The FEC explained it was simply following the logic of court rulings in Citizens United v. FEC  and SpeechNow.org. v. FEC. Because “‘independent expenditures do not lead to, or create the appearance of, quid pro quo corruption’”, the FEC found no basis to limit contributions to these independent expenditure PACs, including contributions by corporations and labor unions.

Here is the power of Citizens United at full throttle. While the Supreme Court disclaimed application of its holding to the statutory prohibition on direct corporate contributions to federal political committees and SpeechNow did not purport to address contributions by corporations at all, the FEC nevertheless rather readily conceded that statutory prohibitions could not be constitutionally sustained in case of corporate and union giving to independent expenditure PACs.

And there’s no reason to think that only federal dominoes will fall. For example, in 1994 the New York State Board of Elections reached a very different conclusion. Its formal opinion No. 1994-3 applied New York’s statutory contribution limits to contributions made to an “independent committee.” That hallowed decision now appears to be on rather shaky ground.

Especially in light of the difficulties encountered in the legislative pushback, it appears that campaign finance regulators may find themselves opening new vistas to campaign spending in response to court rulings for some time to come.

In response to the Supreme Court’s decision in Citizens United, the staff recommends amending the Charter to require the disclosure of independent expenditures “to provide the citizens of New York City with the information they need to properly assess the content of political communications intended to influence their behavior at the polls, and to maintain the City’s status as a national leader in campaign finance law.”    The proposed amendment would make three major changes the Charter, including:

• Requiring any individual or entity making independent expenditures in excess of $1,000 to disclose such activities to the CFB.
• Empowering the CFB to require any entity making independent expenditures in excess of $5,000 to disclose the sources of the funds used to make such expenditures.
• Requiring disclosure of the name of the individual or entity that funds certain literature or advertisements through independent expenditures.

The amendment would also make a knowing violation of the disclosure requirements punishable both as a misdemeanor and through a civil penalty of up to $10,000 for each violation.  These changes, if adopted, would continue an ever-expanding evolution in the scope of public disclosure requirements: first from participating candidates in the public financing program (1988), then from non-participating candidates (2004), and now, possibly, from non-candidate entities, which seek neither public funding nor the attainment of public office.

There are other staff recommendations of note.  For example, while the staff recommends further discussion on replacing the current three-term maximum provision with a two-term provision, the staff specifically recommends amending the charter so as to permit the City Council to enact only prospective changes to the term-limits provision where the amendment would extend the term of any incumbent.   Additionally, the staff recommends amending the Charter to reduce the number of signatures required on ballot petitions to ease candidate burdens.

Many of these changes, if adopted, would certainly alter New York City’s political landscape. Whether or not the Commission adopts the recommendations of its staff, however, remains to be seen.

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.

• Prohibit investment advisers from receiving compensation for advisory services to a government client for two years if they make a political contribution to certain elected officials or candidates.
• Prohibit an adviser from providing payment to any third party for a solicitation of advisory business from any government entity on behalf of such adviser unless the third-party is registered with the SEC or FINRA.
• Prohibit an adviser from soliciting or coordinating contributions (i.e. bundling) to officials or candidates or payments to political parties where the adviser is providing or seeking government business.
• Require a registered adviser to maintain records of the political contributions made by the adviser or covered executives and employees.

UPDATE:  While the rules generally go into effect 60 days after publication in the Federal Register, the effective dates for some of the rules are extended to provide time for compliance:

• The prohibition on providing advisory services for compensation within two years of a contribution and the prohibition on soliciting or coordinating contributions will first be triggered by contributions made six months after the effective date.  Notably, this means that contributions given for the November 2010 elections are not covered.
• The prohibition on making payments to third parties goes into effect one year after the effective date.
• The record retention rule goes into effect six months after the effective date

Covered “officials” include an incumbent, candidate or successful candidate for elective office of a government entity if the office is directly or indirectly responsible for, or can influence the outcome of, the selection of an investment adviser or has authority to appoint any person who is directly or indirectly responsible for or can influence the outcome of the selection of an investment adviser.

“Covered Associates” include the adviser’s general partners, managing members, executive officers, or other individual with a similar status or function. Any employee of the adviser who solicits government entity clients for the investment adviser and any supervisor of any such employee are covered associates.  Additionally, any PAC controlled by the investment adviser or any of the adviser’s covered associates are included in the definition of “covered associates.”

The rule also contains a de minimis exception that would permit each covered associate who is an individual to make aggregate contributions of $350 or less, per election, to an elected official or candidate if the person making the contribution is entitled to vote for the official or candidate and $150 if the person is not entitled to vote for the official or candidate.

