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The Promise and Peril of Corporate Political Activity Compliance

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The Promise and Peril of Corporate Political Activity Compliance

It is now more important than ever for businesses to understand what is permitted—and, perhaps more important—what is not permitted in the realm of political activity. Businesses and individuals are motivated to participate in the political process, but must understand the rules of the road to ensure compliance with campaign-finance laws, pay-to-play laws, and government-ethics laws. This presentation will provide an overview of the current state of the law, trends in enforcement and disclosure obligations, and strategies for compliance.

Presenters

Avi Kelin
Counsel
Genova Burns

Transcript

Good morning, everyone. My name is Avi Kelin, welcome to Quimbee CLE. Today, we're gonna be talking about the promise and peril of corporate political activity compliance. Before we jump in, just a word about me. I'm an attorney with a law firm of Genova Burns, which is headquartered in Newark, New Jersey. I focus on corporate law, political law and I chair our firm's Autonomous Vehicle Law Practice Group. But we'll leave all that stuff to the side for now and jump right into political activity compliance. We're gonna cover today a few topics. We're gonna give a political activity overview, define what that term means and what is counted as political activity. We're gonna review federal campaign finance law, the campaign finance laws in various states. We're gonna dive into pay-to-play restrictions, which we'll get into more later on, but this is really the intersection of government contracting and political activity. We're gonna review ethical interactions with elected officials, and finally, we're gonna review strategies for compliance. So what is political activity? It includes a lot of things that includes making a direct political contribution, giving money to a political candidate, giving money to a PAC, a political action committee, or a political party, and that also includes making an in-kind contribution. So anything of value that you provide to a political recipient, doesn't have to be a check or money. If I give goods or services, if I give free legal services, if I buy food for an event, if I let a political candidate use my van on election day without charge, that's all the provision of goods and services, and those are treated as in-kind contributions. Soliciting contributions also, asking other people to make a political contribution, that is also a political activity that we're gonna be reviewing today. And then, a couple items that people are sometimes confused about. If you purchase a ticket to a political fundraiser, if that's a golf outing, a cocktail party, that is all political activity. The full price of your participation in that political event counts as a political activity. This is different than sometimes you see in the charitable context where only a certain amount of the purchase price for your attendance at a dinner is counted as a charitable contribution. In our case, when it comes to political activity, if I pay $500 to sponsor a golf outing, the full amount of that $500 is treated as a political contribution to the candidate and you can't deduct out any operating costs or things like that. Last, placing an ad in an ad journal in connection with a political fundraiser, you may think of that as just networking or marketing. That's all political activity and is treated as a political contribution under campaign finance law. So let's take a step back now that we understand a bit about what is political activity. Let's think about the theory of what this is under US Supreme Court jurisprudence. So the key case in this area is Buckley v. Valeo from 1976, and the court in that case was dealing with a raft of new campaign finance and ethics laws in the wake of Watergate and the wake of some political corruption scandals. And so Congress passed many new laws and the Supreme Court was asked to weigh in on whether those new laws violated the First Amendment guaranteeing free speech. And the Supreme Court took this in an interesting direction. It said that political speech and limitations on political speech, they really operate in an area of the most fundamental First Amendment activities. The Congress can pass no law abridge speech and political speech is really one of the most important areas of that First Amendment protection. Therefore, the Supreme Court said, "Congress is prohibited from passing any law that limits what candidates for office may expend on a campaign." If the candidate can raise money from enough people, they can spend all of it, there's no limits on expenditures that a candidate may make for their campaign. By the way, that's different in different countries and other countries under their systems that don't have the First Amendment, a candidate can be limited to say, "You can only spend $5 million on this campaign, you can only spend $10 million on this campaign. On smaller races, you can only spend $400,000 on this campaign." In the United States, we have no such law because that's what the Supreme Court said in 1976. The only limitation on what Congress can pass to limit political speech is as follows, the only reason that we can limit political speech is to prevent corruption or the appearance thereof. That's the only reason. And so with that, that's why we have in basically every state, or most states, I should say, and for federal candidates, there are laws that say, "You can only contribute up to X amount to this candidate." And the worry is that if I contribute $10 million to a candidate for Congress, or to a candidate for president, or to a mayor, or a governor, that's too much, that large amount of money is necessarily gonna engender favoritism and corruption. And so