Alert
Alert
12.17.19
The 2020 election is upon us, and just like every other type of payment, making contributions is getting easier. Digital political ads for the 2020 elections are beginning to appear all over the internet, and people can now make contributions with just a few clicks on their phone, or even by just asking Alexa to facilitate a contribution:
Given the ease of making a donation, it is more important than ever to be sure that you have a political compliance program and that your employees are aware of their obligations. Local, state and federal laws limit the political activities of corporations and their employees. For companies that engage in government business, including providing financial services, products, advice or underwriting for government clients or investors, a misstep under these laws can be quite costly, including a ban on earning income from government business. Now is the time to review your political compliance program and make sure that it is as ready as Alexa for the political season.
Corporate Political Contributions
The Federal Election Campaign Act (FECA) permits individuals and certain entities to make contributions to Federal candidates, political parties and PACs that directly support candidates, but prohibits corporations, labor unions and national banks from making such contributions from their treasury funds. FECA does permit a corporation, labor union or national bank to create an employee political action committee (PAC), raise funds for the PAC from a restricted class of employees, and then make contributions from PAC funds to Federal candidates, political parties and other PACs.
A campaign contribution is a broad term, encompassing anything of value provided to a candidate, a political party, a ballot measure committee, or to a PAC that collects funds for the purpose of making contributions or expenditures to support or oppose candidates, ballot measures, or other political committees. Contributions include payments of cash or by check, electronic transactions, the purchase of tickets to fundraising events, contributions in kind (e.g., use of corporate facilities, equipment or supplies, or the use of company personnel during compensated working hours), or any other expenditures which are made for the purpose of influencing voters at an election. Appearances by incumbent elected officials and candidates on corporate premises may be considered campaign contributions under certain circumstances.
Companies and organizations would be advised to have policies concerning the use of corporate resources in connection with political campaigns. Such policies should consider applicable rules regarding individual employee contributions, elected official appearances on company premises or at company events, and any organized effort by company employees to raise money for or to otherwise support candidates for election or the support of, or opposition to, ballot measures.
Pay-to-Play Rules
Companies that do business with federal, state or local governmental entities, including pension funds, must comply with complex pay-to-play rules under both state and federal law. These laws apply to political contributions and solicitation activities of the company, and depending on the jurisdiction, may apply to a contracting entity’s employees, including officers and directors, sales or relationship personnel, investment personnel and other employees. Indeed, in some cases these rules even extend to the family members of employees. Such companies would be advised to have compliance systems in place to review political contributions and solicitation activities by employees in advance to avoid a ban on business. Such systems can be catered to your company based on where your company has contracts or is doing business with the government. Federal and State pay-to-play laws include Securities and Exchange Commission (SEC) Rules 206(4)-5 and 15Fh-6, Municipal Securities Rulemaking Board (MSRB) Rules G-37 and G-38, Financial Industry Regulatory Authority (FINRA) Rules 2030 and 4580, and Commodity Futures Trading Commission (CFTC) Rule 23.451. In addition, the campaign finance laws of a particular jurisdiction may impose restrictions on contractors or those seeking to do business with government agencies.
Investment Advisors
Investment advisers registered, or required to register, with the SEC, or which are “exempt reporting advisers” to private funds or venture capital funds, that seek to manage assets of state and local governments, and their “Covered Associates,” are restricted from contributing to or soliciting for an official of a government entity who is directly or indirectly responsible for hiring investment advisers. Depending on relevant state law, there are certain de minimis exceptions for small contributions depending on the person’s ability to vote for the official. Contributions in excess of the de minimis limits to covered officials will prohibit the investment advisor from receiving compensation for providing investment advice—either directly or through fund vehicles—to government entities for two years after the contribution. This rule has a look-back for “new” covered associates as well as record-keeping requirements. The rule also prohibits covered investment advisers or their associates from providing or agreeing to provide, directly or indirectly, payment to any person to solicit a government entity for investment advisory services on behalf of an adviser, unless that person is a “regulated person.”
Accordingly, investment advisors must have comprehensive programs to track their covered associates, perform political contribution lookbacks on new covered associates, review processes for third-party solicitors or placement agents utilized, and pre-clear covered associates’ political contributions. Employees should be trained on, and periodically reminded about, these rules. We can assist companies with the development of, or advice regarding, their compliance program, legality of particular contributions, corporate events involving officeholders or candidates, recordkeeping, reporting, and the development of monitoring and testing programs to evaluate their program.
Other Regulated Entities
Similar rules apply to municipal underwriters, municipal advisors, swap dealers, and third-party solicitors or placement agents:
Federal and State Contractors
Federal law prohibits federal contractors from making any contributions in connection with a federal election. This mainly applies to individuals, partnerships, and limited liability companies that are contractors, because all corporations are already prohibited from giving to federal candidates. The federal law, however, allows corporations that are contractors to form and sponsor PACs and solicit voluntary contributions from a restricted class of the company’s employees and corporate shareholders. Sole proprietors and individual contractors do not have this option, so they must be very careful about their political giving. Partnerships may sponsor non-connected federal PACs, even if the partnership is a federal government contractor. The federal contractor contribution ban does not extend to employees of the contractor.
All federal government contractors are prohibited from making independent expenditures or contributions to federal Super PACs (independent-expenditure only PACs) even though corporations, labor unions and trade associations may make such expenditures and contributions under the Citizens United Supreme Court decision from 2010.
Similar rules apply at the state and local level. These laws vary state to state, locality to locality. Care must be taken to ensure that certain contributions do not run afoul of these laws.
Now is a good time to consider reviewing and updating your internal compliance policies, procedures and employee training strategies to make sure they address all applicable rules and to remind your employees of their obligations and the importance of these laws for the 2020 election season. Employees should not be expected to be experts in these laws, but they should know when to ask questions and seek expert advice.