As you may recall, the NYC Campaign Finance Board (CFB) has been wrestling with a similar, albeit different, mandate since a Charter Revision Commission proposal passed in 2010.

So, are the two IE disclosure proposals now on the table compatible? In a word, no.

While the State proposal sets forth IE disclosure standards for state and local elections across the State, the City proposal overlaps in setting IE disclosure standards for NYC elections. Both proposals would therefore cover independent expenditures by individuals, organizations, corporations and other entities in NYC elections.

The first divergence is that the State proposal would require the spender to register and report as a political committee, whereas the City proposal does not maintain that the making of IEs requires registration as a political committee. The reason for the State’s approach is obvious: without registration as a political committee, the current statutory disclosure requirements would be inapplicable.  Ominously for the current City proposal, the proposed State rule establishes that “a political committee is the sole vehicle through which individual(s) or entities disclose an independent expenditure.” Does preemption loom?

[Alternatively, does unconstitutionality loom? Individuals, corporations, and unions have a First Amendment right to make unlimited independent expenditures. The Supreme Court in Citizens United frowned upon an argument that it was sufficient to require that right be exercised through a political committee structure and subject to political committee rules.]

Another divergence: the State’s proposed definition of IE is quite narrow, express advocacy through “magic words” (the Buckley v. Valeo standard) done without the candidate’s cooperation. The City’s proposed definition is much broader. It expands “express advocacy” to include a subjective “reasonable person” standard and further extends IEs to include “electioneering communications”, a third rail the State refuses to touch. While a news media exemption is likely encompassed by the State proposal, no exemption for member communications is signaled, an ironic development given the grief to which the CFB has been subjected on this subject. Another irony is that the State mandate of political committee reporting implies that its disclosure of contributions to IE spenders may encompass more transactions that what the City’s proposal contemplates.

Compliance with the dual requirements will certainly be a headache. Let’s say a group wishes to make two expenditures in the 2013 NYC mayoral election: A billboard that says vote for Candidate X and a radio ad that says Candidate Y will raise your taxes. What reporting obligations would be triggered?

• State proposal: the group must first register as a political committee and then report what it raises and spends for the billboard to the State Board of Elections (if the billboard costs more than $1,000). Even though the radio commercial is not an IE under the State proposal, it might still be subject to disclosure as an expense of a political committee.

• City proposal: regardless whether the group registers as a political committee, it must disclose both expenditures to the CFB if the total cost exceeds $5,000. The contributions the group receives may then also be subject to the City’s disclosure.

Even as the content of the reports may diverge, will the timing or the software for the disclosures match? Assuming the CFB proceeds to carry out its local mandate (a good bet), what are the odds the State and City will get together to have a unitary, or at least compatible, disclosure system? Will good government groups work to resolve the unnecessary complexities, or will they be content to declare victory and go home once two incompatible regulatory regimes are adopted?

Stay tuned.

The bill also amends the definition of placement agent for investment advisers who do business with state or local public retirement systems/pension funds.  The current law, which we discussed here, requires state and local public retirement systems to implement a disclosure policy that requires an external asset manager to publicly disclose a placement agent. Current law defines a “placement agent” as any person or entity hired, engaged or retained by an external asset manager, who is compensated to act as a solicitor, marketer, or other intermediary in connection with the offer or sale of securities, assets, or asset management services to a public pension system. The new law, inter-alia, exempts employees, officers, directors, equityholders, partners, members, and trustees of an external manager who spend one-third or more of his or her time, during a calendar year, managing the securities or assets owned, controlled, invested, or held by the external manager.

Additionally, the bill requires the Public Employees’ Retirement System (CalPERS) and the State Teachers’ Retirement System (CalSTRS) to each provide to the Legislature, not later than August 1, 2012, a report on the use of placement agents in connection with investments made by those retirement systems.

Governor Schwarzenegger has yet to sign the bill, but if it is signed into law, AB 1743 will become effective January 1, 2011.

In response to the Second Circuit’s finding that the ban on lobbyist contributions was unconstitutional, Connecticut law now allows lobbyists to make campaign contributions up to $100 and permits solicitation of contributions by lobbyists and state contractors.

