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Tuesday, October 13, 2009, 2:11 PM

D.C. Appeals Court Tosses Out FEC Restrictions on Non-Profits

A three-judge federal appeals panel on September 18 struck down FEC rules that limit fundraising and spending by non-profit advocacy organizations. The court in EMILY’s List v. FEC concluded that such groups have a constitutional right to raise unlimited funds in support of candidates for elected office, and to spend those funds on any independent, election-related activities, including political ads, get-out-the-vote efforts and voter registration drives.

The FEC adopted the challenged rules after the 2004 Presidential election, where 527 groups, such as Swift Boat Veterans for Truth and MoveOn.org, raised and spent millions of dollars on hard-hitting ads. One of the major rules rejected by the court treats funds received by a non-profit as a “contribution” if the organization tells prospective donors that any portion of their donations will be used to support or oppose federal candidates. Groups that receive over $1,000 in contributions and whose major purpose is influencing federal elections must abide by federal contribution limits and source restrictions, and file reports as a political committee. Other invalidated rules require non-profits to use “hard money” to fund certain types of ads and expenses.

The court’s ruling could mean a huge role for advocacy groups in the 2010 election, but it does not leave them unregulated. For instance, while the ruling removes many restrictions on fundraising and spending, it does not affect laws requiring registration and reporting with the FEC. The court noted that the FEC may also require such groups to use a “hard money” account for any direct contributions to candidates. And, the court noted, the ruling will have no effect on so-called “connected” PACs, i.e., PACs connected to corporations and unions.

There are also longstanding restrictions on how non-profits may spend funds received from for-profit corporations and unions. These restrictions, however, may be short-lived. As we wrote in the prior edition of Political GPS, the Supreme Court appears poised to use the pending case of Citizens United v. FEC to reject government limits on independent corporate or union spending.

We urge caution in relying on this ruling until the legal process plays out. The FEC may ask for review by the entire bench of the D.C. Court of Appeals, although at least four of the Commissioners on the six-member panel would have to vote in favor of such a move. This seems unlikely given the present make-up of the Commission and recent series of deadlocked votes in enforcement actions involving non-profits. If the FEC declines to pursue the case, the agency may still decide to issue new rules in response to the decision or the U.S. Solicitor General, who has exclusive authority over Supreme Court cases, may ask the Supreme Court to review the case.

MSRB Proposes Expanded Disclosure of Contributions Under Rule G-37
The Municipal Securities Rulemaking Board may expand Rule G-37, which imposes a two-year ban on doing business with a government issuer when broker-dealers and the financial professionals they employ – known as MFPs – make contributions over $250 to an official of that municipality. Broker dealers must also disclose these contributions to public officials.

On September 16, the MSRB requested comments on a draft rule which would extend the disclosure requirements to the PACs of banks and bank holding companies that are affiliated with the dealers. The MSRB is concerned with the perception that contributions by these PACs to issuer officials may be a significant factor in the awarding of municipal finance business to bank-affiliated dealers. Such contributions would not, however, trigger the two-year time out. Comments on the draft must be submitted to the MSRB by October 30.

This proposal follows on the heels of another proposed change to Rule G-37 that would require dealers to disclose contributions to bond ballot committees. (See July 1 Political GPS) The MSRB has not taken action on that earlier proposal.

More Pay-to-Play Developments in the Empire State
Four more investment firms have reached settlements with New York Attorney General Andrew Cuomo to pay back a combined $4.5 million to the New York State pension fund. The four companies – HM Capital Partners, Levine Leichtman Capital Partners, Access Capital Partners and Falconhead Capital – also agreed to adopt Mr. Cuomo’s Public Pension Fund Reform Code of Conduct. In addition to earlier settlements with The Carlyle Group ($20 million), Riverstone Holdings ($30 million), and Pacific Corporate Group Holdings ($2 million), the Attorney General has now recouped almost $60 million from investment firms allegedly involved in the pay-to-play corruption scandals involving the pension fund.

Attorney General Cuomo also announced on October 6 two more guilty pleas in the pay-to-play investigation involving the pension fund. Raymond Harding, former chair of the state Liberal Party, was set up as a sham placement agent by two former state officials in exchange for political favors he had provided. Mr. Harding received over $800,000 through placement fees. In addition, Saul Meyer, a partner in an equity fund, paid kickbacks to a former state official in exchange for business with the state pension fund.

Meanwhile, New York State Comptroller Thomas DiNapoli issued an executive order on September 23 banning the state pension fund from hiring money managers for a two-year period if they contribute to a candidate for Comptroller. This order is modeled after the SEC’s draft Rule 206(4)-5, which is aimed at curtailing pay-to-play practices by investment advisers in the public pension fund sector, and is intended as an interim measure until the SEC takes final action on its rule. (See August 6 Political GPS) Mr. DiNapoli submitted comments to the SEC on October 2 in support of the SEC proposal, which he believes should be broadened to cover contributions from family members of investment advisers. This order is modeled after the SEC’s draft Rule 206(4)-5, which is aimed at curtailing pay-to-play practices by investment advisers in the public pension fund sector, and is intended as an interim measure until the SEC takes final action on its rule.

