Responses to the US Supreme Court's decision in Citizens United v. FEC have ranged across the spectrum, from 'opening the floodgate for corporate influence' to 'enabling greater speech and debate.'  As previous alerts have discussed,  legislative efforts toward post-Citizens United reform such as the DISCLOSE Act have not gained momentum in Congress.  At the state level, reformers have had limited success mitigating the impact of Citizens United in state legislatures, and have attempted through public pressure on corporations to limit the willingness of companies to directly deploy corporate treasury funds for or against a candidate.  As reform groups work to overturn Citizens United, and others actively defend it, all but the most aggressively libertarian groups seem to share a broad consensus in support of one key component of every reform proposal: disclosure.1

In Citizens United, the Supreme Court specifically rejected a constitutional challenge to the campaign finance disclosure rules.  As a result, many recent campaign finance developments have focused on the precise application and enforcement of rules governing the disclosure of campaign spending by various groups.  Whether pursued by legislation, through litigation -- in the case of Representative Chris Van Hollen's (D-MD) suit against the Federal Election Commission (FEC), or at the regulatory level where agencies are working (slowly) to clarify and to draft disclosure rules consistent with current law and the requirements of Citizens United -- the focus on disclosure has become front and center in the campaign finance dialogue.

This issue of the SNR Denton US Political Law Compliance and Risk Management alert discusses recent disclosure developments at the FEC and in various states, along with relevant enforcement measures surrounding disclosure of campaign finance activity.  This alert also reviews policy recommendations and changes to the current FEC policies agreed to by the six Commissioners.

Developments at the FEC

American Future Fund AO (Electioneering Communications)

On June 13, the FEC issued an Advisory Opinion (AO) responding to a request from the American Future Fund (AFF) regarding proposed political advertisements that AFF wished to run this election season.  AFF asked the Commission whether eight proposed ads would constitute electioneering communications and be subject to the relevant disclosure requirements (e.g., how much is spent on the ad, who paid for the ad).  Under the Federal Election Campaign Act (FECA) and related FEC regulations, electioneering communications include any broadcast, cable, or satellite communications that:  (1) refer to a clearly identified federal candidate; (2) are publicly distributed within 30 days of a primary election, convention, or caucus of a political party, or 60 days before a general election; and (3) are targeted to the relevant electorate.  The AFF asked whether the proposed advertisements refer to a clearly identified candidate if they were to use terms such as "Obamacare" or "Romneycare," refer to Health and Human Services Secretary Kathleen Sebelius or the "White House energy policy," or include an audio clip of President Obama.

The formal AO issued by the FEC to AFF (AO 2012-19) reached a decision regarding only three of the proposed advertisements, while the Commission deadlocked on the remaining five.  In the AO, the FEC found that the two ads referring to Obamacare and Romneycare clearly identify a candidate for federal office and would be subject to the electioneering communication disclosure requirements.  The AO ruled that the ad referring to HHS Secretary Sebelius does not refer to a candidate for federal office and would not constitute an electioneering communication.  The Commission was unable to agree as to whether using President Obama's voice in an ad would render such ad an electioneering communication.  While the Commission rulings on the use of "Obamacare" and "Romneycare" provide some clarification to groups seeking to make independent expenditures in order to air advertisements, such groups must remain attentive to the FEC's current thinking regarding electioneering communications and the disclosure requirements they may trigger during the period prior to an election.

Red Blue T, LLC, ArmourMedia, Inc., and m-Qube, Inc. AO (Text Message Contributions)

On June 11, the FEC approved AO 2012-17, which paves the way for campaign contributions to be made by text message.  Under the AO, requested by Republican and Democratic-aligned consulting firms and a wireless messaging transaction aggregator, text message contributions will be permitted under FECA provided the amount is:  (1) between $10 and $50 per mobile number; (2) per candidate or committee; and (3) per billing cycle.  Republicans, Democrats, and campaign finance watchdog groups all supported the use of text messaging to make campaign contributions.   Many reform advocates hope that the ability to make contributions by text will expand the impact of small money donors in the face of the increasing influence of Super PACs and other third party groups funded by wealthy individuals.