it's permissible for Congress and the states to pass laws that limit what a candidate may accept, what a contributor may contribute directly to candidates. That's the only thing that is constitutional under Supreme Court jurisprudence. Let's jump ahead a few decades. This is the famous Citizens United v. FEC case, and it's really just a quick follow-up and a logical progression from what we dealt with in Buckley. The Supreme Court in that case said that as long as political speech is independent of the candidate or the candidate's agent, there is no corruption or appearance of corruption as a matter of law. That means that if things are done independently, there is no corruption. There's no appearance of corruption if I'm not giving money directly to a candidate's campaign or to a political party, but instead, I'm engaging in political activity independently of that candidate. The candidate has no regard for that, there's no risk for corruption because everything is done independently. Therefore, under what we spoke about with Buckley, if the only rationale is limiting corruption or appearance thereof and when independent activity is done... Because independent activity has no risk of corruption or appearance of corruption, therefore, there can be no limits under the First Amendment on independent expenditures or making contributions to different PACs or entities that make only independent expenditures. And that's where this concept of a Super PAC comes from. A Super PAC, and in the next 30 seconds, you'll probably understand Super PACs better than most of the population. But a Super PAC basically is a group of people that get together and say, "We're gonna raise money. We can raise unlimited amounts of money from people, and we can spend unlimited amounts of money to tell people to vote for Smith or vote against Smith, so long as everything is done independently. Once I start coordinating with a candidate, that's no longer independent activity, and that's when campaign finance limits kick back in." So it's very important for Super PACs, for people that make independent expenditures, it's very important for them to ensure their independence from the campaign, from a candidate, from the candidate's agents, because that's when you enjoy the protection of these Supreme Court decisions to say, "If things are independent, there could be no limits on my political activity, on my political speech." You can agree or disagree with the theory. Some people say that Supreme Court got it right, some people say they got it wrong. But that's what the Supreme Court said, and that's basically the regime that we're operating under in the campaign finance world is understanding that there are very few limits on political speech. About a week before I'm recording this, there is a new Supreme Court case that said, "Limits for the Federal Election Commission on how much of a loan that a candidate makes can be repaid to that candidate are unconstitutional." And again, we're seeing that more and more under the Supreme Court that limits on political speech, limits on political spending, are falling by the wayside in view of this, some would say expansive reading of the First Amendment when it comes to political speech. So that's the theory, we're gonna dive now into the nuts and bolts and talk a few minutes about federal campaign finance law. Under federal campaign finance law and this applies to candidates for US president, US Senate, US House of Representatives, individuals can make personal political contributions, and that includes 2,900 per election to a federal candidate, $5,000 per calendar year to a federal PAC, 36,500 per calendar year to a national political party committee and $10,000 per calendar year to the federal account of a state party committee. And it's not just individuals that can make contributions in some cases, it's also permissible for a contribution fee drawn on the account of a partnership or an LLC. But there's a caveat to that, if the partnership or LLC is taxed as a corporation, or if it has publicly-traded shares, that entity is not permitted to make contributions to federal candidates. If those things are not in place, if the LLC has no publicly-traded shares and is taxed as a partnership, then a contribution can be drawn on the account of a partnership or LLC. But the catch here is that it's really treated as a personal political contribution made by an equity partner or member of that partnership or LLC. So if I have an LLC, ABC LLC, and I'm an equity member, I can draw a check on the LLC account, but the contribution is gonna be listed as made by me individually because it's my funds in the LLC and needs to be treated as such. In contrast to an LLC or partnership, corporations are prohibited under federal law for making contributions to federal candidates. The one exception to this is Super PACs, but we'll dive into that in a second. So under federal law, if you're a corporation, you may not make any political contributions to federal candidates, federal political parties, that's all off the table. So what is a contribution that's subject to this prohibition on corporate contributions to federal candidates? So, as we discussed before, in addition to contributions of money, any in-kind contribution, which is a contribution of goods or services, that's prohibited. In short, no corporate resources may be expended on behalf of federal political campaign if that activity is coordinated with the campaign and that includes things like paid employee time. If I'm a senior partner at a law firm, if I'm a boss somewhere, a CEO somewhere, and I tell employees of mine that they need to spend time working on this political campaign and they don't pay us our normal fee for that, that itself could be a political contribution. I'm using my corporate resources to benefit a campaign, and it's not an arms-length transaction. I'm not being paid. That itself