Pay-to-Play Ruling on Atlantic County Ordinance Turns on the Use of the Word “Any”

Atlantic County is one of three counties in the State of New Jersey with a stringent county pay-to-play ordinance in effect. Like many local pay-to-play ordinances, the Atlantic County ordinance covers contributions to candidates for or holders of county office. The goal is to limit political contributions made by “those seeking or currently performing business with the County,” so as to allay the “reasonable concerns on the part of taxpayers and residents as to their trust in government contracts.”

By its express terms, the Ordinance covers contributions made “to any campaign committee of any candidate for elective County office or to the current holders of any elective County office.” The use of the phrase “any campaign committee” raises the question of whether a contribution to a candidate committee for non-county office is covered by the ordinance when the candidate is also a holder of an Atlantic County office. Last week, a Superior Court judge ruled that the answer is “yes.” In his opinion, Judge Julio Mendez held that the use of the word “any” means that a contribution to the State Senate campaign committee for a sitting Atlantic County Sheriff is covered under the Ordinance even though the sitting County Sheriff plays no role in the award of county contracts and even though the office of State Senator is not an Atlantic County office.

Although the court’s ruling was specific to the Atlantic County Ordinance, the interpretation may spread to other counties and municipalities with local ordinances in effect. Thus, before a vendor makes a contribution to a sitting elected official seeking election to another office, the vendor must determine whether a local pay-to-play ordinance is in effect that may potentially cover the contributions to a candidate committee for that “other” office.

Only in New York, New York

Conventional wisdom holds that campaign finance reform is elusive.  At both the federal level and in many states, the pace of enactment tends to be measured in decades.

New York City is an exception.  For over 25 years, reforms have been enacted, amended, refined, bolstered, enhanced, re-worked and re-formed over and over, and then some more.    Recent developments again illustrate this remarkable dynamic.

Right on schedule, the New York City Campaign Finance Board (CFB) today issued its quadrennial report, “By the People: The New York City Campaign Finance Program in the 2013 Elections.”  The report contains more than a dozen legislative proposals.  Lo and behold, three of these were signed into law last week!

  • Local Law No. 40 requires public communications produced by NYC candidate committees to identify the authorizing candidate or committee.
  • Local Law No. 41 adds numerous public disclosure requirements for independent expenditures.  The new law requires independent spenders to disclose their owners, officers, and board members, as well as contributors of $25,000 or more to contributing entities from which they have received $50,000 or more.  Also, “paid for by” disclaimers on independent public communications will now include owners, CEOs, and top three donors, in addition to identification of the independent spender.
  • Local Law No. 43 trims requirements for the CFB’s printing and mailing of voter guides to NYC voters.

The CFB report details other proposals, which include:

  • Issuing a limited amount of public funds to candidates prior to their obtaining a place on the ballot
  • Streamlining criteria for lifting the public funds payment cap in competitive elections
  • Deeming contributions bundled by persons doing business with the City as ineligible for public matching funds
  • Banning candidates from accepting contributions from labor unions and political committees.

That last proposal is a decade-old warhorse and quite ambitious constitutionally for candidates not receiving public financing.

One issue the CFB kicks down the road for further study is possibly pairing an increase in spending limits for publicly financed candidates with reduced contribution limits (presumably for all candidates).  One might consider a study oriented toward the enactment of new limits on candidates as out-of-step with the trend toward limits-free independent spending.

Finally, today’s New York Times coverage reminds us again that New York City’s campaign finance system is “often viewed as a national model.”  While NYC’s reforms perhaps serve as a model of what can be done, its impulse for perpetual reform doesn’t actually seem to be catching on elsewhere.

Indeed, when it comes to campaign finance reform, that old Sinatra refrain falls flat: the fact that you can make it in New York, New York simply does not prove you can make it anywhere else.

District Judge Permanently Enjoins PA Law that Prohibited Corporate Contributions to IE Committees

On Wednesday, U.S. District Judge William Caldwell permanently enjoined enforcement of Pennsylvania’s prohibition on campaign expenditures by banks, corporations or unincorporated associations (such as labor unions) as against contributions these entities make to independent expenditure-only committees. See General Majority Pac v. Aichele,  No.: 1:14-CV-332 (M.D. Pa. Aug. 13, 2014). Thus, Pennsylvania now joins its sister states in removing all limits on corporate contributions to Super PACs.

The DISCLOSE Act: Fantasy or Future?

Following a wave of judicial decisions that have cleared the way for more soft money in politics, federal legislators have continued to press for the passage of laws creating more stringent regulations on donor disclosures and transparency in political contributions.

The Democracy Is Strengthened by Casting Light On Spending in Elections (DISCLOSE) Act was introduced in Congress in 2010 and 2012, but the legislation was twice defeated after falling short of overcoming a Republican-led filibuster.  A third attempt at passing disclosure legislation, the DISCLOSE Act of 2014, was introduced by Senator Sheldon Whitehouse of Rhode Island and is currently being considered in the Senate Rules Committee. A hearing was held last week.

“DISCLOSE 2014” would:

  • Broaden the definition of what is a reportable “independent expenditure,” by treating the functional equivalent of express advocacy as an independent expenditure ;
  • expand the time periods during which a communication would be considered a reportable “electioneering communication,”
  • require disclosure of donors underlying large transfers to political spenders,
  • require that covered organizations (including corporations, labor unions and 501(c)(4) and 501(c)(6) nonprofit organizations) that spend more than $10,000 or more on election ads publicly identify their donors, and
  • impose new required disclaimers for political advertisements.

The bill faces the hefty obstacle of garnering bipartisan support to become federal law.  Nonetheless, DISCLOSE 2014 could serve as a model for state and local jurisdictions. While the Supreme Court (in decisions such as Citizens United and McCutcheon) has made it easier to generously fund political and issue advocacy organizations, the Court has also emphasized that disclosure requirements are both constitutional and beneficial to a healthy democracy.  Accordingly, proponents of enhanced campaign finance transparency might find that the last bastion of reform lies in disclosure requirements like those introduced in DISCLOSE 2014.

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?

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