A Legislative Scorecard for the New York City Campaign Finance Board

The World Cup is over.  Quadrennial hopes and dreams next turn to the post-election report (PER) the NYC Campaign Finance Board (CFB) must submit to the Mayor and City Council on or before September 1, as it has every four years since 1990.  The PER will include the CFB’s recommendations for legislative changes to the City’s campaign finance laws.  Over the decades these proposals have spurred many changes to those laws.  At the risk of mixing sports metaphors, below we offer a scorecard for the legislative proposals made in the last CFB PER, issued in 2010.

2010 Proposal Score Analysis
Mandatory disclosure of independentexpenditures Home Run Achieved through a 2010 City Charter referendum, the new law brought extensive CFB regulations and a new regulated community/public information resource.  In 2013 the NYC Council trimmed disclosure for intra-organization communications; new proposed legislation (proposed Int. No. 148-A) would expand public identification of owners, officers and funding sources of independent spending entities.
Require that campaign communications identify source of funding Double The same Charter referendum required independent spenders be identified on their public communications.  A 2014 NY State election law amendment includes a similar requirement.  New Council bills would go further, requiring that authorizing candidates be IDed on their communications (Int. No. 6) and that IE communications list their top five donors (proposed Int. No. 148-A).
Refine definition of “doing business” with NYC Whiff The CFB proposed extending the reduced “doing business” contribution limits to placement agents, permissible contribution source entities, associated political committees, unions engaged in collective bargaining with the City, and, possibly, also to family members of those listed in NYC’s Doing Business Database (DBDB).
Increase opponent financing thresholds to qualify for maximum public fundingand bonus public funding Called on Account of Weather In 2011, the U.S. Supreme Court struck down public financing triggers based on opponent spending levels.  Pursuant to a 2013 Second Circuit decision, the CFB no longer enforces these provisions.
Prohibit contributions by organizations (labor unions, political committees) Old Timers’ Day Not Scheduled The CFB has made similar proposals in each PER since 1998.  It hit a solid double back in 2007 when the City Council banned contributions by partnerships and LLCs.
Reduce public financing for special elections; require debates for borough president candidates; repeal requirement that publicly financed candidates submit receipts for personal financial disclosures; mandate candidates and treasurers attend CFB trainings Never Came to Bat Which, if any, will be in the 2014 PER lineup?

 

Vermont Right to Life, Inc. v. Sorrell: Independence Required

Since the Supreme Court found in Citizens United that “the absence of prearrangement and coordination . . .alleviates the danger that expenditures will be given as a quid pro quo for improper commitments from the candidate” – a premise that many would disagree with – commentators have bemoaned the lack of enforcement of coordination standards on the federal level.  The Court’s reasoning implicitly requires enforcement of coordination rules and without that, SuperPACs are having their cake and eating it too. But perhaps not on the state level.

A couple of days before Independence Day the Second Circuit issued a decision under Vermont law that may put some brakes on activity by Hybrid PACs –  a combination of an independent expenditure-only committee (SuperPAC) and a political action committee (PAC).  Hybrid PACs stem from Carey v. FEC,  which found that a committee could establish separate accounts to: 1) solicit and spend unlimited funds for independent expenditures; and 2) solicit and spend permissible funds on direct contributions to political candidates and/or political parties.  As a result, the independent committee could receive unlimited contributions.

The VRTL case involves three affiliated organizations – VRCL, a 501(c)(4), VRLC-FIPE, a SuperPAC and VRLC-PC, a PAC.   While the SuperPAC and the PAC had separate bank accounts, the 2d Circuit found that because the two were “enmeshed financially and organizationally” contribution limits applied to the SuperPAC. Specifically, the court found that:

  • It was insufficient to merely state in organizational documents that a group is an independent expenditure-only group – some “actual organizational separation” must exist; and
  • Whether a group is functionally distinct may depend on factors such as the “overlap of staff and resources, the lack of financial independence, coordination of activities and the flow of information between the entities”.

