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Did the US Supreme Court’s ruling in McCutcheon v. FEC Put the Constitutionality of Some Pay-to-Play Laws in Doubt?

McCutcheon

Much has already been written about the impact of the US Supreme Court’s ruling in McCutcheon v. FEC this week; some of it actually accurate. On its face, the ruling in that case has to do with aggregate contribution limits and has nothing to do with state pay-to-play laws. (If you want to read one of the fifty law firm client alerts that breathlessly delved into the nuances of the case on the very day the opinion issued, why not read ours? It’s a good one.). The reasoning employed by the Supreme Court in reaching the holding it did in McCutcheon, however, would appear to threaten the constitutional foundation upon which many state pay-to-play laws are based.

In McCutcheon, the US Supreme Court weighed whether federal laws prohibiting individuals from giving contributions in excess of aggregate limits over a two-year period ($123,200 of which no more than $48,600 could go to candidates and no more than $74,600 could go to PACs and parties) could withstand constitutional analysis. (We should all have such problems). In ruling as it did, the Court made clear that First Amendment freedoms of speech will invalidate virtually any effort to restrict political spending other than direct contribution limits which are designed to prevent direct quid pro quo corruption (fancy legal language for “bribes”). If the law can’t be shown to be narrowly drawn solely to prevent corruption, First Amendment freedoms of speech will trump even laudable goals such as circumvention or public distaste for a system whereby wealthy insiders enjoy undue influence. This is why the Court did not strike down (this time) contribution limits, but did find that limits on contributions to an unlimited number of candidates are unconstitutional.

This leads us to an analysis of the potential impact the Court’s ruling might have on the myriad of state and federal pay-to-play laws on the books. As we have pointed out since our inaugural blog post, pay-to-play laws are not designed to prohibit pure corruption; state bribery laws are already on the books for that purpose. Rather, pay-to-play laws typically ban all (otherwise legal) contractor contributions to procurement officials expressly because proving direct quid pro quo corruption (bribery) is so difficult. Statistically, legislators, regulators, and the public can see a correlation between vendor political contributions and success in winning contracts but can’t prove corruption (unless they are fortunate to live in Chicago where politicians are willing to be audio taped doing such things). Because such a correlation is unseemly, but direct corruption difficult to prove, pay-to-play laws are born whereby actual corruption need not be proven but its appearance generally is prevented through a blanket restriction on contributions (speech?) imposed upon an entire suspect class.

Framed that way, there are a number of pay-to-play laws, including those put forth by the Securities and Exchange Commission, which might not sleep quite as soundly after McCutcheon. Colorado’s pay to play provisions have already experienced the consequences to straying too far in restricting contractor contribution activity. Others might follow closely behind.

Did the US Supreme Court’s ruling in McCutcheon v. FEC Put the Constitutionality of Some Pay-to-Play Laws in Doubt?

Is it Illegal “Pay-to-Play” for a Government Contractor or National Bank to Contribute to a Super PAC?

A new complaint was filed with the Federal Election Commission yesterday alleging that Chevron USA violated campaign finance laws and corollary “federal pay-to-play” laws by contributing $2.5 million to the Congressional Leadership Fund, a Super PAC tied by press reporting and former staffers to House Speaker Boehner. While the FEC complaint was filed by organizations likely more interested in “poking the bear” because of Chevron’s environmental footprint than its politics (Public Citizen, Friends of the Earth, Greenpeace, and Oil Change International, hereinafter referred to as “The Usual Suspects”), the complaint has facial merit and needs to be on the radar screen of government contractors, national banks, and foreign nationals everywhere.

The logic of the complaint is relatively straightforward and not new. Federal law (2 USC 441c) prohibits government contractors from making campaign contributions to candidates, political committees, or political parties. 2 USC 441b imposes similar restrictions on corporations, national banks, and labor unions. “Chevron”, as a government contractor, the complaint alleges, thus violated federal law by making a $2.5 million contribution to the Super PAC Congressional Leadership Fund (technically, an “independent expenditure political committee”).

