Political GPS: FEC DROPS CASE AGAINST 527 GROUP – WHAT ARE THE LESSONS?

The FEC this week quietly dismissed an October 2006 complaint charging that the Lantern Project, a 527 organization, had failed to register as a political committee and raised funds outside of the limits and prohibitions of federal law.

An organization must register with the FEC and comply with federal source restrictions and contribution limits if it raises or spends over $1,000 to influence a federal election. That may seem like a low bar, especially given that to qualify as a 527 under IRS rules, an organization's primary purpose must be to influence elections. So how did the Lantern Project avoid an expensive investigation and hefty fines, a fate suffered by a number of high-profile groups from the 2004 campaign?

FEC records indicate that the Lantern Project spent over $1.6 million in the months immediately prior to the 2006 election, with every ad apparently critical of Rick Santorum. The ads attacked Santorum's positions on minimum wage, Social Security, tax breaks for oil companies, and other issues. If this was an "issue" group, the issue was Rick Santorum. But the FEC chose not to interview donors or look at written fundraising appeals to see if the activities of the organization qualified the group as a political committee under Commission rules.

Here's why. Before the FEC will look beyond the public record or any information the party charged with the violations elects to share with them, the agency must find "reason to believe" that a violation has occurred. In this case, neither the available fundraising appeals nor the ads satisfied FEC tests for political committee status. While in some cases allegations of wrongdoing can be enough to go forward, the FEC typically declines to credit allegations if they are specifically disputed by the respondent organization, as occurred here. On a vote of 4-1, with one Commissioner recused, the FEC found insufficient grounds to look into the matter and decided to shut it down.

This outcome is best explained by the Lantern Group's method of operating and awareness of FEC tripwires. For one thing, the group was more circumspect about its objectives than some of the 527s in the 2004 campaign. In 2004, organizational leaders touted their electoral ambitions in news stories - statements that helped support an argument that the Commission should delve further into the groups’ fundraising and spending. In contrast, the Lantern project described itself this way: "our mission here is simple: [t]o shine a light on the facts about Rick Santorum’s extreme positions, failed policies and hypocritical statements – and let the facts speak for themselves."

The Lantern Project's ads were also crafted to avoid "expressly advocating" for Santorum's defeat, which would be "expenditures" triggering political committee status if they cost over $1,000. One example: "From privatizing Social Security to cutting student loans for the middle class, when Rick Santorum has to choose between siding with George Bush or middle class Pennsylvanians, Santorum supports Bush. What is he thinking?" There was no language such as "vote against" or "defeat," which would satisfy one FEC test for express advocacy, and no words referring to Santorum’s candidacy or election, which may have helped satisfy another.

There were also no statements on the group's website indicating that the funds would be used to target Santorum's defeat, which under FEC rules would mean that the funds received were "contributions." More than $1000 raised that way and you have a political committee. The Lantern Group told FEC staff that in communications with donors, fundraisers expressly disclaimed intentions to elect or defeat Santorum, and that the organization had placed a statement on its website saying the same thing. The FEC says the website disclaimer alone would not insulate a group from liability if there was evidence to the contrary. Of course, it's difficult to find contrary evidence if you don’t look for it.

What are the lessons for 527 organizations and other non-profits engaged in political activity? One lesson is that there is less risk of an FEC investigation if most fundraising is done through personal appeals, rather than through websites or other public communications. If a group does use a website, it will help fend off legal action if there is a statement on the site that funds raised will not be used to elect or defeat a candidate.

As for the ads, a group should be careful to avoid crossing into territory that the FEC considers to be express advocacy - although the records released in the Lantern Project case hint that the Commission may in future cases apply an even stricter test, first articulated by the Supreme Court in the Wisconsin Right to Life case, that forbids consideration of context, such as the fact that an ad was run in proximity to an election. And finally, it may help if public statements and organizational filings stress the positions of the officeholders, rather than their suitability as candidates.