In other words there must be a firewall.  And firewalls are not a new concept – FEC rules allow for a safe harbor in a “common vendor” scenario where a firewall exists.  The decision is significant in that it raises questions:

If the SuperPAC and PAC had maintained a firewall or established a policy permitting “internal coordination” solely for the purpose of avoiding assistance to the same candidates, would the burden of proof shift to the state to demonstrate that such procedures had not been followed?

Would a different level of scrutiny apply if the question was not whether the facts required imposition of contribution limits on a SuperPAC’s receipts, but rather whether the SuperPAC’s spending would be treated as coordinated with candidates? In other words, could coordination between a PAC and a SuperPAC ever give rise to a presumption that the SuperPAC’s spending was coordinated with candidates the PAC is supporting?

These are questions that may have to be answered as states and localities define and enforce their coordination standards.

SEC Charges Private Equity Firm with Pay-to-Play Violations

For the first time since passing Rule 206(4)-5, the Securities and Exchange Commission (SEC) has charged a Philadelphia-area private equity firm with violations of the pay-to-play rule.  The case concerns contributions made to a Philadelphia mayoral candidate and to the governor of Pennsylvania.

The firm –TL Ventures Inc. – has been a limited partner with the Pennsylvania State Employees’ Retirement System since 1999 and the Philadelphia Board of Pensions and Retirement since 2000. In 2011, a “covered associate” made a $2,500 campaign contribution to a Philadelphia mayoral candidate and a $2,000 campaign contribution to the governor of Pennsylvania. According to the NY Times, the contributor was a co-founder of the firm.

Accordingly, the SEC found that the firm violated SEC Rule 206(4)-5, which prohibits investment advisers from providing advisory services for compensation to a government client for two years after the adviser or certain of its executives or employees (i.e. “covered associates”) make a campaign contribution to a “government entity”. As a result, TL Ventures, entered into an Order Instituting Administrative and Cease-and-Desist Proceedings which requires it to pay disgorgement of $256,697, prejudgment interest of $3,197 and penalty of $35,000.

A couple of points to note:

  • Rule 206(4)-5 applies to investment advisers even if the government entity was already invested in the covered investment pool at the time of the contribution. As noted above, Rule 206(4)-5 was passed in 2010, ten years after the partnership began. There is no exemption for investments existing at the time of the passage of the rule.
  • The firm obviously did not receive exemptive relief from the SEC (which the SEC granted in 2013 to a different investment adviser). Rule 206(4)-5(e) provides that the SEC can exempt an investment adviser from the time-out provision upon consideration of several factors including, whether the exemption is in the public interest and whether the IA:
    • before the contribution was made, adopted and implemented policies and procedures reasonably designed to prevent violations of the rule;
    • prior to or at the time of the contribution had actual knowledge of the contribution;
    • has taken all available steps to cause a return of the contribution; and
    • has taken such other remedial or preventive measures as would be appropriate under the circumstances

The latter point in particular illuminates the value of an appropriate compliance program. The critical first question? Whether employees – including co-founders of the firm – are subject to the law.

The Law of Unintended Consequences?

Shortly after the indictment of Rod Blagojevich, Illinois legislators passed a number of campaign finance reform measures, including contribution limits for the first time in the state’s history and limits on independent expenditure-only committees (i.e. SuperPACs). Shortly thereafter, citing to Citizens United, a federal judge struck down the law restricting contributions to SuperPACs.

In response, Governor Pat Quinn signed a law in 2012 that allows all contribution limits to be removed in a race once an outside group spends $250,000 on behalf of or against a candidate for statewide office ($100,000 for the Legislature or local government).

The law also has another provision: if a candidate is “self-funding”, then this designation lifts the contribution limits for all candidates (including the self-funding candidate) for the same office. What’s a self-funding candidate? If during the 12 months prior to an election, the candidate or their immediate family contribute, loan, or make independent expenditures in support of or opposition to the candidate totaling more than $250,000 (for statewide offices) or $100,000 (for all other elective offices) to the candidate’s political committee or to other political committees that transfer funds to the candidate’s committee.