Legislative Recommendations for 2012

The FEC has released a list of five legislative recommendations for the remainder of 2012, summarized below:

  1. Congress should require electronic filing of campaign finance reports for all Senate candidate committees if they have, or expect to have, aggregate contributions or expenditures in excess of $50,000.  Legislation requiring mandatory electronic filing has been introduced by Senator Jon Tester (D-MT) and received a hearing in the Senate Rules and Administration Committee.  While this legislation is not particularly controversial, the bill sits in Committee and has not moved closer to passage.
  2. Congress should permanently extend the FEC's authority to assess administrative fines for failure to file timely reports of receipts and disbursements.  Current authority to assess such fines expires December 31, 2013.
  3. Congress should eliminate the exclusion of the FEC from eligibility for the Senior Executive Service.
  4. Congress should extend the prohibitions on fraudulent misrepresentation of campaign authority to apply to all persons who purport to act on behalf of a candidate or a political organization and should eliminate the requirement that the misrepresentation be damaging to another candidate or party.  Currently, the prohibition against fraudulent misrepresentation applies only to a federal candidate or his or her agents.
  5. Congress should extend the FECA prohibition on the conversion of candidate campaign funds for personal use to cover all political committees (e.g., PACs, party committees).

While these recommendations are not likely to spark a huge battle in Congress, any legislation dealing with the FEC and campaign finance faces an uphill battle in a divided Congress, especially during an election year.  Republicans are likely to oppose some of these proposals, and the entire package seems unlikely to be acted upon this year.

Rulemaking Priorities for 2012

On May 24, the FEC approved "rulemaking priorities" for the remainder of 2012.  The first of these is to finalize the proposed rule responding to Citizens United.  The FEC is reviewing comments to the proposed rule, which would delete the current FEC regulations that were invalidated by the Supreme Court.  The second priority is to provide guidance to certain political committees in response to the SpeechNow.org v. FEC court decision that paved the way for Super PACs.  Specifically, the FEC plans to provide guidance on how to establish and maintain a separate bank account for independent spending, how to allocate administrative and fundraising expenditures, and how to report receipts and disbursements.

Included in the rulemaking priorities approved by the FEC are additional projects the FEC plans to undertake.  One such project would be to provide guidance as to how electioneering communications are to be reported. This initiative comes in response to the Van Hollen v. FEC case, as decided at the district court level, which requires disclosure of certain donors to political committees that make electioneering communications.  The FEC may undertake a formal proposed rulemaking process, if appropriate, once the appellate process in this case is complete.  The Van Hollen decision already has had an impact on political advertisement spending as certain organizations have vowed not to make electioneering communications, but rather, divert money to other areas such as independent expenditures.  Another rulemaking project the FEC is considering is whether to update various regulations dealing with financial transactions, in response to the expanded use of gift cards, debit cards, the internet, and text message contributions.

Express Advocacy

A federal appeals court sided with the FEC in Real Truth About Abortion v. FEC, which presented a challenge to the method by which the FEC determines whether an organization is subject to disclosure requirements.  The US Court of Appeals for the Fourth Circuit upheld the FEC's definition of 'express advocacy,' as well as the FEC regulation outlining when an organization is considered to have 'influencing federal elections' as its major purpose.

Under FEC rules, communications that, "taken as a whole and with limited reference to external events, such as proximity to the election, could only be interpreted by a reasonable person as promoting or opposing the election of a candidate" qualify as express advocacy.  Organizations sponsoring messages meeting those criteria may be subject to FEC registration and reporting requirements.  The plaintiffs challenged the FEC express advocacy rule, arguing that only the use of so-called magic words such as "vote for" or "defeat" in a message should trigger FEC requirements.  Rejecting that argument, judges in the case upheld the FEC regulations, stating that the rules are not designed to prevent any group from expressing its views; rather they are intended to identify which groups must disclose political spending.  As this alert has highlighted, disclosure regulations have repeatedly been reaffirmed in the post-Citizens United world.  The deference to disclosure rules is further illustrated by the court's decision to uphold the challenged FEC regulations, rejecting the argument that the rules are too vague.

