform, has scheduled five hearings in October on different aspects of the financial crisis, including a panel last week targeting hedge funds. It’s no secret that hedge funds are among Chairman Waxman’s targets for new regulation. Similarly, Rep. Barney Frank, Chairman of the Financial Services Committee, says he’s outraged with hedge funds that oppose the renegotiation of mortgages in order to protect the value of the funds’ investments. He has scheduled a hearing on November 12, and has indicated that a refusal to demonstrate cooperation may lead to “tougher legislation” governing the industry.

Meanwhile on the Senate side, Sen. Dianne Feinstein has signaled that a firm’s participation in the government rescue plan may come at the expense of its First Amendment right to petition the government. The Senator, who chairs the committee responsible for ethics and campaign finance issues, promises to introduce legislation to ensure that companies receiving government loans and grants through the rescue plan may not use taxpayer funds for lobbying efforts.

These stirrings in Congress should also be viewed in the context of other possible ethics reforms in a probable Obama administration. For the financial services industry - and others ramping up their political operations - it’s important that lobbying expenses are monitored, publicly-filed reports are complete and can withstand a federal audit, lobbyists and senior executives are familiar with Congressional gift rules, and that all fundraising efforts comply with federal guidelines.

If you have any questions or would like more information, please feel free to contact Larry (LNorton@wcsr.com, (202) 857-4429) or Jim (JKahl@wcsr.com, (202) 857-4417).

Larry Norton on Patti Morrison Radio Show

605 Million Reasons That Publicly Financed Campaigns are Dead

From 89.3 KPCC FM, a Southern California Public Radio station:

It was an astonishing month of fundraising for Barack Obama, even by his already lofty standards: the Illinois Senator raised $150 million in September, far eclipsing the $84 million in public money that Sen. John McCain accepted for the entire campaign. Sen. McCain's reaction to Obama's record haul was to warn about future scandals and corruption in presidential campaigns. No matter which candidate you support, it's safe to say that the torrid fundraising by both Democrats and Republicans has severely damaged the model of publicly financed campaigns. Sen. Obama raised $605 million since he began his campaign last year—if you were in his place, would you sacrifice that sum for public finances?

Guests:

Thomas Mann, Director of Governmental Studies at the Brookings Institution; executive director of the American Political Science Association

Lawrence Norton, regulatory attorney at Womble Carlyle law firm in Washington D.C.; former general counsel of the Federal Election Commission

Listen to their discussion (download)...

From the Politico: Is public financing of presidential campaigns doomed? If so, so what?

Larry Norton's response:

Yes, it's doomed - due to lack of interest and profound dysfunction.Americans have resoundingly concluded that public financing is not worth even the cost of a small - er, tall - latte. In 2006, only 9% of Americans agreed to set aside $3 for the public financing system. Even Senator Obama, whom reformers are counting on to resuscitate the system, checked "no" on his personal tax returns.

In the 2000 election, taxpayer money went to Lyndon LaRouche (over $1.5 million), John Hagelin (over $700,000), and Pat Buchanan (over $4.5 million) - and millions more went to others who never made it past the Iowa caucus. Sound like a good investment?

This year, the dysfunction grows. Senator McCain's cash-strapped primary campaign promised a bank it would stay in the public financing system if necessary to repay a loan. When the campaign gained its footing, it scrambled to get out of the system and escape the strict spending limits. In the general election, the McCain campaign is augmenting taxpayer money by adding references in his ads to his "congressional allies" (or something similar) - a device that lawyers argue allows the RNC to pick up half the cost. So much for the spending cap that's supposed to be the trade-off for taking public money. As for Obama, after pledging to participate in the public financing system, he ditched the idea, figuring correctly that he would pay no price for doing so. Yesterday, his campaign announced that in September 632,000 new donors contributed an average of $86 each. Why would Americans conclude that taxpayer subsidies are preferable to that?

See the full discussion on the Politico.

Political GPS: FEC TO REVISIT RULES FOR CORPORATE-SPONSORED ISSUE ADS

The Federal Election Commission is scheduled next week to consider a request for an advisory opinion by the National Right to Life Committee (NRLC) that may clarify the rules for issue-based ads financed by corporations – including incorporated associations – during the political season.