Allowing a candidate to contribute enough to his own campaign to obliterate all limits may seem counter-intuitive, but this is the state of campaign finance today, particularly after the Supreme Court’s decisions in Davis v. FEC (2008) and Arizona Free Enterprise Club’s Freedom Club PAC v. Bennett (2011). In Davis, the Court struck down the Millionaires’ Amendment, which allowed candidates to receive contributions at increased limits if their opponents (typically millionaires) spent more than certain threshold amounts of their own personal funds on their campaigns. And in Bennett, the Court struck down a provision of the Arizona public financing law that afforded additional money to a publicly-funded candidate where outside groups made independent expenditures over certain amounts (see here)

As a result, Governor Quinn’s Republican opponent Bruce Rauner just received a $2.5 million dollar contribution from a hedge fund CEO. Mr. Rauner contributed more than $250,000 to his campaign (indeed, reports indicate Mr. Rauner has pumped more than $6 million into his campaign) which lifted the contribution limits for all candidates – including Mr. Rauner.

The law of unintended consequences? Governor Quinn probably thinks so.

FEC Approves Bitcoin Transactions

Earlier this month the Federal Election Commission issued Advisory Opinion 2014-02, which permits the acceptance of Bitcoins for political contributions.

Bitcoin is a form of virtual, peer-to-peer currency that can be exchanged online for goods and services anywhere in the world without using a bank or third party financial institution to host the transaction. Bitcoin currency exchanges offer users an account, or “virtual wallet,” that utilizes multiple layers of cryptography to protect transactions. Once a merchant or individual has received a transfer, the value is calculated by a constantly fluctuating currency conversion rate. Bitcoin transactions are managed collectively by the community of Bitcoin users and are regulated by software and user agreements – unlike traditional currencies, which are regulated by governments, banks or any other central authority. Indeed, the day before the FEC approved the use of Bitcoin, the SEC issued an Investor Alert cautioning the use of Bitcoin, which followed FINRA’s similar alert.

Nevertheless, the FEC found that committees may accept Bitcoin contributions and may purchase Bitcoins with funds from its campaign depository for investment purposes. The FEC also found that:

  • Recipients may not make disbursements using purchased Bitcoins because Commission regulations require the committee’s funds to be returned to a campaign depository before they are used to make disbursements.
  • Recipients must provide a unique linked address by which an individual may make a Bitcoin contribution only after that contributor provides his or her name, physical address, and employer, and affirms that the contributed Bitcoins are owned by him or her and that the contributor is not a foreign national.
  • Like securities a recipient may receive into and hold in a brokerage account, Bitcoins may be received into and held in a Bitcoin wallet until the committee liquidates them.
  • Recipients should value the contribution based on the market value of Bitcoins at the time the contribution is received based on contemporaneous documentation or other reasonable exchange rate.

A non-connected committee (i.e. a PAC) called (appropriately) Make Your Own Laws PAC requested the Advisory Opinion. Interestingly, in a comment on drafts of the AO, Make Your Own Laws PAC wrote that it “request[s] clarification as to how this [opinion] applies to earmarks, which we expect to constitute the majority of our activity.” The FEC AO, however, specifically states that because the PAC’s “advisory request neither posed this question nor provided facts concerning it . . [the]opinion does not address MYL’s receipt of Bitcoin contributions earmarked for others.” In other words, the AO doesn’t address the majority of the activity the PAC seeks to engage in – leading to the conclusion that this isn’t the last we’ve heard on Bitcoin.

Contributions by New Jersey Government Contractors Increased Dramatically in 2013: Will Pay-to-Play Reform Follow?

Late last month, ELEC issued its 2013 Annual Report, which includes an analysis of the Pay-to-Play Annual Disclosures (Form BE) filed by New Jersey government contractors. Although New Jersey has stringent pay-to-play restrictions in effect at virtually all levels of government, ELEC reported that contributions by public contractors jumped to $10.1 million in 2013 (up more than $2 million from 2012). Despite this increase, ELEC advised in its May ELEC-Tronic Newsletter that “overall contributions still are down 39 percent from a peak of $16.4 million in 2007.”