Additionally, under the old law, participating gubernatorial candidates received public funding up to $3 million but could have qualified for an additional $3 million in funds if they were widely outspent by a non-participating opponent (the so-called “excess expenditure” provision).   Indeed, a similar provision under Florida law was recently struck down by the 11th Circuit Court of Appeals in Scott v. Roberts citing in part to Green Party.  The amendments to the CEP now double the amount of the grant to participating candidates to $6 million, which is payable without regard to the opponent’s spending.

On the one hand, the Court upheld Connecticut’s pay-to-play ban against contributions to candidates for state offices by state contractors, prospective state contractors, and their principals, spouses and dependent children. On the other, it struck down, on First Amendment grounds, the following provisions:

• the ban against contributions by lobbyists (and their spouses and dependent children) to candidates for state offices.
• the ban against contractors’ and lobbyists’ soliciting contributions on behalf of candidates for state offices.
• “trigger” provisions granting supplemental public funding to candidates participating in the Citizens Election Program on the basis of the level of expenditures made by non-participating opponents or independent expenditures opposing the participating candidate.

We briefly comment on the potential significance of these holdings in two parts.

Pay-to-Play Reforms

By Rebecca Moll Freed

Pay-to-play reform has been spreading to a growing number of states in recent years. The Second Circuit decision trims back some of the more ambitious restrictions and raises additional potential concerns about the constitutionality of outright contribution bans (as opposed to limitations). Was this victory for First Amendment principles too narrow?

The Court struck the ban on contributions by lobbyists, distinguishing between contractors and lobbyists because the recent corruption scandals in Connecticut in no way involved lobbyists. The Court reasoned, therefore, that no constitutional basis existed for subjecting lobbyists to an outright ban on contributions.

The Second Circuit struck down the solicitation ban as unconstitutional because unlike limiting contributions which present “marginal speech” restrictions, the Court reasoned that a ban on solicitation is a ban on speech itself – the core activity protected by the First Amendment. As such, solicitation restrictions are subject to strict scrutiny and must be narrowly tailored to serve a compelling government interest. The Second Circuit opined that while it is easy to see how a large contribution may be given to secure a political quid pro quo, it is not clear that individuals might secure political favors simply by urging others to make contributions.

In contrast, the decision maintains that a total ban on contributions by certain business entities with or seeking state contracts (and associated individuals and PACs) is constitutional based on a history of actual corruption by state contractors and the resulting public perception of corruption posed by contributions from this class of contributors. The decision referenced a long line of campaign finance jurisprudence, from Buckley v. Valeo through Citizens United v. FEC. But was the Court’s reasoning in upholding the contractor ban consistent with its concurrent striking down of the lobbyist contribution and contribution solicitation bans?

For example, in striking down the ban as applied to lobbyists the Court noted that an outright contribution ban “utterly eliminates an individual’s right to express his or her support for a candidate.” The Court also states that “[a] ban is a drastic measure.” Because an outright ban strips individuals of the right of political association and of the right to express their support for candidates of their choice, the ban raises the question of whether it will continue to survive constitutional scrutiny as the recent corruption scandals recede into history and public perceptions of state contractors change.

The Second Circuit’s decision may also have consequences beyond Connecticut. Take New Jersey for example. Although New Jersey’s statewide pay-to-play restrictions contain a reduced limit rather than an absolute ban, many local pay-to-play ordinances include absolute bans on contributions by government contractors. Will these provisions withstand constitutional muster? Will the State of New Jersey look to ban contributions by contractors rather than subjecting contractors to a reduced limit? Another question arises with respect to solicitation restrictions in New Jersey’s statewide pay-to-play laws. Currently a state vendor may solicit contributions of up to $300 each to/for a covered recipient. Is this solicitation restriction constitutional?

In the wake of the Green Party v. Garfield, it looks as though the ever changing landscape of pay-to-play reform may evolve into an even more intricate labyrinth of limitations, restrictions and prohibitions. The question is – will these more stringent restrictions work to prevent actual corruption and to counter the perception of corruption in the government contracting process?