is a contribution. The FEC does recognize a de minimis exception of one hour per week that people can work on political campaigns while on the clock. But beyond that, you're looking at a potential violation of federal law if employees are working for political campaigns while they're on the clock. In addition to employee time, any corporate resource on behalf of a political campaign, should not be used, that includes things like corporate letterhead, corporate copy machines or printers. If you're printing out invitations for a political event with your business equipment, that's not permitted. Use of corporate conference rooms, so if you normally don't allow outside groups to use your conference room, you can allow a political candidate to use your conference room for a fundraiser. The same is true for corporate email accounts or distribution lists. Those things have value and you can't just give it to a political candidate to send out solicitations or updates because that has value that would be a contribution which is not permitted for a corporation. Even something like providing unpaid leave to employees who wanna work or volunteer for a political campaign may be treated as a prohibited contribution if the leave is granted in a way that demonstrates a preference for one party or candidate. So we often deal with a situation where someone wants to take time off work, someone wants to take paid leave or unpaid leave to go volunteer or work for a political campaign and we have a discussion with that client. What's the general policy for taking unpaid leave? Would you grant this request to everyone? Are you saying yes to this just because you think this person's gonna be the next governor or the next Congressman and you wanna benefit that person? If so, that's not permitted. For example, if you approve unpaid leave so that individuals may volunteer only for Democratic campaigns but refuse to grant unpaid leave to individuals who wish to volunteer or work for Republican campaigns, that shows favoritism and that may itself be a prohibited contribution in violation of federal law. So we've discussed so far what political activity is and the limitations on what corporations can do, at least under the federal system. But let's take a few minutes and discuss how a corporation can participate in the political process and what is permitted as opposed to what's prohibited. So in the wake of the Citizens United case, there's a big opportunity now for corporations and some see it as an opportunity, some see it as a danger. But corporations are now permitted to engage in independent expenditure activity. As we discussed before, so long as everything is done independently, federal law and the First Amendment does not permit any restriction on what a corporation can do. So that means that a corporation can take its funds, it can take out a billboard, or TV ads, or Facebook ads, or anything else, and it can say, "Vote for Smith, vote against Smith." That's all permitted now as long as that's not coordinated with a candidate. If the candidate goes to a corporation and says, "Hey, I really need help reaching people on my minimum wage message, especially woman ages 40 to 49, so please take out some Facebook ads for that." That's coordination, that's a classic case of coordination. And that would take activity that's independent and make it coordinated and bring it back to the realm of prohibited, direct contributions. But again, if you're gonna do things independently, a corporation can now take as much money as they want, there are no limits, and they can spend money and say, "Paid for by ABC, Inc." You can now say, "Vote for Smith, vote against Smith," in any method that you want. You're also allowed to contribute to a Super PAC. Again, a Super PAC is a organization that only makes independent expenditures, they don't do anything coordinated with a candidate. So as long as you're giving money directly to a Super PAC and there's no coordination on either end, on the corporation end or the Super PAC end, a corporation can give unlimited amounts of money to a Super PAC to make independent expenditures to try to influence elections. Please note though that the Citizens United decision and other related case law does not lift the absolute prohibition on direct contributions by corporations to candidates. So that has not changed if you're a corporation or you're providing compliance services to a corporation, make sure that your corporate entity knows they still can't make direct contributions to a candidate, everything needs to be done independently. I wanna switch gears a little bit and think about tax-exempt organizations and nonprofits that sometimes try to get engaged in political activity and sometimes they do not, and it's important to understand the rules of the road for those organizations as well in the nonprofit space to understand what's permitted and what's not permitted for their political activity. So a 501 is a social welfare organization, it's similar to a charitable 501 , but it's different in many ways. So under this provision of the tax code, you can be tax-exempt, you don't pay federal corporate tax of IRS. And the IRS actually allows you to engage in political activity so long as political activity is not the primary purpose of the organization. So the ballpark figure here is 51% or more needs to be devoted to social welfare, needs to be devoted to improving the social good. And 49%, we usually tell people to keep it less, but 49% or less can be devoted to political activity that advocates for candidates and the IRS is gonna be okay with that tax-exempt purpose, you're gonna maintain your tax-exempt status. Just note that a 501 may be subject to tax on political activity, but if you wanna do it, you can do it. So how does a 501 operate? So you can register with the IRS by filing Form 1024 or you can self-declare 501 status. Donations to the 501 