Given that contributions by New Jersey government contractors increased significantly in 2013, it raises the question of whether pay-to-play restrictions are working. Although the law has not changed in nearly five (5) years, changes may be taking place on the local level to spur an increase in giving. Perhaps more local government entities are moving to a “fair and open process”, which allows vendors to contribute up to the full limits of New Jersey campaign finance law during the term of a contract. Perhaps more local government entities are adopting less stringent pay-to-play restrictions, which contain higher contribution limits during both the pre-contracting period and during the term of a contract itself. Perhaps the increase is simply due to the fact that contributions to legislative candidates generally fall outside the scope of pay-to-play restrictions and 2013 was a big legislative election year. Or, perhaps the increase is based on the fact that more government contractors have become aware of their filing obligations. No matter the reason, there is still a push for pay-to-play reform in the Garden State. Despite the fact that legislation was introduced in the New Jersey Senate over a year ago, New Jersey’s statewide pay-to-play restrictions have not changed since 2008.

Now that the 2013 legislative elections are over, will 2014 be the year for reform?

Public Trust Act Preserves Candidate Choices

Political communications are like trees in a forest.  Blessed with monetary sunshine political communications reach toward the sky, dominate the horizon, and potentially drench competitors in shade.  Legal limits on financial support serve to wither these other messengers who, like trees in a forest, fall to silence.

Consider then what this April showered upon New York’s thicket of contribution limits.

First came the Public Trust Act.  It marks the first time the State has adopted a public campaign financing law, in the form of a this-year-only pilot for one office, State Comptroller.  As was the case for all New York City elections between 1988 and 2004, this new State law does not purport to change the currently high contribution limits for non-publicly-financed candidates and reduces contribution limits only for those candidates seeking public matching funds.

Immediately on the heels of that legislation, the U.S. Supreme Court in McCutcheon v. FEC struck down aggregate contributions limits in federal elections, seemingly imperiling New York’s $150,000 annual aggregate limit.

Now, Judge Paul Crotty has brought New York’s $150,000 annual aggregate contribution limit to an inevitable (albeit incomplete) denouement pursuant to McCutcheon by striking down its applicability to SuperPACs.  When the rest of the $150,000 limit falls, contributors will also get to sprinkle maximum financial support upon as many candidates and party committees as they may wish.  In theory, according to McCutcheon, these candidates will remain insulated from risk of quid pro quo corruption by “base limits.”

Returning then to the distinction the new Public Trust Act makes between the base limits that apply to publicly-financed and the lower base limits that apply to non-publicly-financed candidates: what public policy does this serve?  (While this blog has generally not been a forum for discussion of active cases in which we appear as attorneys, I’m about to make an exception.)

At the very time Judge Crotty was (however reluctantly) sprinkling sunshine on SuperPACs, this lawyer was arguing an appeal on behalf of former NYC Republican mayoral candidate George McDonald (McDonald v. New York City Campaign Finance Board).  Putting aside the specific legal issues of that case, which is a challenge to a 2004 local law leveling base limits for non-publicly-financed candidates, the McDonald appeal aims to help candidates compete for sunshine in a post-Citizens United wilderness.

Under the Public Trust Act, candidates have three financing options: 1) self-financing; 2) raise matchable contributions for public financing and comply with reduced base limits; or 3) raise legally permissible campaign contributions under the pre-existing base limits.  Each option for candidates runs up against limits: the limits of a candidate’s personal wealth, the limits of the time and effort that will be necessary for demonstrating eligibility for public funding, and the base limits themselves.  In contrast, independent spending is constitutionally unlimited.  Indeed, SuperPACs serve as a force multiplier for uniting the potentially unlimited fortunes of (non-candidate) citizens in pursuit of a common political message.