NRLC is a non-profit corporation – a 501(c)(4) – that wants to use treasury funds to air radio ads across the country. The ads will accuse Senator Barack Obama of opposing a bill to provide health care for “babies who are born alive after abortions,” and “later misrepresent[ing] the bill’s content.”

The request cites last year’s Supreme Court ruling in FEC v. Wisconsin Right to Life, where the Court curbed the McCain-Feingold law’s ban on pre-election ads financed by corporations or unions that merely refer to a federal candidate. A bare majority of the Court concluded that the ban may only be Constitutionally applied to ads that contain “express advocacy – phrases such as “vote for,” “defeat,” or “elect” – or its “functional equivalent.”

New FEC rules now provide a safe harbor for ads that meet three tests: (1) they do not mention any election, candidacy, political party, opposing candidate, or voting by the public; (2) they do not take a position on a candidate’s character, qualifications, or fitness for office; and (3) they focus on an issue and urge the public to take a position on it or contact the candidate. Ads that don’t qualify for the safe harbor will be dealt with on a case-by-case basis.

This is the first case to reach the FEC involving the application of the Court’s decision and the new Commission rules. The Supreme Court’s ruling has already had a major impact on political advertising in the 2008 election, especially in House and Senate races. According to the Center for Public Integrity, in September and early October, the Chamber of Commerce spent $8.8 million on issue ads that mention candidate names, while the union-sponsored American Rights at Work spent $2.3 million over a similar period.

JANUARY RULING EXPECTED IN CONNECTICUT PAY-TO-PLAY CHALLENGE

A federal judge in Connecticut has indicated that he will rule in January 2009 on a case brought by the Green Party, the Association of Connecticut Lobbyists, and others, challenging the constitutionality of the state’s 2005 pay-to-play restrictions.

Connecticut's strict pay-to-play law prohibits contractors, prospective contractors, their "principals," and their immediate family members from making campaign contributions to, or soliciting them for, covered state officials. (Lobbyists are also prohibited from making certain contributions.) "Principals" of a contractor include the company's directors, President, Treasurer, Executive VPs, shareholders with 5% stakes or greater, employees who negotiate state contracts, and dependent children residing in the parent's household. Violations of this law can result in contracts being voided and debarment from future contracting.

All types of contracts are covered by the law, including competitive and sole source awards. In addition, an individual who makes contributions to state candidates that in the aggregate exceed $50 must certify that that he or she is not a principal of a state contractor or prospective state contractor.

In the wake of this law, many companies have shut down their Connecticut PACs, limited their state-level political activity, and cautioned employees about personal political contributions. Political GPS will follow the developments in this important case, which is sure to impact challenges to other pay-to-play laws around the country.

SO HLOGA WAS JUST THE FIRST STEP?

The chief lobbyist for Public Citizen, a consumer advocacy organization, has urged that a mandatory code of conduct for lobbyists be added to the federal Lobbying Disclosure Act, according to Ken Doyle, at BNA’s Money & Politics Report. This proposal is a significant departure from the approach taken in Section 214 of last year’s Honest Leadership and Open Government Act, in which Congress encouraged the lobbying community to exercise greater self-regulation and develop its own standards for lobbyists’ conduct. A mandatory code of conduct would undoubtedly draw a legal challenge on First Amendment grounds. Given the many pressing issues on the agenda for the new Congress, we’ll have to see if Members want to address government ethics so soon after 2007’s sweeping reforms.

PAC AND LOBBYING POINTERS

Pre-General Reports. Treasurers should keep in mind that certain PACs have to file a pre-general report. While monthly filers must file these reports, quarterly filers have to file only if the committee made contributions or expenditures in connection with the general election between October 1 and October 15. The pre-general report has to be filed on October 23.

PAC Filing Frequency. PAC filers should also remember that they are allowed to change their filing frequency only once in a calendar year. That means that a monthly filer can switch to semiannual reporting in 2009. To do so, the Committee has to notify the FEC in writing, and then it must follow the new reporting schedule for the year. Such a change could be a real time-saver in an off-year.

Reporting Lobbying Expenses. Lobbying Disclosure Act registrants should keep in mind that they can change the method that they use to report lobbying activity expenses (Line 14 of the LD-2), though they must use one method for an entire calendar year. Registrants can use either LDA definitions of lobbying contacts and activities (Method A) or Internal Revenue Code definitions of lobbying (Method B or C). Caution should be exercised because the tax definitions of lobbying are broader with respect to legislative activity, but narrower with respect to the universe of executive branch officials who are considered covered officials. Also, using Method B or C to calculate expenses can lead to confusion because other obligations in the law are still tied to LDA definitions.