Comment Period Closes on SEC Pay-to-Play Proposal; Connecticut Treasurer Cites Concerns
Speaking of the SEC proposal, the period for the public to submit comments closed on October 6. The SEC has yet to indicate whether there will be a public hearing on the proposal or when a final rule might be issued.

One comment that caught our attention was submitted by Connecticut State Treasurer Denise Nappier, whose state has one of the toughest pay-to-play laws. While Nappier is supportive of the SEC’s effort, she also offered some strong criticism of the proposal.

  • Napier warned that the proposed ban on placement agents would harm many private investment funds that do not have in-house marketing capabilities. She urged instead that the SEC consider the approach taken in the Connecticut law, which bans “finder’s fees” and requires disclosure of fees paid to placement agents.
  • Napier urged the SEC to abandon a “look-back” provision, which would prohibit an investment fund manager from providing advisory services to a public pension plan if one of its associates made a contribution to an official of the government entity within the prior two years. Napier noted that government investors frequently purchase interests in long-term pooled investment vehicles that include both public and private investors. Because such investment vehicles often have severe default provisions, Napier warned that “[g]overnmental investors cannot be placed in the position of potentially losing 50% or more of their capital account because a future hire triggers the retroactive attribution of a campaign contribution.”
  • Napier characterized the ban on contributions to political parties as “extreme,” noting that “[n]othing in the SEC’s proposed rule indicates that contributions to political party committees have presented a significant problem in the past.”

We will continue to report on the SEC proposal, and spotlight other comments and issues in future editions of GPS.

North Carolina Tightens Gift Ban, Restrictions on Placement Agents
Governor Bev Perdue has signed an Executive Order requiring all employees in Cabinet agencies to follow a state law barring the acceptance of gifts from firms that do business with the state or bid on state contracts. The order comes on the heels of allegations that Division of Motor Vehicles staff received from an outside vendor meals and tickets to sporting events and the governor’s inaugural ball. While the Executive Order is only directed at Cabinet agencies, many departments run by statewide elected officers are already operating under their own gift bans, and those that are not say they are either following Governor Perdue’s lead or are considering doing so.

North Carolina’s State Government Ethics Act forbids accepting gifts from firms that do business with the government. However, that law applies only to elected officials and high-ranking appointees such as cabinet secretaries and department heads.

North Carolina State Treasurer Janet Cowell also announced several initiatives designed to increase transparency and strengthen oversight for the state’s $60 billion public pension fund. The changes come just weeks after the Treasurer ousted her chief investment officer. Among these changes, outside managers of state pension funds are required to disclose fees paid to placement agents and whether placement agents are registered with the Securities and Exchange Commission or the Financial Industry Regulatory Authority.

White House Takes Aim at Lobbyists . . . Again
The White House has announced that agencies may not appoint federally-registered lobbyists to serve on agency advisory boards and commissions. The new policy applies equally to corporate, union and public interest lobbyists, but lobbyists who currently serve on such boards may continue to serve until their appointments expire.

In a September 23 blogpost, Special Counsel Norm Eisen stated that the new policy, which he characterized as “aspirational,” represents the “next step in the President’s efforts to reduce the influence of special interests in Washington.” Federal advisory boards have been around since the 1970s, and were created to facilitate private-sector input to government agencies.

The White House incurred the ire of the lobbying community earlier this year when it attempted to prohibit lobbyists from engaging in any oral (in-person or telephone) communications with agency officials regarding Recovery Act funded projects. It eventually backed off of that effort, and instead created a limited oral communication blackout period for anyone who sought to influence the funding process. (See August 6 Political GPS) One of the chief criticisms of the failed lobbyist communication ban was that it singled out lobbyists when other private sector participants also had the capability to influence awards. The same charge could be leveled at this latest policy, which bars lobbyists from advisory committees, but allows non-lobbyist CEOs and other company officials to serve on such boards.

Upcoming Deadlines

October 15, 2009

Third quarter FEC report for candidates

October 20, 2009

Quarterly report for Lobbying Disclosure Act filers (LD-2)

Monthly FEC report for PACs filing monthly

Monthly IRS Form 8872 for nonfederal PACs filing monthly*

*Qualified state or local political organizations (QSLPO) are exempt from this filing

Upcoming Events

Navigating Pay-to-Play Laws: Ensuring Compliance in a Complex Environment

An Audioconference sponsored by Columbia Books & Information Services

October 27, 2009 (2:00 – 3:30 pm EST)

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