Precisely because independent spending may be financed by unlimited sources, base limits inadvertently weaken the voice of candidates and amplify the impact of independent spending.  Candidates therefore need all the options that campaign finance law may afford for financing their own campaign advocacy effectively.  The Public Trust Act follows this approach precisely both by creating and preserving choice for candidates.

The Next Domino – New York Knocks Down Limits to SuperPACs

Last week, Judge Paul Crotty of the Southern District of New York ruled that New York Election Laws §§ 14-114(8) and 14-126, which impose limits on the amount of money that may be contributed to political candidates, are unconstitutional as applied to independent expenditure-only organizations. The full opinion can be downloaded here. 

New York’s Election Law had applied the $150,000 aggregate contribution limit to SuperPACs. In other words, a contributor could only give up to $150,000, despite contrary rulings in Citizens United and SpeechNow v. FEC (see here).  The Second Circuit made clear back in October that it disagreed when it reversed the district’s decision to deny the preliminary injunction sought to prevent enforcement of the limit and sent the case back down.

Consequently, contribution limits to independent expenditure-only committees have seen their last day in New York. This decision represents the fall of yet another domino in the ongoing movement away from contribution limits by U.S. courts.  The next one? New York’s $150,000 annual aggregate limit applicable to all political recipients, including candidate committees and political parties.

Public Trust Act – A Public Financing Trial and Tribulation

The NY State Legislature and Governor Cuomo enacted a new State budget on April 1, and with it, enabling legislation that includes changes in NY’s campaign finance law. In addition to new independent expenditure disclosure requirements, which we discussed here, the new law includes a this-year-only public financing test program applicable only to the NYS Comptroller’s race.

The State Board of Elections (SBOE) is charged with implementing the new public financing scheme.  But with so little time in advance of this year’s election to adopt the necessary rules and regulations, disclosure forms and software, pre-election review and post-election auditing procedures, many are skeptical that the test program will actually take flight. Indeed, following the urging of public financing proponents,the State Comptroller has indicated that his campaign is opting-out and no other candidate has step forward to participate.

Yet, the new law marks the first time that public campaign financing has been adopted at the state level in New York.  Even with its December 31, 2014 sunset, these provisions offer a new point of departure for future public financing reforms in the Empire State.  Let’s take a look.

Like New York City’s public financing law, candidates for comptroller may “opt-in” to try to qualify for $6 for every $1 raised up to the first $175 from each New York State resident contributor (natural persons only).  Contributions deemed non-matchable include illegal contributions, contributions from minors, and, contributions from registered lobbyists.  The threshold for eligibility for “participating candidates” requires $200,000 in donations that qualify for the match from at least 2,000 donations of $10 to $175.  The maximum amount of public funds payable to each participating candidate is $4 million for the primary and another $4 million for the general.

The law requires reporting of every contribution, loan received and expenditure made and requires the Board of Elections to review each report and advise committees of “relevant questions” regarding compliance with the law and rules issued by the Board and qualifications for receiving matching funds. The law affords committees an opportunity to respond and correct potential violations.

Participating candidates may file more reports on a weekly basis on Fridays “so that their matching funds may be paid at the earliest allowable date.”  The law requires the SBOE to pay matching funds “as soon as practicable” and to verify eligibility for matching funds within four days of receiving a report and pay the committee within two days of eligibility (though no earlier than 30 days after ballot petitions have been filed and not less than 45 days before the primary).

The law requires public financing participants to disclose each “intermediary”, an individual, corporation or other entity which “bundles, causes to be delivered or otherwise delivers any contribution from another person or entity” to a candidate or his committee.  NY Election Law does not otherwise require disclosure of intermediaries.

Public financed campaigns are not subject to spending limits (unlike New York City law).  Restrictions apply to the use of public funds, however, such as prohibitions against use for illegal expenses, political contributions, gifts and legal fees to defend against a formal criminal charge.

The new law sets a limited time period for the SBOE to audit participating campaigns after the election.  Provisions require participants to maintain 3 percent of matching funds for expenditures needed to comply with the post-election audit.