are generally not tax-deductible and this is a big difference between a 501 and a 501 , the donors generally don't get a donation deduction if they support a 501 . And the reason why we're seeing a 501 be involved more and more in political activity is that they're generally not required to disclose their donors publicly. Some states are increasingly seeking to mandate disclosure if a 501 is being politically active. So this is a changing area of the law and we're seeing more and more that states are getting savvy to the potential political activity that a 501 may engage in. So many states are trying to say if you're gonna be politically active as a 501 , you need to disclose your donors publicly. And that's actually the case now for the FEC, the Federal Election Commission, it now requires disclosure of donors to a 501 that participates in federal elections. But in some states, that's not the case, and in some states, some people view that as a appealing factor here is I can engage in political activity without having my name disclosed. For some corporations, some people, that appeals to them a lot and that's why we're seeing more and more a 501 being used for political activity really across every state. But again, this is a changing area of the law, the IRS is rethinking its regulations about public disclosure. Different states are rethinking it, but for now, it's really an evolving area of the law. And corporations, they may contribute without limit to a 501 , that itself would engage in political activity. So that's one way for a corporation to get involved in political activity is that you can support a 501 . You can support a Super PAC, you can make your own independent expenditures, but again, you can't make a direct contribution to a political candidate for federal office, that's still prohibited. In contrast to a 501 , a 501 charitable organization, what we normally think of as a nonprofit, a charity, it's prohibited, not under FEC rules or under political law, but under the Internal Revenue Code itself, it's prohibited from engaging in any partisan political activity. However, a 501 may engage in limited lobbying to further its exempt purpose and it can engage in activities that further the democratic process. So it can do education on policies that are within the mission of the organization. It can do nonpartisan voter registration efforts, or get out the vote efforts, so it can be involved in the democratic process. It can advocate for its policies, it can do lobbying, but it may not do anything that would support or oppose a candidate or a party, nothing that's partisan in nature, nothing that would get involved in electing specific candidates or supporting specific candidates, that's all off the table. But if you're a 501 , you are allowed to engage in the public discussion around your policy issues. It's important to keep in mind that individuals who are associated with a 501 , they can engage in political activity. They can support a mayor, or a governor, or president, but they can't do it on behalf of the 501 , they can't do it while they're wearing their 501 hat. Instead, they need to do that political activity only in their individual capacities, so you can't use organization titles, email addresses, resources, to support a candidate if you're working for a 501 , everything needs to be done individually because, under IRS rules, we don't want anyone to use the goodwill of the organization of a charity to support candidates for office. Let's turn now to federal pay-to-play laws. Under federal pay-to-play laws, and again, pay-to-play laws are roles that really govern the political activity of government contractors. So an entity that holds a federal government contract is prohibited from making federal political contributions. That doesn't apply to any individuals or owners in their individual capacity, so if there's a corporation that has a federal government contract and the 100% owner of that corporation wants to make political contributions, that's fine. But the corporation itself may not make any federal political contributions. In most cases, you would expect that federal government contracts are held by corporations, LLCs or other business entities. And because corporations may not contribute to federal candidates anyway, as we've discussed, in practice, this is not a terribly big limitation, but it is important, there was just an FEC enforcement action a couple weeks before I'm recording this, that found a corporation that held government contracts. It also contributed to a federal Super PAC, and there's a big enforcement action now investigating that and fining that company, because you're not allowed to do that. You're not allowed to make political contributions to federal recipients registered with the FEC if you hold federal government contracts. It's also important if there are any individuals or sole proprietorships that personally hold federal government contracts, those individuals and sole proprietorships may not contribute to federal candidates. In addition to the federal pay-to-play laws, there are also many restrictions for federal agencies in different states that cover the making and soliciting of contributions to a state official with authority to make public investment decisions. For example, if I wanna provide investment services to a state entity, to a state investment service, or a state investment authority, I can't contribute to the political campaign of a decision-maker for that investment authority. This came up a couple years ago when Chris Christie, who was the sitting governor of the state of new New Jersey, ran for president. Anyone who provided investment services to the state of New Jersey was not permitted to contribute even to his presidential campaign because federal contributions to those candidates are also covered. So a whole bunch of people were not permitted to make contributions to