Public Financing

By Laurence D.  Laufer

Earlier this week Trigger, the late Roy Rogers’ taxonomically-preserved horse, brought $266,000 at auction.  The New York Times laments that the “trigger” provisions of public campaign financing laws might likewise be on their last legs. In issuing a stay last month blocking additional matching funds to gubernatorial candidates under Arizona’s trigger provision (McComish v. Bennett), the U.S. Supreme Court sent a strong signal that it would hold such provisions unconstitutional, much as the Second Circuit just did.

Following the Supreme Court’s 2008 decision in Davis v. FEC, the Second Circuit found the trigger provision to be a “penalty” on a nonparticipant’s or independent spender’s choice to spend personal funds. The Court found the governmental interest in encouraging participation in a public financing program or in leveling electoral opportunities insufficient justification for this trigger under the First Amendment.

Is there a legislative alternative that might pass constitutional scrutiny? The New York City campaign finance law suggests a possibility.

While it includes a now similarly vulnerable provision triggering additional matching funds based on the level of an opposing non-participant’s spending, New York City’s law also contains a separate provision designed to conserve public funds for competitive elections. Specifically, if a participant’s opponent fails to raise or spend at least one-fifth of the applicable spending limit (and fails to meet alternative criteria demonstrating competitiveness), the maximum public funds payment to the participant is reduced by 75 percent.

In its 1976 landmark ruling, Buckley v. Valeo, the U.S. Supreme Court upheld presidential public financing which reflected the government’s “interest in not funding hopeless candidacies”. Thus, legislatures adopting public campaign financing may constitutionally choose to calibrate levels of funding made available to candidates as a safeguard against wasting taxpayer dollars.

Here’s how a “reverse trigger” might work. Initial public funds awards are made up to the maximum level permitted in the hypothetical law. But then portions of that funding are not actually released to the qualifying candidate until an opponent demonstrates a sufficient level of competitiveness; the opponent’s level of spending may be one of several alternative criteria. Importantly, the law would make no distinction as to whether the opponent is a participating or non-participating candidate.

The goal would not be to level the playing field among candidates, but rather to protect against wasteful disbursements of public money. Thus, a full award would be released in segments, according to the opponent(s)’ competitive performance. Each segment of the full award would be released only if and when it is actually needed by the qualifying candidate.

As against a First Amendment challenge, this reverse trigger just might be seen as a horse of a different color.

On October 11, 2009, Governor Schwarzenegger signed into law Assembly Bill 1584 (“AB 1584”), which became effective immediately.  AB 1584 requires that the boards of all public employees’ pension or retirement systems in California implement a disclosure policy detailing payments made to placement agents in connection with system investments in or through asset management firms. Additionally, the required disclosure policy must include a five year solicitation ban on external asset managers and placement agents who violate the disclosure policy.  The required disclosure policy must be adopted by June 30, 2010.

AB 1584 also:

• Requires that intermediaries disclose all campaign contributions made to any member of the board as well as all gifts given to any board member in the preceding twenty-four months before acting as a placement agent in connection with a potential system investment;

• Requires that intermediaries disclose any contributions or gifts made after becoming placement agents; and

• Prohibits any board member or board employee from directly or indirectly selling or providing any investment product that would be considered an asset of the fund to any public retirement system.

Looking forward to the 2013 election cycle, Genova, Burns & Vernoia has submitted a request for an advisory opinion setting ground rules for 2013.

In the case of a State contractor, the prohibition applies for the duration of the term of office or for two years following the expiration or termination of the contract, whichever is longer. For business entities with aggregate bids or proposals (combined with the annual total value of current State contracts, if any) that total more than $50,000, the prohibition applies from the date the invitation for bids or RFP is issued through the date the contract is awarded.

The contribution prohibition is enforced through a requirement that the business entity register with the State Board of Elections. The registration must include the name and address of the business entity, any affiliated entity, and any affiliated person. Affiliated persons and entities are subject to the same contribution prohibition. Affiliated persons include persons with an ownership interest in excess of 7.5%, executive employees, and the spouse and minor children of such persons. Affiliated entities include subsidiaries, members of the same unitary business group, 501(c) organizations established by the business entity, affiliated person, or affiliated entity, and political committees for which the business entity or such 501(c) organization is the sponsoring entity.