The reform lowers contribution limits for donations to participating candidates to $6,000 per election, which is far below the current statewide election limits of $19,700 and $41,100 for the primary and general elections, respectively.  These current high limits are retained without change for non-publicly-financed candidates and for statewide offices other than comptroller.  A special provision for the retroactive application of the new $6,000 limit would require the segregation and non-use (or return) of contributions over $6,000 raised previously.  As with the reduced limits, the segregation/return requirements are not extended to non-participating candidates or to other state-wide offices.

The law establishes the New York State Campaign Finance Fund, which consists of revenues raised from the abandoned proper fund and names the State Comptroller and the Commissioner of Taxation and Finance as joint custodians.

Putting aside issues of feasibility this year, imagine the re-enactment of these very same provisions in time for the beginning of the next statewide election cycle in January 2015 and their extension to every statewide office, not just comptroller.  Just imagine.

New York’s New Public Trust Act Expands Independent Expenditure Disclosure

Effective June 1, 2014, the Public Trust Act included in this year’s State Budget legislation redefines “Independent Expenditures” (IEs) in state and local elections.  The new definition includes expenditures conveyed to 500 or more members of a general public audience in the form of an audio or video sent by broadcast, cable or satellite, a written communication via advertisements, pamphlets or the like, or other published statement that meets either the “magic words” test of expressly calling for the election or defeat of a clearly identified candidate at any time OR “refers to and advocates for or against” a clearly identified candidate or ballot proposal on or after January 1 of the relevant election year.

Exceptions are made for news and editorial publications, candidate debates, member-to-member communications within membership organizations of not more than 500 members, and Internet communications (other than paid ads).  Moreover, the definition of general public audience does not extend to an audience “solely comprised” of members, employees and other specified persons connected to a labor organization, corporation, unincorporated business entity, or trade association.

The new definition appears to both broaden and narrow current State Board of Elections (SBOE) section 6200.10 regulations.  For example, the current SBOE rules do not specify an audience threshold or format trigger for the definition.  Most significantly, the current SBOE rules extend only to communications that meet the magic words test; the election-year-communication-that-refers-to+advocates-for/against-a-candidate is a new trigger, as is the coverage of ballot proposal advocacy.

The new law (like current SBOE regs) requires all persons making IEs to first pre-register with the SBOE as a political committee.  If an IE costs more than $1,000 it must include a disclaimer clearly stating who paid for or otherwise published or distributed the communication and that the communication was “not expressly authorized” by any candidate.  These IE registrants must disclose to the SBOE on a weekly basis (each Friday) any contribution received of over $1,000 and expenditures made over $5,000.

Given the June 1 effective date, the first weekly IE disclosures would be due on Friday June 6.  That’s right, D-Day.  Within the last 30 days before the primary or general election, these disclosures are due within 24 hours.  Unlike current political committee disclosure requirements, an IE registrant’s report must include the occupation and employer of contributors, the name of the clearly identified candidate or ballot proposal referenced in the IE-paid ad, and a copy of that political communication.

The SBOE is directed to promulgate regulations and to provide suitable forms.  Presumably, the SBOE will now conform its existing IE rules to the new statutory standard.  It is less clear whether the State Attorney General or NYC Campaign Finance Board will see a need to adjust their separate IE definitions and disclosure provisions in light of this new Election Law definition.

One oddity is the new statute’s description of when communications are not treated as independent of a candidate.  After enumerating the content triggers as including a “call for … the defeat of the clearly identified candidate” or “advoca[cy] … against a clearly identified candidate”, the definition excludes “communications where such candidate… did authorize … or cooperate in such communication.”  (Emphasis added.)  This phrasing suggests that a negative ad against a clearly identified candidate may remain an IE,and therefore not be treated as an in-kind contribution to an opposing candidate who benefits, even if that opponent has authorized or cooperated in that ad.  In all likelihood, such a result is not what was intended.

 

 

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