The bill aims to reach “stealth PACs” which seek to influence the outcome of elections but do not fit within the definition of political committee.  Specifically, an issue advocacy organization would be a not-for-profit organization organized under Internal Revenue Code sections 527 (political organization), 501(c)(3) (charitable organization) or 501(c)(4) (civic league or social welfare organization) “that engages in influencing or attempting to influence the outcome of any election . . . to any State or local elective public office, or the passage or defeat of any public question, or in providing political information on any candidate or public question.”

Much like the federal legislative response to the Citizens United holding, which has now been passed by the House, A-2595 seeks to ensure that the financing and source of any expenditures designed to influence elections should not evade public scrutiny.

• Set severely reduced contribution limits for public contractors and lobbyists.  These limits would apply to candidates for state and local offices and to political party “housekeeping accounts.”  In addition to lobbyists and contractors, the limits would extend to owners, senior managers, immediate family members, and controlled political committees (largely following the New York City doing business reform model).

• Prohibit the award of State or local government contracts to companies at which associated persons exceeded these reduced limits (essentially following the New Jersey pay-to-play reform model).

• Within the last 36 days of an election (the time period currently covered by a single 11-day pre-election filing by political committees), require the following contributors to make disclosure within 48 hours: lobbyists, public contractors, immediate family members, and controlled political committees.

• Establish a voluntary public campaign financing system (like New York City’s), allowing for spending limits and debate requirements for participating candidates.

• Subject party “housekeeping accounts” to contribution limits.

• Reduce generally applicable contribution limits.  (The level of the proposed limit is not specified.)

• Subject corporate subsidiaries and related limited liability companies to the current $5,000 annual limit on corporate contributions (i.e., treating related entities as a single source subject to a single limit).

• Require public disclosure of a contributor’s employment and occupation (as under federal law).

• Restrict Albany-area fundraisers during legislative session and require timely disclosure of funds raised at such fundraisers.

• Specify permissible and impermissible uses of campaign funds and more clearly prohibit non-campaign related, personal uses of any kind.

• Improve enforcement, such as by granting the Attorney General concurrent authority with the State Board of Elections enforcement counsel unit to investigate and prosecute criminal and civil campaign finance violations, directing the State Board to publish the names of violators (following the New York City Campaign Finance Board’s example) and increasing penalties for violations significantly.

• Prohibit investment firms from making campaign contributions, charitable contributions or gifts to the State comptroller (or to pension fund trustees – another proposal).

• Establish ongoing disclosure requirements for investment firms, including disclosure of information relating to campaign contributions (New Jersey State Investment Council rules might serve as a model).

• In proposing the holding of a Constitutional Convention, the Cuomo plan first recommends reform of the delegate selection process, which would include relaxed ballot access requirements and public campaign financing.

All-in-all, it appears to be an impressive and ambitious set of reforms.  One cautionary note: in building a new structure of reform, it will be necessary to carefully re-examine current legal foundations.  For example, what lessons for the future legal definition of “contribution” should be drawn from the acquittals in the Anderson case?  This issue has particular significance since the concept of campaign contribution lies at the core of so many of the proposed reforms.

• Prohibiting campaign-related expenditures (independent expenditures and electioneering communications) by government contractors in federal elections.
• Extending the ban against campaign contributions and expenditures by foreign nationals to corporations in which (i) a foreign national directly or indirectly owns 20 percent or more of voting shares, or (ii) a majority of the board of directors are foreign nationals, or (iii) a foreign national has the power to direct corporate decision-making, or to direct the making of a political contribution or expenditure or the administration of the corporation’s PAC.  The CEO would certify compliance with the Federal Election Commission in advance of making a contribution or expenditure.
• Expanding the definition of contribution to include any communication made in cooperation with a candidate or political party committee that refers to a clearly identified candidate for federal office and is publicly distributed in the candidate’s jurisdiction within a specified time period ending on the date of the general election (beginning 120 days before the first Presidential primary or caucus for Presidential candidates, and beginning 90 days before the candidate’s primary for Congressional candidates).
• Allowing political party-paid advertising on behalf of party affiliated candidates without limitation, provided that the ads are not controlled by or made at the direction of the candidate.
• Subjecting corporations, unions, section 501(c)(4), (5), and (6) organizations and section 527 organizations (”covered organizations”) that make federal campaign-related expenditures (independent expenditures and electioneering communications) to new disclosure requirements, including information about donors.  Various disclosures would be required to be made to the FEC, to shareholders, and on the organization’s website.  Additional disclosures and disclaimers apply to radio and television communications paid for by persons other than political committees (such as a “stand by your ad” statement by the CEO and a similar statement by a “significant funder” of the covered organization).
• Requiring federally registered lobbyists to disclose any election spending of more than $1,000, and the name of candidate or campaign supported or opposed.