The Real Truth case also challenged the FEC's method of determining when a group's major purpose is influencing elections, thereby becoming a political committee subject to regulation by the FEC.  Current FEC provisions do not include a definition of 'major purpose.'  Instead, the FEC reviews each organization and makes a case-by-case determination. Challengers to the rule argued that this standard is too vague and claimed the process is unconstitutionally intrusive.  The appeals court upheld the FEC's policy.

A similar suit has been filed against the FEC by a group called Free Speech, though counsel affiliated with the group says the case may be distinguished from Real Truth About Abortion because Free Speech has requested guidance from the FEC regarding whether proposed messages would trigger disclosure requirements.  The Commission deadlocked along party lines, however, in response to an AO request submitted by Free Speech (AO 2012-11).  For most of the proposed ads submitted by Free Speech, the Commissioners could not agree on whether the express advocacy threshold had been reached, thus triggering reporting requirements.  Though Free Speech will argue that the FEC cannot agree on the application and interpretation of its own regulations and policies, the legal challenge seems likely to have an outcome much like those in similar cases, with the court ultimately upholding the FEC provisions.

Enforcement and Compliance Practices Documents

On November 3, 2011, the House Administration Subcommittee on Elections held a hearing with the FEC to discuss the Commission's enforcement and compliance processes.  Republican Members criticized the lack of transparency regarding the FEC's processes and requested the public posting of documents describing FEC processes, which previously have not been made public.  On May 23, the FEC released multiple documents in response to the requests from Members of Congress, including the following:  (1) the 1997 enforcement manual and additional enforcement materials; (2) a document entitled Reports Analysis Division Review and Referral Procedures for the 2011-2012 Election Cycle; and (3) and documents describing three "Materiality Thresholds," which are used to determine if an issue is significant enough to warrant inclusion as a finding in an audit report.  It is unlikely that the release of these documents will lead to any legislative response, however, the documents may shed some light on FEC enforcement procedures and help political committees to adhere to FEC regulations.

Spotlight: Citizens United

On Monday, June 25, the US Supreme Court voted 5-4 to strike down a state ban on certain corporate political contributions that was challenged in the Montana case American Tradition Partnership v. Bullock.  The Court summarily reversed the Montana Supreme Court decision in the case, which challenged a Montana law prohibiting corporations from making independent expenditures for state elections.  The US Supreme Court did not hear arguments and issued the reversal in a three page decision -- relying exclusively on the ruling in Citizens United.  The dissenting opinion was written by Justice Breyer, who was joined by Justices Ginsburg, Sotomayor and Kagan.

In reversing the Montana Supreme Court's decision to uphold the law banning corporate contributions, the Supreme Court said the holding in Citizens United that allows corporations to spend corporate funds advocating for or against candidates applies at the state level as well as the federal level.  This means that corporations can still spend unlimited corporate funds on independent expenditures for both federal and state candidates.  The Court's ruling sets a precedent for similar cases challenging state laws and signals to states that attempts to regulate such corporate political activity at the state level will likely be shot down when challenged.  However, efforts by campaign reform proponents to negate the impacts of Citizens United are not expected to dwindle.  The advocacy surrounding the Supreme Court's review of the Montana case illustrated the public interest in the issue, with powerful groups weighing in on both sides.  Members of Congress, former FEC officials, almost two dozen attorneys general and campaign finance reform advocates urged the Court to revisit the decision in Citizens United citing the potential for corruption they believe may ensue and stating their support for state laws that regulate corporate campaign spending.  Opposition to a full review came from Members of Congress, including Senator Mitch McConnell, the US Chamber of Commerce and the group that brought the original case, Citizens United.

With the Court reaffirming its holding in Citizens United, the efforts to increase disclosure, transparency and oversight are likely to be reinforced, as the prospect of overturning the decision now seems much more slim in the absence of passing a Constitutional amendment, which is not likely to occur in the near future notwithstanding a pledge for a greater push by reform advocates.  Although the Montana ban restricting the use of corporate funds for political purposes was overturned by the Court, multiple states have developed and enacted laws or regulations enhancing disclosures for corporate political spending.  As we have discussed, the focus on campaign finance disclosure continues to grow and calls for transparency will be amplified across the spectrum of politically active groups as a result of the Court's rejection of corporate spending restrictions.