At issue is whether the landmark Supreme Court opinion in Citizens United v. FEC has changed the rules with regard to contributions to independent expenditure committees (one of too many law firm “client alerts” on the meaning of Citizens United can be found here). There has not been a case addressing this precise issue squarely since that case. Arguably, the same United States Supreme Court which found corporate and labor union finance of political speech to enjoy First Amendment protection notwithstanding federal law to the contrary will likely extend such protections to government contractors, national banks and potentially foreign nationals notwithstanding the laws referred to above.

The Usual Suspects, in their complaint against Chevron, allege as a matter of fact that “The Federal Election Commission has appropriately interpreted the prohibition against contractor contributions to “any political party committee, or candidate for public office or to any person for any political purpose or use” to include political committees and super PACs involved in Federal elections.” (The Usual Suspects Complaint, p.3, emphasis added). This might be news to three of the six commissioners of the Federal Election Commission.

It is true that a Democratic commissioner of the FEC testified to this effect before Congress in a House Oversight hearing. It is also true that the FEC, in a footnote I am convinced the Republican Commissioners failed to catch before publication of an explanation of FEC policy, wrote “Foreign nationals, government contractors, national banks and corporations organized by authority of any law of Congress cannot contribute to … separate [independent expenditure] accounts.  §§ 2 U.S.C. 441b, 441c, and 441e.”

It is also true that the Usual Suspects’ complaint cites a prominent law firm blog for this same proposition although, if one reads the actual blog post cited, one gains a new appreciation for the phrase “selective, out-of-context, quoting”.

Chevron argues in its own defense that the “Chevron” that made the contribution is a distinct company from the “Chevron” which contracts with the government. I guess I’d argue that too were I Chevron, but this fight will ultimately be won or lost at the Altar of the First Amendment.

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Is it Illegal “Pay-to-Play” for a Government Contractor or National Bank to Contribute to a Super PAC?

Citizen’s United Update: Supreme Court Confirms Montana Subject to US Constitution

 

Back in April, this blog boldly predicted that the United States Supreme Court would exert little effort in dismissing the State of Montana’s effort to convince us that the Court’s holding in Citizens United v. FEC, and the First Amendment analysis that supported it, did not apply in Big Sky Country. Journalistic integrity, and the fact that my prediction was correct, impels me to revisit that prediction now that the Court has ruled.

In a ruling issued today in the case American Tradition Partnership v. Bullock, the Supreme Court affirmed the principle that its Constitutional analysis must be applied throughout the country and is binding even upon those state courts which may disagree with that analysis:

The question presented in this case is whether the holding of Citizens United applies to the Montana state law. There can be no serious doubt that it does. See U. S. Const., Art. VI, cl. 2. Montana’s arguments in support of the judgment below either were already rejected in Citizens United, or fail to meaningfully distinguish that case.

Those paytoplaylawblog readers who bet the twenty-five word “over” and the one page “under” may now make their way to the cashier’s window to collect their winnings.

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Citizen’s United Update: Supreme Court Confirms Montana Subject to US Constitution

Citizens United Update: LXBN TV Wants to Know More

As a follow-up to my post yesterday on the future of Citizens United, the folks at LXBN TV conducted a follow-up interview which I’m posting here. Note, degenerate gamblers, that Colin O’Keefe of LXBN TV has chosen to take the “over” in my 25 word over/under line for the number of words expended by the Supreme Court in dispatching Western Tradition Partnership, Inc. v. Attorney General of Montana, 2011 MT 328. There is still time to place your bets.

Citizens United Update: LXBN TV Wants to Know More

US Supreme Court Agrees to Revisit Citizens United – Should We Be On High Court Alert for a News Stunner?

The United States Supreme Court has recently announced that it might be revisiting its uber-controversial opinion Citizens United v. FEC. The ruling at issue was in the form of a little-noticed order entered by the Court staying a Montana Supreme Court opinion declining to enforce Citizens United. Nothing controversial there. What makes the opinion intriguing, as noted by recent news reports, is the fact that Justices Ginsburg and Breyer went out of their way to note that:

Montana’s experience, and experience elsewhere since this Court’s decision in Citizens United v. Federal Election Comm’n, 558 U. S. ___ (2010), make it exceedingly difficult to maintain that independent expenditures by corporations “do not give rise to corruption or the appearance of corruption.” Id., at ___ (slip op., at 42). A petition for certiorari will give the Court an opportunity to consider whether, in light of the huge sums currently deployed to buy candidates’ allegiance, Citizens United should continue to hold sway.