While 527 groups appeared to play a reduced role in the 2008 elections, this recent FEC decision reminds us that there is still plenty of opportunity for them - as well as other non-profit organizations - to influence federal elections.

CHARITABLE-MATCH IS NO MATCH FOR FEC

FEC deadlocks along party lines are fast becoming a common occurrence. Somewhat surprising is the matter that split Commissioners earlier this week. Intercontinental Exchange, Inc. (ICE), which operates global futures exchanges and over-the-counter markets, asked the FEC for permission to increase the charitable match on employee PAC contributions from $1-to-$1 to as much as $2 for each $1 contributed to the PAC.

The Commission has issued many advisory opinions (AOs) approving charitable matching programs, provided that the contributor does not receive any financial, tax, or other tangible benefit from the corporation, the PAC or the charity. Since the proposed incentive program met that condition, FEC lawyers recommended granting ICE’s request. The three Republican Commissioners concurred with the draft opinion, but none of the Democratic Commissioners were willing to sign on. As a result, no AO was issued.

The FEC's non-decision is surprising in a number of respects. Advisory opinion requests regarding PAC promotional programs do not traditionally engender partisan splits. In fact, the FEC has approved a wide variety of charitable-match, raffles, and other promotional programs that encourage PAC participation.

The legal underpinnings for opposing the request are also unclear. One explanation reportedly offered by Democratic Commissioners was that the generous match would provide such a substantial incentive that it would cast doubt on the voluntariness of PAC contributions. That's puzzling because the amount of the match in comparison to the PAC contribution has never been a focus of past FEC opinions. And in the context of promotional raffles, the value of the prize can be much greater than the winner’s PAC contribution.

It may well be that after some turnover on the Commission, a requestor, either ICE or some other organization, may decide it's worth asking this question again.

COURT DEALS BLOW TO OHIO PAY-TO-PLAY LAW

An Ohio appeals court on April 14 struck down certain provisions of the state's pay-to-play law that were adopted in 2006. This is the second time a court has invalidated these provisions on technical grounds involving the manner in which the law was passed. The Ohio Attorney General obtained a stay of the first ruling pending appeal. There is no word yet on whether further appeals or requests for a stay are in the offing.

We will have more to say on the Ohio pay-to-play situation in coming weeks. Until the legal uncertainty clears, however, we urge that state bidders and contractors, their owners (20% or more) and family members, and contractors' affiliated PACs – all of which may be subject to contribution restrictions - exercise great caution in making contributions in Ohio. Also, Ohio’s Legislative Inspector General recently issued a statement, reminding prospective contractors that once the state receives federal funds under the American Recovery and Reinvestment Act of 2009, the distribution of those funds through state channels means that Ohio's lobbying laws apply. Under Ohio law, lobbying includes efforts to influence executive agency decisions regarding the expenditure of funds, award of contracts, and regulatory decisions.

NEW CAMPAIGN CONTRIBUTION LIMITS PROPOSED FOR EARMARK BENEFICIARIES

Rep. Paul Hodes (D-NH) and Gabrielle Giffords (D-AZ) have introduced legislation that would ban federal lawmakers from taking campaign contributions from companies for whom they have secured earmarks. The ban would also extend to contributions from the president, CEO, COO, and CFO, as well as the lobbyists for such companies.

H.R. 2038, The Clean Law for Earmark Accountability Reform (CLEAR) Act, would amend the Federal Election Campaign Act. Until the text of the bill is available, we do not know whether the prohibited contributions would result in violations by the contributors and the recipient campaigns or what the penalties would be for violators. It is also not clear if the bill would apply to both in-house and retained lobbyists. Political GPS will follow this bill and report on it in future posts.

Posting will resume the week of May 4th.

OMB Clarifies Presidential Gag Order on Discussions with Lobbyists

The Director of OMB last week issued a memo to heads of executive departments, clarifying President Obama’s instruction that agencies restrict oral communications with registered lobbyists. The President’s memo only permits in-person or phone conversations between lobbyists and executive branch officials about Recovery Act spending that are limited to "policy issues" that do not "touch upon" particular projects.

