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Friday, April 9, 2010, 10:23 AM

Citizens United: Federal and State Courts React

Aftershocks from the Supreme Court’s ruling in Citizens United v. Federal Election Commission continue to be felt in federal and state courts, legislatures and agencies across the country. As we have previously reported, the landmark ruling allows corporations to spend unlimited treasury funds to promote or oppose candidates, so long as that spending is conducted independently of candidates and political parties. Congress and state legislatures are examining various proposals to limit the impact of the ruling, including more disclosure of political spending, advance approval by shareholders, and limits on political spending by government contractors and foreign interests. In the meantime, a number of recent court rulings reflect the profound influence of the Citizens United case on federal and state election laws.

Advocacy Group PACs May Raise Corporate Funds, But Still Must Report to the FEC

The Supreme Court ruling in Citizens United means that advocacy groups may raise unlimited money from corporations to finance election ads, according to a D.C. appeals court ruling issued on March 26 in a case called SpeechNow.Org v. Federal Election Commission. But the Court also ruled that such groups still need to register and file periodic disclosure reports with the FEC, if they spend more than $1,000 on “independent expenditures” and their major purpose is influencing federal elections.

As we have been advising our clients, when a corporation contributes funds to an organization that engages in political advocacy, it is important to consider in advance whether the group will be required to disclose the contribution in public reports filed with the FEC. The answer depends in large measure on how the funds are raised, and what is communicated between the organization and its corporate donors.

The SpeechNow ruling is limited to advocacy groups that spend all their funds on independent expenditures – that is, purchase ads and engage in other kinds of political activity, but do not make contributions to candidates or political parties. Federal PACs that use their funds to make direct contributions may not raise funds from corporations, trade associations, or other incorporated entities.

Corporations Eyed By Republican National Committee for Campaign Cash

A three-judge panel for the federal district court in Washington, D.C. dismissed a suit by the Republican National Committee to overturn a law preventing national party committees from raising and spending “soft-money” (corporate and labor contributions, and unlimited funds from individual donors). A cornerstone of the McCain-Feingold law, the soft-money ban was upheld in 2003 in a 5-4 Supreme Court ruling. The three-judge panel agreed with the RNC that Citizens United raises questions about the vitality of the Court’s earlier ruling, but wrote that its hands are tied unless and until the Supreme Court reconsiders that ruling.

That may happen soon. An appeal of the panel’s ruling has already been filed with the Supreme Court, although any decision is likely to come after the 2010 elections. But if the Court sides with the RNC, the national party committees, Democrat and Republican, will be back in the soft money business for the 2012 elections.

It is worth recalling that when the McCain-Feingold law was initially challenged in the Supreme Court, some corporate leaders joined reform advocates in support of the soft money ban. A brief filed with the Court by prominent business leaders, including Warren Buffett and Paul Volcker, characterized soft money fundraising by the parties as a “shakedown” that led to "rampant influence peddling." But the law and political landscape have changed considerably since then. While the Supreme Court concluded in 2003 that certain soft money donations to political parties were made to gain access to lawmakers, Citizens United rejects that as a constitutional basis for restraining political spending. Only "quid pro quo" corruption, either in reality or appearance, can justify such limits. Also, an unintended result of Citizens United was to diminish the influence of political parties, leaving them constrained by hard money limits and source prohibitions, while no restraints apply to political spending by corporations and interest groups.

Supreme Court of Colorado Says State Constitutional Provisions Violate First Amendment

Key Colorado campaign finance laws are found in the state constitution, rather than state laws and regulations. For that reason, the attorney general asked the Supreme Court of Colorado to address the impact of Citizens United on the state constitution. Not surprisingly, the court ruled that two state constitutional provisions are invalid to the extent they restrict corporations and unions from funding communications that advocate for the election or defeat of candidates, or from funding electioneering communications (ads that refer to a candidate during the period immediately preceding an election). Within a day of the ruling, a state legislator announced that she may propose a bill to require corporate advertisers to disclose their parent companies or top ten donors, and to prevent the use of shell companies to purchase political ads.