Can you feel the thrill running up Chris Matthews’ leg at the mere thought of such a ruling? Is this a sign that the Court has had a change of heart and is about to rethink its controversial holding that corporations have the right under the first amendment to freely advocate for and against federal candidates?

Spoiler Alert: Not likely.

At issue here is a Montana Supreme Court opinion in which that court concluded that the sky is too big in Montana for some pesky infringement of its laws by the United States Constitution: “Citizens United does not compel a conclusion that Montana’s law prohibiting independent political expenditures by a corporation related to a candidate is unconstitutional.” (Western Tradition Partnership, Inc. v. Attorney General of Montana, 2011 MT 328, p. 28).

Of course the US Supreme Court stayed application of that opinion. To do anything else would invite an undermining of the primacy of the federal constitution.

You gotta’ give Montana credit for chutzpa, if not for originality. South Carolina tried this gig first in 1832 with its Ordinance of Nullification but that didn’t work out too well.

A good example of what to expect in the future from the Supreme Court in this case can be found in Bluman v. FEC; a fun case in which a few individuals sought to challenge the prohibition against foreign nationals from making direct contributions or independent expenditures in domestic elections on first amendment grounds by arguing that Citizens United didn’t mean what it said.

The U.S. Supreme Court dispatched that argument in four words. I’m setting the “over-under” for the Court’s reversal and remand consistent with its ruling in Citizens United in this case at twenty-five words. Any takers?

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US Supreme Court Agrees to Revisit Citizens United – Should We Be On High Court Alert for a News Stunner?

Federal Pay-to-Play Rule is Here to Stay

On Wednesday, June 29, the Securities and Exchange Commission unanimously approved the final text of a new rule under the Investment Advisers Act of 1940 directed at preventing pay to play practices by investment advisers. In response to 250 comment letters, with divergent views on the issue, the Commission revised certain provisions of the rule it proposed last year but largely kept intact its initial proposal of regulations designed to ensure that investment advisors are prohibited from using campaign contributions to steer municipal investment business. Oddly enough, the Commission received no comment letters from the class of plan beneficiaries that it sought to protect with the proposed rule, although two public interest groups strongly supported the proposed revisions.

The new rule has three key elements:

1) It prohibits investment advisors from providing advisory services for compensation—either directly or through a pooled investment vehicle—for two years, if the advisor or certain of its executives or employees have made a political contribution to an elected official in a position to influence the selection of the advisor;

2) It prohibits advisory firms and certain executives and employees from soliciting or coordinating campaign contributions from others (a practice referred to as “bundling”) for any elected official in a position to influence the selection of the adviser. It also prohibits solicitation and coordination of payments to political parties in the state or locality where the adviser is seeking business; and

3) It prohibits investment advisors from paying third parties, such as placement agents, from soliciting a government client on behalf of the investment adviser, unless that third party is an SEC-registered investment advisor or broker/dealer subject to similar pay to play restrictions.

Finally, the rule contains a catch-all, “don’t let the lawyers find a loophole” provision, which prohibits acts done indirectly, which if done directly, would result in a violation of the rule (such as old favorites like funneling contributions through an investment adviser’s attorneys, spouses or affiliated companies).

JUSTIFIED BY PAST ABUSES

The Commission justified its approval of the new rule by referencing the perceived past success of MSRB rule G-37: “Our years of experience with MSRB rule G-37 suggests that the ‘strong medicine’ provided by that rule has both significantly curbed participation in pay to play and provides a reasonable cooling off period to mitigate the effect of a political contribution.” The Commission further rationalized the need for a tough federal rule based on its belief that neither “codes of ethics [nor] compliance procedures alone would be adequate to stop pay to play practices, particularly when the advisor or senior officers of the advisor are involved…” Under the rule, investment advisers remain obligated to adopt policies and procedures designed to prevent violation of the rule. The Commission affirmed “that an adviser’s implementation of a strong compliance program will reduce the likelihood, and therefore costs, of inadvertent violations.”