OMB Director Peter Orszag’s new memo provides some needed clarification, but the core restriction – the gag order on lobbyists’ discussions about projects – is unaffected. The key points are:

• There are no restrictions on oral communications between lobbyists and agency officials about logistics or implementation, such as how to apply for funding under the Recovery Act, how to conform to deadlines, and requests for information about program requirements under the Recovery Act.

• Communications between federal officials and registered lobbyists are permitted at widely-attended gatherings, as defined in executive branch ethics rules.

• The oral communication bar applies "only to communications with individuals who are Federally registered lobbyists," not more broadly to organizations that lobby or to their non-registered employees.

One matter is sure to require further explanation. OMB says that the President's directive "applies to communications prior to the award of a grant or other Recovery Act funding; it does not restrict grant recipients' representatives' ability to communicate with officials regarding the administration of a grant that has already been awarded." It is not clear, however, whether this would allow a lobbyist to speak with a government official about possible modifications to a grant that would help in the administration of the project.

The bottom line is that Mr. Orszag’s memo does little to make the President’s gag order more palatable for federal lobbyists. In a “Frequently Asked Questions” attachment, the OMB Director instructs that while the gag order applies to federal lobbyists, it does not apply to individuals who used to be federal lobbyists, but are no longer, or to currently registered state lobbyists. It is small comfort that the FAQ admonishes agencies that they should not avoid all contact with federally registered lobbyists because they bring to bear helpful information that facilitates agencies’ evaluation of “policies and projects on the merits.” Just don’t talk to them.

ILLINOIS GOVERNOR RESCINDS BLAGOJEVICH ORDER, EASES PAY-TO-PLAY RESTRICTIONS

The new Illinois pay-to-play law just became a bit less complicated, as Governor Pat Quinn rescinded his predecessor’s executive order regarding campaign contributions by state contractors.

Governor Quinn explained his action by saying there was confusion over the interplay between the Blagojevich order and the state’s pay-to-play statute, and that he wanted to clear the decks as legislators consider proposals recently unveiled by a state reform commission.

The Illinois “pay-to-play” law, like similar laws in states and municipalities around the country, seeks to break the link between campaign contributions and the award of government contracts. Contractors and bidders must file registration statements that list affiliates and key employees, along with their spouses and children, all of whom are barred from contributing to certain officeholders and candidates. Failure to comply with registration obligations can lead to fines, and false statements can give rise to perjury charges. A single violation of the contribution ban allows procurement officers to void contracts and disqualify bids.

The Blagojevich executive order substantially built on the restrictions contained in the Illinois law. While the statute bans contractors from contributing to the executive official responsible for overseeing their state contracts (and to candidates for the same offices), the Blagojevich order banned contributions to all top executive branch officials and candidates, regardless of whether they had responsibility for a particular contract. The former Governor’s order also barred contractors from contributing to state legislators, a group unaffected by the Illinois pay-to-play law. And, the Blagojevich order extended the law's contribution restrictions to a greater number of contractor affiliates, officers and employees.

In the wake of the political scandals that have rocked Illinois, further efforts to reform campaign finance and procurement laws seem likely. In the meantime, however, the rescission of the executive order will somewhat ease the compliance burden on Illinois contractors.

ARKANSAS TO LOBBYISTS: YOU PAY, YOU STAY

A new Arkansas law, which will take effect mid-summer, prohibits lobbyists from paying for food and beverages at any location or event where the lobbyist is not physically present. The bill’s sponsor says the law is aimed at preventing lawmakers from going out for a meal and calling a lobbyist for a credit card number in order to pay for it. Was this really going on? The state Attorney General, perhaps revealing that there was not much, if any, evidence of this practice, said in a statement: “I am pleased to see that ‘absentee lobbying’ will now be a thing of the past, no matter how rarely it happens.”

