Monday, January 3, 2011, 12:53 PM

PACs, LOBBYING, AND GIFTS TO PUBLIC OFFICIALS: When Is The Last Time You Had A Compliance Audit?

The start of a new year and a new election cycle is the ideal time to review your internal processes for political activity, including PACs and direct corporate contributions, lobbying registration and reporting, board oversight and disclosure of political spending, and policies and practices for giving “gifts” to public officials. Periodic compliance audits by experienced political law counsel can identify major risk areas and provide your best defense in the event of an inadvertent violation.

We recommend a compliance audit every two years. If it has been two years or more since you audited your political activity, a compliance assessment is especially important to keep pace with major changes in federal, state and local laws. For example, in 2010, the Supreme Court issued a landmark ruling (Citizens United v. FEC) that has prompted the FEC and many states to rewrite the rules for corporate participation in elections. Transformative change has also occurred in the regulation of lobbying and gifts to public officials, including tougher restrictions on companies and trade associations that employ or hire federal lobbyists. The Obama Administration has also tightened rules on gifts that may be accepted by political appointees. On the state and local levels, there have been many recent changes in the laws regulating political activity, including “pay-to-play” laws that restrict political contributions by officers and executives of companies that do business with government agencies.

Some key areas for a compliance audit include:

  • PACs – Review PAC bylaws and other foundational documents; review fundraising solicitations and other communications; ensure that all those solicited are in the “restricted class” and evaluate whether changes are appropriate; consider fundraising incentives, such as charitable matching programs; determine whether practices for safeguarding PAC funds qualify for the FEC’s safe harbor; review compliance with state registration and reporting requirements; review record-keeping policies.
  • Company-sponsored Events and Use of Corporate Facilities – Review policies and procedures for officeholder and candidate appearances before executives or larger groups of employees; use of corporate staff, facilities and work hours in connection with volunteer fundraising; impact of new FEC bundling rules.
  • State Lobbying and Gift Laws – Review policies and procedures for determining whether employees must register as "lobbyists" and file periodic reports; review policies and procedures on site visits and tours by public officials, offers of tickets to sports and entertainment events, and invitations to public officials to attend charitable functions.
  • Pay-to-play laws and procurement lobbying – For companies that seek or do business with state and local government agencies, as well as public colleges and universities, pay-to-play and procurement lobbying laws pose serious risks. Under pay-to-play laws, political contributions by companies, their PACs, and their officers and senior executives can disqualify bids and void existing contracts. Bidders and contractors may also have to register and file reports disclosing PAC and personal political contributions. Under procurement lobbying laws, a salesperson who interacts with government officials and employees may be required to register and file periodic reports in the same manner as a traditional lobbyist.

NOW IS ALSO THE PERFECT TIME FOR POLITICAL LAW TRAINING

In addition to a compliance audit, the New Year is also the perfect time for politically active companies and associations to provide training on key issues for employees who interact with public officials or oversee such activity. Your government relations team, government sales professionals, PAC managers, legal and compliance staff, and certain company executives should be aware of the most recent developments affecting their interactions with legislative and executive officials, and other political activites. A training session is also an excellent occasion for disseminating and explaining new political activity policies and procedures.

PAY-TO-PLAY LOOMS LARGE IN 2011

Federal, state and local pay-to-play laws and rules continued to proliferate in 2010. These restrictions on political contributions by public contractors present complex compliance challenges, especially for companies that are active in multiple jurisdictions. In the last months of 2010, there were several important new pay-to-play developments, and new laws and rules are planned for 2011.

Investment Advisers Face March Deadline in New SEC Pay-to-Play Rule

Starting on March 14, 2011, investment advisers (including hedge funds and private equity funds) will be barred for two years from receiving compensation for investment advisory services from a state or local government client, if the adviser, its PAC, or a “covered associate” makes a political contribution to, or engages in fundraising for, a public official or candidate who is in a position to influence the award of advisory business. Covered associates include any general partner, managing member, executive officer, any employee who solicits government business, and any person who supervises such an employee.

The March 14 deadline is part of a “pay-to-play” rule adopted by the Securities and Exchange Commission in September 2010. The SEC chose to phase in various requirements of the rule to allow time for investment advisers to implement compliance programs. Our comprehensive summary of the rule is available here.