ANTICIPATING A FIRST AMENDMENT LEGAL CHALLENGE?

In the discussion portion of the rule, the Commission addressed comment letters and also tackled First Amendment concerns, explaining that the new rule is closely drawn to accomplish the goal of preventing quid pro quo arrangements while avoiding unnecessary burdens on the protected speech and association rights of investment advisers. The Commission pointed out “…the rule imposes no restrictions on activities such as making independent expenditures to express support for candidates, volunteering, making speeches, and other conduct.” The Commission distinguished the recent Citizens United Case, by stating: “Citizens United deals with certain independent expenditures (rather than contributions to candidates), which are not implicated by our rule.”

PLACEMENT AGENTS ARE NOT BANNED BUT SUBJECT TO FINRA REGULATION

The Commission, persuaded by comment letters, retreated from an outright ban on investment advisers hiring so-called placement agents. As outlined above, the regulations approved allow advisors to continue hiring placement agents provided those agents are registered with the SEC or the Financial Industry Regulatory Authority (FINRA) and subject to pay-to-play restrictions. The restriction on investment advisers using unregistered placement agents will not take effect for one year, in part to give FINRA, which has experience enforcing the MSRB rules, time to propose such rules. Andrew Donohue, who heads the SEC division of investment management, said that the FINRA regulations will be “at least as stringent” as his agency’s rules. Nevertheless, SEC Chairwoman Mary Schapiro warned in an open meeting Wednesday that if the SEC finds any signs of abuse of the new rule, it may still consider an outright ban. “If the Commission determines that third-party placement agents continue to inappropriately influence the selection of investment advisers for government clients even under our enhanced rule, I expect we would consider the imposition of a full ban,” said Schapiro.

SOME CONTRIBUTIONS PERMITTED – BUT HAVE AN ACCEPTED PAY TO PLAY COMPLIANCE PROGRAM IN PLACE

The Commission also attempted to temper the rule by providing certain exceptions to the prohibition on contributions. Contributions of $350 or less per election per candidate can be ignored “de minimus” if the contributor is entitled to vote for the recipient and contributions of $150 or less per election per candidate are permitted even if the contributor is not entitled to vote for the candidate. In addition, an adviser may apply to the Commission for an order exempting it from the two-year compensation ban. The SEC emphasized that a key factor in determining whether to exempt a firm in circumstances in which a violation occurs will be whether the firm has adopted and implemented an adequate pay to play compliance program.  As the Commission noted: “While we have designed the rule to reduce its impact, investment advisers are best positioned to protect these clients by developing and enforcing robust compliance programs designed to prevent contributions from triggering the two-year time out.”

The effective date of the new rule will be 60 days after it is published in the Federal Register. As noted above, investment advisers may no longer use third parties to solicit government business except in compliance with the rule on one year after the Effective Date. Advisers may need to continue to provide advice for a reasonable period of time during which a client can seek to obtain advisory services from others. While some commentators urged the Commission to allow advisers to continue to receive fees during the two year time out for services provided pursuant to existing contracts, the Commission responded: “Allowing contracts acquired as a result of political contributions to continue uninterrupted would eviscerate the rule.”

The financial industry remains in the early stages of evaluating the impact this new federal pay to play rule will have on its activities. One thing we all know for certain, federal regulation of pay to play is here to stay.

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Federal Pay-to-Play Rule is Here to Stay

Proposed Pay-to-Play Laws in the Wake of Citizens United v. FEC: Congress and States get in on the Act

As we have previously analyzed on the blog, the recent U.S. Supreme Court decision in Citizens United v. FEC has sparked both election law commentary over the limits of government efforts to restrict political speech as well as a much celebrated one-way fight between branches of government at the State of the Union Address. Now, the third branch of government is about to get in on the act as Senator Charles Schumer (D-N.Y.) and Congressman Chris Van Hollen (D-Md.) are set to unveil “responsive” federal legislation containing federal pay-to-play prohibitions with the apparent support of at least one Republican, Rep. Mike Castle (R-Del.). This legislation was recently released and is called the “DISCLOSE ACT”. Please click here to view the summary.