Securities and Exchange Commission

Notwithstanding mounting pressure for some regulatory enhancement of corporate political spending disclosure, the Securities and Exchange Commission (SEC) is not likely to issue a ruling in this arena.  With the flurry of activity in the courts and at the FEC, the urgency to regulate through the SEC has diminished and any attempts to pursue a rulemaking would become entangled in complex obstacles, politics, and likely result in inaction.  Although SEC Chairwoman Mary Schapiro has said the agency would address the issue - a rulemaking petition has been submitted to the agency - the outcome is unclear.  Some companies already disclose political spending voluntarily, but it is not known to what degree corporations are using corporate treasury funds for independent expenditures in political campaigns.  According to the president of the Center for Political Accountability, over 100 major companies have agreed to disclose some political spending, though the degree and format of the transparency varies.

The DISCLOSE Act and other legislation introduced in the wake of Citizens United included requirements for timely disclosure of political spending to shareholders, and in some cases required affirmative shareholder approval, but those bills all failed to move forward.  The SEC now appears to be the only potential source of further regulation in this area.  At the grassroots level, shareholder proposals calling for the disclosure of corporate spending have been on the rise.  However, the increase in the number of proposals offered has not translated into increased support for such proposals.  It appears that shareholder support, no matter the form of the disclosure proposal, in general has not approached 50% (though a few have received votes exceeding 35%). Shareholders who favor such disclosure requirements have not prevailed, and shareholder engagement on the issue appears to be limited beyond reform advocates.

Although the disclosure proposals have not been particularly successful, pressure for enhanced corporate transparency from campaign finance reform advocates is not diminishing.  Reform advocates continue to place public pressure on companies, so that more companies will voluntarily disclose political spending information.  Reform groups have focused recent efforts on shining light on the money flowing from corporations to trade associations and other third party groups that use corporate money for political spending and influence but have no obligation to disclose their donors.

Non-Profits and Political Activity

The continued call for transparency in campaign finance and political activity has prompted the IRS to step up investigation efforts into the activities of 501(c)(4) groups.  Though the IRS has been slow to enforce the rules governing the limit of political activity in which non-profits may engage without jeopardizing their tax-exempt status, the agency recently revoked the tax-exempt status of five groups.  The agency also has sent out questionnaires to 501(c)(4) groups in an effort to enforce compliance with IRS rules regarding campaign activity by non-profits.  The increased enforcement efforts have been prompted by increased political activity by 501(c)(4) organizations and the corresponding concerns regarding how money is spent and disclosed by non-profits.

Critics of the increased enforcement efforts argue that the IRS is targeting Republican and conservative organizations, while not focusing as much on Democratic groups.  As the IRS pursues this sensitive area of compliance, they will face the challenge of more precisely defining "campaign activity."

In the States

Alaska

Though not a legal ruling, the Alaska Public Offices Commission (APOC) issued an advisory opinion in early June stating that independent expenditure groups in Alaska are likely exempted from current state campaign contribution limits and certain disclosure requirements.  Current contribution laws limit annual contributions to independent expenditure organizations to $500 per individual and $1,000 per group, while current disclosure requirements mandate that groups spending more than a third of their funds campaigning for a single candidate include that candidate's name within the group's name.  However, the APOC issued an opinion saying Alaska state laws establishing limits on campaign contributions to independent expenditure groups and laws requiring disclosure of supported candidates in certain situations are "likely unconstitutional" in light of Citizens United.  This means that independent expenditure groups in Alaska may raise and spend unlimited amounts of money, with the exception of raising money from foreign nationals, and that independent expenditure groups are exempted from the disclosure requirement should they meet the one-third threshold.

California

The California Senate has passed a bill regarding rules on lobbyist gift-giving to lawmakers.  The legislation would prohibit lobbyists from providing entertainment gifts to elected state officers or members of that officer's immediate family.  According to the bill, entertainment gifts include including tickets to specified venues and events, spa treatments, recreational trips, and gift cards.  Specific examples enumerated in the bill include:  theme park tickets; professional sporting event tickets; collegiate sporting event tickets exceeding $25 in value; golf, hunting or fishing trips; and theater or concert tickets exceeding $25 in value.  Under the bill, these prohibitions would not apply to a fundraising event for a bona fide charitable organization.

