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Monday, November 9, 2009, 11:03 AM

Rules for Advocacy Groups May Not Be Settled Until Spring 2010

The Federal Election Commission (FEC) announced on October 21 that it will not seek further review of a ruling by a three-judge federal appeals panel that struck down restrictions on fundraising and spending by non-profit advocacy groups. (EMILY’s List v. FEC). The six-member Commission split evenly on whether to ask for review by the entire D.C. Circuit Court of Appeals, even though the ruling invalidated rules that the Commission adopted just four years ago.

For non-profits looking ahead to 2010, however, the rules governing fundraising and spending will probably not be clear until next spring. One reason is that the issue at the heart of the ruling in EMILY’s List – whether federal contribution limits apply to fundraising by advocacy groups – will reach the full D.C. Court of Appeals regardless of the FEC vote, through a separate case filed by a 527 organization called SpeechNow.org. The nine sitting judges currently on the appeals court are scheduled to hear oral argument in SpeechNow v. FEC on January 27, 2010. A ruling in the case is unlikely to come before March.

In addition, the Supreme Court is expected to rule in the next few months on the constitutionality of spending restrictions by corporations and unions. The FEC, in the meantime, promises to "issue guidance to political committees in the near future" regarding enforcement in the wake of the EMILY’s List decision.

Much remains unsettled in terms of the rules for fundraising and spending by non-profit advocacy groups. Until the picture clears, caution is well-advised.

FEC’s New Coordination Rules Could Impact Non-Profits, Political Consultants in 2010 Race

In October, the FEC released proposed rules concerning coordinated spending between outside groups and the campaigns of federal candidates and political parties. Federal law has long prevented candidates and political parties from arranging for outside groups to finance ads and other communications. Absent this prohibition, limits and source restrictions on campaign contributions would become meaningless.

The question for the FEC is when contact between outside groups and candidates/political parties is "coordinated" and when the Commission will investigate allegations that a coordinated expenditure has been made.

These new rules could have a huge impact in the 2010 election. With the Supreme Court poised to loosen restrictions on "independent" spending by third-parties, rules that define when a third-party is acting in concert with a candidate (or political party) will determine how careful advocacy groups must be to avoid ties with the candidates and parties they support. The stakes are also high for political consultants. To prevent the sharing of plans and strategy, the FEC proposes to limit the circumstances when consultants may simultaneously work for candidates and outside groups.

The Bipartisan Campaign Reform Act of 2002 (the "McCain-Feingold law") required the FEC to adopt new coordination rules, but earlier efforts have been invalidated by the courts. The current proposal seeks to cure defects cited by a federal appellate court in June 2008. (Shays v. FEC). One of the major faults cited by the court is the fact that the rules place relatively few restrictions on coordinated activity by outside groups and candidates unless it occurs within certain short periods before elections. The general approach of the proposed rules is to eliminate these time frames and instead confine the agency’s authority to certain types of communications. The FEC seeks comment on several alternatives, including communications that "promote, support, attack or oppose candidates; express advocacy communications; and communications that are the functional equivalent of express advocacy."

The proposed rules also address professional political consultants that provide services to campaigns and independent advocacy groups. As currently drafted, one way that coordination may occur between a candidate or party and an outside person or group is through a "common vendor" that conveys information between its two clients. Under the rules tossed out by the June 2008 ruling, no coordination can be found if a vendor performs services for the campaign or party at least 120 days before performing services for the outside group. The proposed rule offers three alternatives: retain the 120-day window, if the agency can develop a better record to support it; use a "two-year period" ending on the date of the general election; or use the "current election cycle" for the office sought, which could be a two, four or six-year election cycle period.

Whatever form the FEC coordination rules take, they are likely to have a major impact on the conduct of upcoming elections. Several court cases working their way through the appeals process, such as the Citizens United and Emily’s List cases, could allow outside groups to spend unlimited amounts on federal elections – so long as these groups act independently. Comments on the draft FEC rules are due on or before January 19, 2010, and hearings will be scheduled at a later date.

Illinois Expands Pay-to-Play Law: Adds Restrictions on Contributions, Requires More Lobbying Disclosure

The Illinois General Assembly has overridden Governor Quinn’s amendatory veto of a procurement reform law, with the House voting on October 29 and the Senate on November 3. The new law (SB0051), which will take effect on July 1, 2010, substantially changes restrictions on political contributions by contractors and their principals, and requires disclosure of contractors’ efforts to influence the award of state contracts.

The Illinois pay-to-play law took effect earlier this year and has been a moving target for businesses attempting to comply with it. Last year, an embattled Governor Blagojevich signed an executive order expanding the contribution ban, but Governor Quinn rescinded that order. Both the State Board of Elections and the Department of Central Management Services have published regulations to implement the law, and in September 2009 businesses were required to re-register using a new on-line registration system.