The Citizens United opinion expressly recognized the First Amendment rights of corporations and labor unions to participate in the political process through the funding of independent communications expressly advocating the election or defeat of clearly identified candidates. Couched as it was in Constitutional principles, there are limits to what Congress can do to overturn the opinion. The Senate and House Democratic leadership appears to have concluded that if the prohibition of such speech is unconstitutional, the preferred response will be to require disclosure of corporate and union independent expenditures to the FEC and to shareholders and further to require corporate CEOs to appear on expenditures with the same “stand by your ad” messages we have learned to love in campaign advertising. The bill will also seek to impose additional limitations on the abilities of foreign individuals and companies to influence political speech by U.S. corporations.

Of significance for corporations doing business with the federal government, it is expected that the Schumer/Van Hollen legislation will contain significant federal pay-to-play limitations. Under draft versions of the legislation currently circulating on Capitol Hill, Schumer/Van Hollen is expected to entirely bar federal government contractors from using corporate funds to finance independent expenditures advocating the election or defeat of a federal candidate. Such contractors are already barred by federal law from making campaign contributions (11 CFR 115.2) but the proposed legislation is expected to seek in addition to preclude such contractors from financing independent speech about federal candidates. Whether such a prohibition could withstand constitutional scrutiny is, at best, an open question.

Another class of citizens expected to have their right to finance independent expressions of support or opposition of federal candidates muzzled under the proposed Schumer/Van Hollen legislation are all recipients of federal TARP (bailout) funds. Again, the constitutionality of such a prohibition remains open to debate, but considering the degree to which Members of Congress on both sides of the aisle have been scoring political points by demonizing TARP recipients, one can certainly understand why Congress would try.

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Proposed Pay-to-Play Laws in the Wake of Citizens United v. FEC: Congress and States get in on the Act

What Does Citizens United v. FEC Really Mean?

I received an email from a law student who posed a question about the impact of the recent Supreme Court decision in Citizens United v. FEC. The student asked:

“After the recent Supreme Court decision in Citizens United v. Federal Election Commission, it seems to me that pay-to-play laws across the nation will now serve even more of a purpose as corporations are now free to contribute to the political process (although not directly to candidates).

In saying that, I was wondering about your take on the matter. Am I missing something, or does Citizens really mean what I think it does?”

It’s a very good question because, while Citizens United doesn’t directly affect state pay-to-play issues, its impact is certain to be felt this legislative session. States and municipalities have already been struggling to respond to voter angst about the political process – and recent election results combined with breathless media reporting is certain to exacerbate that angst.

In a nutshell, Citizens United is a landmark ruling for corporations, unions and groups of individuals interested in participating in any aspect of the federal political debate. The ruling is particularly relevant because it is predicated upon a recognition that corporations, tax exempt groups and unions have a First Amendment right to use unlimited corporate funds for independent expenditures that expressly advocate the election or defeat of federal candidates.

The ruling does not directly impact state pay-to-play laws because it expressly left intact existing federal and state limitations on campaign contributions and upon the ability of federal candidates to “coordinate” their activities with outside groups. It would be an error, however, to conclude that the Supreme Court’s ruling will not affect state legislative action on pay-to-play simply because the ruling doesn’t affect contributions, coordination or any of the quid pro quo issues that pay-to-play laws are generally looking to capture. If anything, it is more likely that Citizens United is going to cause a number of state legislatures and municipal bodies to feel they need to pass tougher pay-to-play laws to counter the perceived invitation for corporations and unions to overwhelm the political process.

It is likely that such concerns are somewhat exaggerated. Rather than being incentivized by this enhanced recognition of rights to engage in pay-to-play politics, if anything, corporations and unions now have the opportunity to exert much more leverage with politicians simply by threatening to fund independent expenditures either for or against candidates depending on how responsive they are to the corporate or union cause. These groups no longer have to make contributions to exert leverage – they can do just fine on their own, thank you. As was seen just last week when a group of 40 corporate executives notified congressional leaders that they were tired of being solicited for campaign contributions, the ruling has already begun to change the political landscape away from the candidates and parties and towards the “independent expenditure”.

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What Does Citizens United v. FEC Really Mean?