The Senate also passed a bill increasing lobbyist registration fees from $25 to $50, which is expected to raise $600,000 a year for the sole purpose of maintaining and improving the state campaign and lobbying database.  The bill also imposes a new fee of $50 a year for campaign committees receiving $1,000 or more in contributions.  The legislation does not indicate a hostility toward lobbyists in California, but rather signifies the need for funding to improve and eventually replace an outdated campaign finance disclosure website.

Both bills now go to the California Assembly and must pass before the session ends on August 31 in order to make it to the governor's desk.

Illinois

Both chambers of the Illinois legislature have passed a bill eliminating campaign contribution limits for candidates if third party groups have exceeded a certain spending threshold in support of another candidate. Governor Pat Quinn (D) has not indicated his position on the bill.  The legislation moved forward in response to a court decision which held that state political contribution limits are not applicable to super PACs that make independent expenditures in the absence of candidate coordination.  That court decision was based on the ruling in Citizens United.  The newly-passed Illinois law is meant to level the playing field for candidates, allowing a candidate to raise money beyond the current caps in order to match the uncapped spending of super PACs.  The rationale is similar to that underlying provisions which allow relief from contributions limits for candidates who face an opponent who self-funds a campaign at a high level.  Reform groups are encouraging the Governor to veto the bill, calling it a step backwards from the campaign finance reform established in the wake of the political scandal involving former Governor Rod Blagojevich.

North Carolina

The US District Court for the Eastern District of North Carolina struck down a North Carolina matching funds law based on the US Supreme Court's ruling that deemed a similar matching fund law invalid in ArizonaFree Enterprise Club's Freedom Club PAC v. Bennett.  The North Carolina law provided public campaign funds to candidates for appellate court judge and other state offices upon the candidate showing support for his or her campaign through limited fundraising and by pledging to adhere to specified contribution and spending limits.  The law also provided that if a candidate not participating in the public financing system receives contributions or makes expenditures above a certain threshold, then all of the publicly financed candidates would receive matching funds.  Critics of the law argued that the system could result in the participation and contribution by citizens and organizations in support of a non-publicly funded candidate triggering funding to candidates they do not support.  The district court ruled that the law restricted the speech of some in order to enhance the voice of others, which the US Supreme Court has held violates the First Amendment.

Federal Communications Commission

As noted in our May 22 US Political Law Compliance and Risk Management alert, the Federal Communications Commission (FCC) recently approved a rule that would require certain broadcasters to upload their public "political files" to the FCC's website.  The FCC rule would require online disclosure by TV stations of all requests to purchase time for political commercials, how the stations responded to such requests, the schedule and classes of times purchased and the rates charged, and whether a station granted free time to a candidate.  Currently, these records are kept in hard copy at the TV stations.  The rule would not apply to cable channels, websites, satellite providers, the internet, or radio, but would apply immediately to the top four stations (i.e., ABC, CBS, FOX, and NBC) in the top 50 markets.  All other stations would have to comply beginning July 1, 2014.  The National Association of Broadcasters (NAB) responded to the FCC rule with a lawsuit filed in the US Court of Appeals for the District of Columbia.  The NAB lawsuit attacks the rule on First Amendment grounds.

Filing Deadlines

The following are key filing deadlines for 2012 PAC reports:  

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Political committees that make independent expenditures during 2012 are required to disclose this activity at any time up to and including the 20th day before an election each time the expenditures aggregate $10,000 or more.  This disclosure is required within 48 hours.  Committees that make independent expenditures aggregating $1,000 or more during the last 20 days of, and up to 24 hours before, an election must disclose this activity with 24 hours.  Entities that make disbursements for electioneering communications in 2012 that aggregate $10,000 or more must disclose this activity within 24 hours of public distribution of the communications.

Future FEC Meeting Dates

The following are upcoming dates for FEC open meetings and closed executive sessions for the remainder of 2012:

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Regulation of Lobbying

The following are the Lobbying Disclosure Act (LDA) filing deadlines for the remainder of 2012 lobbying activity:

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