All investment advisers should act now to ensure compliance with this SEC rule. Investment advisers should prepare and disseminate written policies and procedures for monitoring contributions by PACs and covered associates, and vetting contributions by potential hires. The rule also mandates strict record-keeping requirements that will allow the SEC to monitor compliance with the contribution restrictions.

MSRB Guidance on Dealer-Affiliated PACs Takes Effect

As discussed in prior Political GPS posts, Municipal Securities Rulemaking Board (MSRB) Rule G-37 restricts campaign contributions to elected officials by municipal securities dealers. Certain political contributions by a dealer or a controlled PAC can prohibit a dealer from engaging in municipal securities business with issuers of municipal bonds for a period of two years from the date of any triggering contribution.

New MSRB guidance, which took effect December 12, 2010, outlines factors that may result in the PAC of an affiliated company, such as a bank, being viewed as controlled by the dealer itself or one of its municipal finance professional employees (MFPs). In a nutshell, the guidance requires a thorough examination of all facts and circumstances related to the creation, management, funding and operational control of the PAC to ascertain if it is controlled by the dealer. The guidance is clear that control can exist in the absence of “majority control” of a PAC board. For example, a PAC may be viewed as dealer controlled if the dealer has just one vote on a multi-member PAC governing board or if a majority of the PACs funds come from the dealer’s MFPs.

Even if a PAC is determined not to be dealer controlled, the dealer must still consider whether any payment made by the dealer or its MFPs to the PAC could be viewed as an “indirect” conduit contribution made in violation of the Rule G-37’s anti-circumvention provisions. The MSRB has previously recommended that dealers establish “supervisory procedures” to avoid such indirect rule violations, including "information screens" between the dealer (and its MFPs) and the PAC of the affiliated company.

MSRB. . . But There’s More

The MSRB’s Board of Directors agreed in December to issue a request for comment on new pay-to-play rules that would restrict municipal advisors from engaging in or soliciting business from municipal entities when an advisor has made certain political contributions to officials responsible for awarding that business. The MSRB’s authority to issue new rules derives from the Dodd-Frank financial reform law, enacted in July 2010, which expanded the MSRB’s jurisdiction to regulate municipal advisors, in addition to dealers.

CFTC Requests Comment on Pay-to-Play Rule Aimed at Banks and Others in Derivatives Business

The Commodity Futures Trading Commission (CFTC) has also proposed its own pay-to-play rule for banks and other institutions that enter into derivative trades, known as “swaps,” with states, municipalities and public pensions. Like the SEC rule, the CFTC proposes a two-year time out from engaging in swaps business when a dealer or any of its covered associates makes a campaign contribution to a person in a position to influence the award of government business.

The CFTC's pay-to-play proposal is also part of a broader implementation of the Dodd-Frank financial overhaul law. Additional CFTC proposals aim to curb fraud and manipulation in the derivatives market.

Written comments on the CFTC’s proposal may be submitted up until February 22, 2011.

Kentucky Pay-to-Play Interpretation

The Kentucky Registry of Election Finance recently offered much needed guidance to companies subject to the state’s broad pay-to-play law. As written, the law prohibits a company from receiving a non-bid state or local contract if company officers, employees or spouses knowingly contribute or raise funds, in an aggregate amount of $5000 or more, for an elected official with responsibility for the affairs of the contracting agency. Many companies that pursue Kentucky public contracts have fretted about the impracticality and intrusiveness of tracking political contributions in state elections by all employees and their spouses.

A company recently asked the Registry whether it was obligated to undertake an investigation to determine if its officers, employees, or spouses contributed or engaged in fundraising in excess of the monetary limits. The Registry stated in an advisory opinion that the law does not contemplate such an investigation. Rather, the “relevant inquiry” is whether a company’s officers, directors, shareholders or employees “purposefully made or encouraged” other employees to contribute to the candidate with” knowledge or expectation” that the candidate’s election would result in preferential treatment of the company with respect to state contracts.

In light of this guidance, it seems unlikely that isolated contributions, especially by lower level employees or employees unconnected with public contracts, would result in violations of the law. It is still advisable, however, to implement some screening procedure for political contributions by certain key officers and employees if a company intends to pursue non-bid contracts in Kentucky.

Pay-to-Play in LA

A new pay-to-play measure – Charter Amendment H – will be on the March 8, 2011, ballot in the City of Los Angeles. The new measure would prohibit companies that bid on city contracts from giving campaign donations to city candidates. Companies that violate the ban would be barred from receiving a city contract for one to four years.

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