SHAREHOLDER RESOLUTIONS PROLIFERATE IN WAKE OF CITIZENS UNITED

Shareholders are pressing for more corporate disclosure and oversight of political spending, in the wake of the Supreme Court’s ruling in Citizens United v. FEC. Dozens of shareholder resolutions have been filed in recent weeks that seek to force corporations to report all of their political spending online (including independent expenditures and payments to advocacy groups) and require more oversight of political spending by corporate boards. Some corporations have reached pre-vote agreements with shareholders. Others have sought to exclude shareholder resolutions under SEC rules that allow the company to omit a shareholder proposal from its proxy materials if the company has substantially implemented the proposal. Others have obtained “no action” relief from the SEC, on grounds that the proposals are vague and indefinite.

Any corporation that has not examined its disclosure and oversight policies in some time is well-advised to do so before shareholders force the issue. Even if a resolution never materializes, a reassessment of current policy will help the company define its approach to corporate political activity in the wake of Citizens United, and establish policies and procedures for company officials and employees to follow. Also, as discussed above, Congress and many states are considering laws that would require shareholder approval for political spending. One U.S. House bill, for instance, requires shareholder approval for independent expenditures and electioneering communications over $10,000, and trade association dues that may be used for political activity. The bill also calls for quarterly reporting to the U.S. Securities and Exchange Commission of expenditures for political activity.

IOWA IS FIRST STATE TO PLACE CONDITIONS ON CITIZENS UNITED SPEECH RIGHTS

Iowa is the first state to impose conditions on the exercise of corporate free speech rights that were recognized by the U.S. Supreme Court in Citizens United. The new law was signed on April 8 by Iowa Governor Chet Culver.

The Iowa law requires corporations to obtain an affirmative vote of the board of directors, executive council, or similar leadership body before making an independent expenditure that advocates for or against a candidate or issue. Each ad funded by a corporation must state who the ad was "paid for by," the name and address of the corporation, and the name of the CEO.

Corporate independent expenditures in excess of $750 must be reported to the Iowa Ethics and Campaign Disclosure Board within 48 hours. The disclosure report must identify all sources of funding for the independent expenditure, the names and addresses of all individual shareholders, and the names and addresses of the shareholders in any corporation which is itself a shareholder in the company making the independent expenditure. The disclosure report must also include a certification from the board of directors or similar body authorizing the expenditure.

GAO REPORTS ON LDA COMPLIANCE – MORE SUNLIGHT ON THE WAY?

The U.S. General Accountability Office, which randomly audits federal lobbying reports, issued its own report on April 1 regarding compliance by federal lobbyists and lobbyist-employers. GAO's third annual report – mandated by the Honest Leadership and Open Government Act of 2007 – covers lobbying reports filed for the last quarter of 2008 and the first three quarters of 2009. The main take away point is that GAO expects LDA registrants and individual lobbyists to maintain records of their lobbying income and expenses, their reportable contributions, and other information required to substantiate their lobbying reports.

The report also noted that Congressional referrals to the U.S. Attorney's Office regarding noncompliance have risen significantly. In 2007, there were just 368 Congressional referrals stemming from LD-2 reports, which are the quarterly activity reports filed by registered lobbyists or the organizations that employ them. Since passage of the 2007 law, the number of referrals grew to 1099 for the period covering 2008 and the part of 2009 addressed in the GAO report. In addition, there were 2680 referrals stemming from LD-203reports, which is the new semi-annual filing that calls for disclosure of certain political contributions and other disbursements, and a certification that filers have complied with congressional ethics rules.

While the U.S. Attorney has yet to announce a prosecution stemming from the 2007 lobbying law, it has implemented a new tracking system for referrals and enforcement actions, and is pursuing potential violators with the aim of bringing them into compliance. The GAO report acknowledged that its review did not include identifying lobbyist organizations that failed to register and report.