If you have any questions or would like more information, please feel free to contact Larry (LNorton@wcsr.com, (202) 857-4429) or Jim (JKahl@wcsr.com, (202) 857-4417).

Political GPS: Estimating Your Lobbying Expenses: Will Your Quarterly LDA Report Satisfy Government Auditors?

The third quarterly report for filers under the federal Lobbying Disclosure Act (LDA) is due on October 20, covering the period July 1 - September 30.

Under last year’s lobbying reform law – the Honest Leadership and Open Government Act of 2007 – all LDA reports are subject to random audit by the GAO (Government Accountability Office). In preparing for this next filing, we suggest companies and trade associations review carefully the manner in which your lobbying expenses are tracked and reported. Here are some things to keep in mind:

• All organizations registered under the LDA must file quarterly reports until their status as a lobbyist-employer is validly terminated. This is true even if the registration has been valid for only part of the reporting period and even if lobbying activities during a particular quarter would not require registration in the first instance.
• In the first quarterly report of 2008, filers chose whether to estimate lobbying expenses using the LDA’s definition of lobbying (Method A) or the definitions used in the Internal Revenue Code (Method B or C). Whatever the election, it may not be changed during the calendar year. Also bear in mind that the tax law definitions of lobbying are broader than the LDA definitions in some ways and narrower in others.
• Review your timesheets and expense forms to ensure that they track covered activity. Regardless of which reporting method you use, reportable expenses must include not only time spent by each employee in direct contact with government officials, but also time spent by employees behind the scenes, such as drafting background papers or bill language that will be given to government officials and scripting strategy sessions. Even a meeting held by the CEO with a covered official is reportable if it supports lobbying initiatives.
• The estimate of lobbying expenses must capture employees’ salary costs and overhead (including a percentage of support staff salaries), payments made to outside lobbying firms, travel expenses, and dues paid to trade associations allocated to political activities.
• If lobbying expenses are $5,000 or more, the organization must provide a good faith estimate of the actual dollar amount rounded to the nearest $10,000.
• Keep copies of supporting documentation for at least 6 years.

GAO Issues Report on Lobbying Disclosure Act Compliance

The GAO just issued its first annual report on lobbyists’ compliance with the Lobbying Disclosure Act. GAO found that in over 65% of reports, filers lacked adequate documentation to explain why individuals were listed as lobbyists on their reports. Not surprisingly, many of the randomly-sampled lobbyists reported confusion about their LDA filing obligations and felt that additional Congressional guidance would help them.

GAO also studied the procedures used by the U.S. Attorney for the District of Columbia to review and prosecute apparent LDA violations. The GAO noted increasing numbers of referrals from Congress to the U.S. Attorney in recent years, and constraints on that office’s ability to deal with the caseload. Looking to the future, GAO recommended that the U.S. Attorney develop a more structured approach to LDA cases to ensure that action is taken with respect to repeat offenders. The U.S. Attorney agreed to follow this recommendation and, among other things, intends to develop an improved database for tracking LDA cases.

Surely The Law Doesn’t Mean That. . . . Unintended Consequences in Colorado

In 2007, Colorado adopted a sweeping new ethics law, under which state and local government officials and their family members may not accept or receive gifts or other things of value worth more than $50 in a calendar year, including favors, services, travel and entertainment. The law allowed for only limited exceptions – for example, items of trivial value, awards of appreciation, and food or beverages consumed at certain receptions or meetings.

The new enforcement agency – the Independent Ethics Commission (IEC) – quickly realized that the new law posed several practical problems. Read literally, it would prohibit government employees from receiving a wide range of benefits and things of value that are regularly available to others. In Position Statement 08-01, the IEC clarified that government employees and their family members can receive educational scholarships, insurance proceeds, winnings in raffles or lotteries, and inheritances. Surprisingly, the IEC ruled that it will, in some instances, allow private organizations to give government employees honoraria of more than $50 for speaking engagements, even though honoraria are specifically prohibited in the law.

Colorado and South Dakota to Consider Pay-to-Play

On election day, the voters in two more states will decide whether to restrict campaign contributions by businesses that hold government contracts. Amendment 54 will be on the ballot in Colorado, and Initiated Measure 10 will be put before the voters of South Dakota. The South Dakota measure would limit both contributions and independent expenditures by businesses that hold no-bid state contracts.