The new law also bans contingency fees for lobbyists – fees that depend on whether a lobbyist achieves a favorable outcome for the client. Most states ban this practice. Also, lobbyists who deliberately fail to register within five days of beginning lobbying activities are now subject to fines.

UPCOMING FILING DEADLINES

A number of reports are due on April 20, 2009:

• Quarterly activity report for Lobbying Disclosure Act filers

• IRS Form 8872 (for 527 organizations that are monthly filers and do not register and report with the FEC)*

• FEC report (for PACs filing on a monthly schedule)**

*In a non-election year, 527 organizations may elect to file their 8872 report on a semi-annual basis, in which case the next report is due on July 31, 2009. Form 8872 must disclose the organization’s contributions and expenditures.

**In a non-election year, federal PACs may elect to file semi-annually, in which case the next report is due on July 31, 2009.

Political GPS: OVER 1000 COMMITTEES MISS FEC BUNDLING RULES DEADLINE - DOES REPORTING REALLY MATTER?

Over 1,080 federal political committees known to be controlled by lobbyists failed to file an amended statement of organization by March 29, according to CQ Today Online (subscription required). New FEC rules require these filings to help candidates and others track “bundled” contributions received from lobbyist-controlled PACs. These non-filers reportedly took in over $100 million in receipts during the 2008 cycle, and made $75 million in contributions.

In a companion story, CQ reported that many leadership PACs, which were required by March 29 to disclose the Members with which they are associated, also failed to file amended reports. One FEC Commissioner has suggested that the poor compliance record by leadership PACs is because the filing deadline “may have fallen off people’s radar screen.”

It certainly doesn’t sound like Members of Congress have much to worry about, and perhaps the late-filing PACs don’t either.

Indeed, there are times when missing a filing deadline draws only a stern warning or a small fine. But last week also offered fresh reminders that in other circumstances a casual approach to disclosure of political activity can land an organization and its executives in hot water. For instance:

• Maryland prosecutors last week filed criminal charges against 77 state political committee chairmen and treasurers for failing to file timely campaign finance reports. Each count of failing to file campaign finance reports carries a maximum penalty of one year in jail and/or a $25,000 fine.
• The Government Accountability Office (GAO) just released its second report analyzing compliance with 2007 amendments to the Lobbying Disclosure Act that impose stricter reporting obligations on federal lobbyists. The GAO noted that the U.S. Attorney’s Office for the District of Columbia is finalizing a new system to track and report on its enforcement of lobbying violations, and is devoting an additional staff member to lobbying compliance. The GAO also referred two committees to Congress for failing to cooperate fully with its statutorily-mandated audit. GAO’s frustration with these two committees is evident in the report’s detailed description of their recalcitrance.
• A new “pay-to-play” law in Illinois requires state contractors and bidders to file registration statements that list affiliates and certain high-level employees, along with their spouses and children. Under the Illinois law, all are barred from contributing to certain state officeholders and candidates. A false report can expose a company and its executives to perjury charges.
• Politico reported recently that a growing number of companies are increasing scrutiny of their political operations and more carefully vetting the beneficiaries of their political spending. The on-line publication notes, for instance, that a number of companies have been caught up in a federal investigation involving alleged ties between their contributions and millions of dollars in Congressional earmarks. Also, many companies are yielding to shareholder pressure to disclose political spending that the company is not required to report in public filings, such as corporate donations in state elections and ballot contests, and donations to trade associations.

So, do disclosure obligations matter? Apparently not, if you’re a Congressional leadership PAC and missed the initial filing deadline under the new FEC bundling rules. But for less fortunate organizations, inattention to disclosure can lead to battles with prosecutors and shareholders, or news stories linking contributions to troublesome allegations surrounding a recipient officeholder.

It’s been years since many organizations have reexamined their oversight of political spending or their procedures for preparing publicly-available reports. Active political committees should conduct a legal compliance audit after each election cycle to avoid the kinds of problems and unwelcome attention discussed above. At the very least, the events of the past week show that reporting obligations and their consequences are well worth putting on your “radar screen.”

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