More disclosure obligations may be on the way. Rep. Mike Quigley (D-IL) and Rep. Darrell Issa (R-CA) have introduced The Transparency in Government Act (H.R. 4938), which would expand the publicly available information about the activities of Members of Congress and federal lobbyists. The bill would require the disclosure of Members' finances, gift and travel reports, earmarks, and votes. Lobbyists would have to disclose each executive branch official and each Member with whom they met, rather than listing on their reports the government agency or house of Congress lobbied as is currently the case. Lobbyists would also have to register online within 72 hours of making a lobbying contact or being hired, rather than waiting 45 days. The Quigley/Issa bill would enact several of the lobbying "reforms" advocated by President Obama in his State of the Union Speech.

FINANCIAL INDUSTRY PAY-TO-PLAY: SEC CLAMPING DOWN

The SEC intends to be active on the pay-to-play front, as signaled in two recent announcements involving Municipal Securities Rulemaking Board (MSRB) Rule G-37. This rule restricts campaign contributions to elected officials by municipal securities dealers. In a report involving JP Morgan Chase & Co, the SEC announced that the rule applies to contributions by an individual in an affiliated organization outside the corporate structure of the broker-dealer. In this matter, the illegal contribution to the California Treasurer was made by an executive of JP Morgan Chase who oversaw the activities of the bank’s broker-dealer subsidiary, JP Morgan Securities, Inc. Robert Khuzami, the Director of the SEC’s Division of Enforcement, has indicated that the activities of a person determine whether he or she is subject to the rules, not the person’s position in an organizational chart.

Separately, Southwest Securities Inc. recently agreed to pay the SEC $470,000 because the company underwrote Massachusetts bonds after a banker contributed to the campaign of state Treasurer Tim Cahill. While the company alleged that the violation was unintentional, it agreed to a $50,000 fine and a $420,000 payment to the U.S. Treasury representing the fees, plus interest, it earned on the bond work.

Meanwhile, the SEC continues its work on Proposed Rule 206(4)-5, which would restrict campaign contributions by investment advisors seeking contracts from public pension plans. This proposal is modeled closely on Rule G-37. One of the main sticking points is the proposal’s complete ban on investment advisors making payments to third-party “placement agents” who help them obtain the government work. Some critics claim that the prohibition discriminates against smaller investment advisors who need the placement agents to compete for government work. It appears now that the Financial Industry Regulatory Authority will work with the SEC to develop a more limited approach to the placement agent ban. We are following these developments closely and will provide updates as Rule 206(4)-5 moves forward.

FEC ISSUES REPORT ON PAC ACTIVITY

The FEC reported this week that PAC activity remained steady in 2009. The 4618 federally-registered PACs raised in excess of $555 million, spent over $464 million, and contributed over $174 million to federal candidates. This level of activity is roughly in line with 2007, the first year of the last election cycle. Labor PACs showed the greatest activity in comparison to 2007. They reported approximately $129 million in receipts, $96 million in disbursements, and $26 million in contributions, increases of 12%, 22.5%, and 9% respectively. PACs ended 2009 with over $403 million cash-on-hand, which is an increase of 6% over 2007.

We have been reminding clients and attendees of our webinars and presentations on the Citizens United case that a corporate PAC remains an essential tool. While restrictions have been lifted on independent corporate spending for ads and other communications that support or oppose candidates, a PAC is the only vehicle for a corporation to make political contributions that are directly identified with the company. PAC contributions are more closely linked to corporate goals and can provide a greater benefit to the corporation than personal contributions made by company officials.

We recommend a legal compliance audit for federal PACs, every two years, to review PAC bylaws, solicitations and other communications; assess reporting obligations for contributions to nonfederal candidates; review compliance with contribution limits and FEC bundling rules; evaluate internal controls for safeguarding PAC funds, consistent with FEC guidelines; and review recordkeeping practices. We also advise periodic training for personnel involved in PAC operations.

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