If you have any questions or would like more information, please feel free to contact Larry (LNorton@wcsr.com, (202) 857-4429) or Jim (JKahl@wcsr.com, (202) 857-4417).

Larry Norton Quoted in LA Times on Election Laws and Current Campaign Fundraising

Larry Norton was quoted in today's Los Angeles Times about the effectiveness of 1970s election laws in the age of modern political fundraising. The article discusses how FEC reporting rules permit millions of small contributions to the Obama campaign to go unreported. To read the complete article, click here.

Political GPS: Welcome to the World of Tomorrow – And We Don’t Mean A Tourist Spot in Orlando

As we write this week’s Political GPS, Congress is considering the massive financial bail-out plan known as the Emergency Economic Stabilization Act. Whatever form of that bill passes, we are likely to leave the days of deregulation behind, and enter a new, more regulated world of tomorrow. In that brave new world, decisions made here in Washington – by Congress and the new Administration – will have an even greater impact on businesses in America and elsewhere.

A robust government relations program is more essential than ever to business success. Keep in mind, however, that as a result of last year’s lobbying reform legislation, the government relations world has also been through a regulatory sea change, with new reporting requirements, random audits, and stepped-up penalties. Additionally, the increased oversight and transparency can lead to damaging news stories and harm to business reputation. Political GPS will follow these developments and keep you up to date as the world changes around us.

Millionaire’s Amendment Reprieve – Finders Keepers

In the August 1 Political GPS, we reported that the FEC will no longer enforce the so-called Millionaire’s Amendment, a provision of the McCain-Feingold law. This change stems from the Supreme Court’s June 26 decision in Davis v. FEC that found certain parts of the Amendment unconstitutional. Last week, the FEC took the next logical step and announced that it will not require candidates who received increased contributions in accordance with the Millionaire’s provision to return those funds, so long as the funds are spent in a proper manner. Similarly, the Commission said that political parties that have made increased coordinated expenditures consistent with the Millionaire’s provision will not have to take any remedial steps.

Plan Early When Funding Travel for Members

As a result of last year’s lobbying and ethics reform legislation, there are fewer circumstances in which a Member of Congress can have travel paid for by a private source, and pre-approval is required for such payments. The House Committee on Standards of Official Conduct (more commonly known as the House ethics committee), last week told House Members that such requests must be submitted to the committee at least 14 days in advance of the travel. Previously, the committee had required requests to be submitted 30 days before the travel, but Members were having trouble meeting that deadline.

This makes the travel approval process marginally easier for Members and event sponsors. But while the approval period has been shortened, the House ethics committee says that the deadline will no longer be waived for emergencies. Organizations seeking to pay for officially-connected Member travel would be wise to provide Members with all necessary information, including documentation and sponsor certifications, well in advance of the date of travel.

New Jersey Governor Plugs “Pay-to-Play” Loopholes

On September 24, 2008, New Jersey Governor Jon S. Corzine signed a series of Executive Orders designed to close loopholes in a state law banning large political contributions from companies doing business with the State. The Governor’s orders were effective immediately and do the following:

• Ban large campaign contributions to municipal party committees and legislative leadership committees. The ban previously applied only to a contractor’s contributions to candidates, and state and county party committees.
• Ban large campaign contributions by “redevelopment” contractors, and lawyers or lobbyists who make contributions at their request.
• Close the loophole that allowed lawyers, engineers, and architects to make campaign contributions without risking lucrative state contracts. The Executive Order extends the contribution ban to partners of professional service firms regardless of their percentage of ownership. The ban previously applied only to individuals with at least a 10% equity interest in the firm.

New Jersey’s “pay-to-play” law is one of the strictest laws of its kind in the country. It prohibits businesses with government contracts in excess of $17,500 from contributing amounts to covered officials or committees in excess of $300. In addition, businesses that receive over $50,000 in a calendar year through state or local contracts must file an annual disclosure report with the New Jersey Election Law Enforcement Commission, listing political contributions during the prior calendar year.

If you have any questions or would like more information, please feel free to contact Larry (LNorton@wcsr.com, (202) 857-4429) or Jim (JKahl@wcsr.com, (202) 857-4417).