Highlights of the new law include:

  • A contribution ban now extends to corporate parents of bidding and contracting entities, and each operating subsidiary of the corporate parent. The law formerly applied to members of the contracting entity’s "unitary business group," a term which the law failed to define.
  • The law defines which executive employees of the contractor are subject to the contribution ban and other restrictions. The change in the law mirrors regulations adopted by the Illinois Department of Central Management Services.
  • Contractors are required to amend their registration within 5 business days of any change in information or no later than 1 day before the contract is awarded, whichever date is earlier. Registered entities have a continuing duty to report changes in information to the State Board of Elections on a quarterly basis.
  • State bond underwriters subject to the Municipal Securities Rulemaking Board’s Rule G-37 must certify, before entering into underwriting contracts with state agencies, that they will report political contributions, as required by the Rule, and that their failure to remain in compliance shall make the contract voidable by the State.
  • Bidders for contracts with an annual value of $10,000 or more must disclose their own financial interests, as well as the financial interests of each of their subcontractors and lobbyists.
  • Any person who initiates or participates in an oral communication about a procurement matter must submit a written report memorializing that communication, if the communication was made by someone required to register under the State’s Lobbying Registration Act.

We expect the State Board of Elections and Department of Central Management Services to propose new rules in the coming months to implement these changes.

Pressure Builds on Financial Sector to Curb Pay-to-Play Practices

Regulators across the country are intensifying scrutiny of the financial sector over the use of campaign contributions and other payments to get business with state retirement funds. At the federal level, the Municipal Securities Rulemaking Board approved in mid-October an amendment to Rule G-37 that requires municipal securities dealers to publicly disclose contributions to bond ballot committees made by dealers, their municipal finance professionals, and their political action committees. These reportable contributions do not, however, trigger G-37’s two-year "time-out" on government business that applies to many contributions by dealers to public officials and candidates. As reported in the October 13 Political GPS, the MSRB is still considering another proposal to extend the contribution disclosure requirements to PACs of banks that are affiliated with the dealers.

In New York State, Attorney General Cuomo and a bipartisan group of legislators are backing a bill to enshrine in law Mr. Cuomo’s Public Pension Reform Code of Conduct. Cuomo has been investigating pay-to-play practices involving the state pension fund, collecting almost $60 million in fines from several investment firms, and requiring settling firms to abide by the model Code of Conduct. The proposed legislation, entitled "Taxpayers’ Reform for Upholding Security and Transparency" ("T.R.U.S.T.") bans the use of placement agents; provides for a "time-out" on pension business if investment managers and their families make contributions to certain public officials; and replaces the state Comptroller as the sole fund trustee with a 13-member board of trustees.

As this legislation moves forward, we understand that 36 other states are investigating how financial brokers and other middlemen have used kickbacks and campaign contributions to gain access to retirement funds. In California, the Public Employees' Retirement System ("CalPERS") has launched an investigation into payments by money managers to a former CalPERS board member. The former board member allegedly received $65 million in fees while the state pension fund lost hundreds of millions on the investment. CalPERS also accepted the resignation of a prominent real estate investment advisor who was allegedly responsible for a $970 million investment in a development company that subsequently went bankrupt.

Contract Bidder Sues to Oust Competitor under New Jersey Pay-to-Play Law

A New Jersey contractor has filed suit over a $30 million contract award by Hudson County, New Jersey, claiming that the County should have voided the low bid because of a violation of the state’s pay-to-play law. The suit charges that prior to submission of the bid, the President of the low-bidder made a prohibited $1,000 contribution to a county official.

As we have discussed previously, New Jersey has one of the strictest and most complex pay-to-play laws in the country. The State has disqualified dozens of bids, while counties in the state continue to adopt new ordinances. Governor Corzine had pledged to bring a uniform approach to the state’s overlapping pay-to-play system, which includes a statewide law governing state and local contracts, well over 100 municipal ordinances and a series of executive orders. That task will now rest in the hands of Governor-elect Christie, who defeated Corzine last week.

This is the first instance of which we are aware that a pay-to-play law has served as the basis for a contract award challenge. It is likely that competitors for public contracts in pay-to-play jurisdictions across the country will scour state political contribution databases to look for grounds to oust their competitors. Please contact us if you need assistance in researching contributions in pay-to-play jurisdictions.

NC Candidates May Face Personal Liability for Campaign Penalties

The North Carolina State Board of Elections has asked the North Carolina General Assembly to consider making political candidates personally responsible for penalties their campaigns incur through violations of campaign finance laws. The requested change comes as the Board orders former Governor Mike Easley’s campaign committee to pay $100,000 for failing to report flights Easley took aboard donors’ planes throughout the years 2000 and 2004. Under current law, Easley cannot be held personally liable for the penalty. Attorneys for Easley’s campaign have said that the committee does not have sufficient funds to pay the penalty assessed by the Board.

Senate President Pro Tempore Marc Basnight issued a statement saying that lawmakers would "take a long look" at the Board’s recommendation. "We need to continue working to restore the public’s trust in government," Basnight said. The General Assembly is scheduled to reconvene in May 2010.

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