his presidential campaign because he happened to be the sitting governor at the time and that would jeopardize their eligibility for state investment services. There are also SEC, CFTC and MSRB restrictions and limits on political contributions that apply to investment advisors, swap dealers and broker dealers that underwrite municipal securities and municipal advisors. There are limits on what they can contribute to people who have authority to make investment decisions with public funds. Let's switch gears a little bit now and talk about... We spoke about federal campaign finance law. Let's switch gears and talk about state campaign finance laws. So the laws in each state basically differs depending on the state. And I'm just gonna focus today on a few close by states, nearby states, that happen to be located in the Northeast. And it just a good example of the different laws that apply in three states that are basically neighbors. They all have different approaches and different laws. So let's think about corporate contributions for a minute. In the state of New York, a corporation can make contributions to a candidate. However, there's a law that says any corporation is permitted to contribute only up to $5,000 in the aggregate for all political recipients. So if I'm a corporation and I wanna support the governor in New York, let's say, and I can write a check to a candidate for governor for $4,000, I only have $1,000 to spend on the rest of my political contributions in New York state for the rest of the calendar year. There's an aggregate limit that says you can only contribute up to this amount to all political recipients in New York. And what I do to one reduces the amount that I have under that $5,000 threshold to everyone else. However, when it comes to New York City elections, candidates for New York City mayor, or council, or other city offices, corporate contributions are prohibited. So even within New York state, there are different laws depending on the candidate and depending on the jurisdiction. In the neighboring state of New Jersey, corporations can contribute up to 2,600 per election to any candidate except for governor who has his or her own limits. But basically, any other candidate in New Jersey, a corporation can contribute up to 2,600 per election, and there's no aggregate limit. So I can give 2,600 to every candidate for New Jersey Senate, if I want. I can even give to competing candidates who are running against each other, that's all fine, under New Jersey campaign finance law. In Pennsylvania, however, all corporate contributions are prohibited. So it's the same type of rules that we've discussed for federal law. So if I wanna participate in the political process in Pennsylvania, I can't use any corporate funds, I can't use any corporate resources because that's all prohibited. Let's focus now on what individuals can do. So in New York, individuals can make political contributions, but the limits depend on the office and the number of registered voters in the political party. So there's a calculation that's done and there are different limits that say, "We're gonna multiply the number of registered voters for your party by this dollar amount." And that's gonna tell us how much can be contributed to each candidate. So there are different limits in a Republican primary, from a Democratic primary, because there are different numbers of registered voters in each party. In New Jersey, we have the same $2,600 per election limit. So that's the same for a corporation and an individual, the limits are the same for each. And in Pennsylvania, as opposed to the complete prohibition on corporations making contributions, in Pennsylvania, an individual can contribute to a candidate without limits. So I can contribute with my personal funds to a candidate for governor in Pennsylvania with no limits. In addition to these general campaign finance laws, many states have restrictions on political contributions from highly-regulated industries, and that many states have restrictions on what gaming companies, casinos, things in the gaming industry, may contribute or for lottery contractors, there's a concern that this would lead to corruption if we have gaming interests making contributions to candidates in different states, and some states go beyond that. For example, the state of New Jersey has a regulated entry prohibition that's pretty broad and it prohibits an insurance company, a bank, a utilities company, railroads, lots of different industries that are highly-regulated. None of those companies can use any of their corporate funds to aid or promote any candidate or political party in the state of New Jersey. And again, it's a concern about corruption that if these highly-regulated industries are going to be very politically involved, they may seek to encourage specific outcomes, to loosen the regulations or have favorable regulations for them. So anytime that a company is gonna be active in a certain state, it's very important to be aware of these state-specific restrictions. If you're an insurance company, you may be permitted to make political contributions in Florida or Texas or somewhere else, but that's not the case in New Jersey. And if you come to a new jurisdiction and you have a new market that you're looking to engage in, it's very important to be aware of these state-specific restrictions. Let's focus for a few more minutes, I know we touched on it briefly, but let's focus on pay-to-play restrictions. So what is a government contract? We spoke before about how pay-to-play is really the intersection of government contracting and political activity. So let's think about what a government contract is. Providing legal services to a government entity, that's a government contract. Providing any other services to government entity, that could be insurance, engineering, military, you can think of lots of government contracts. Any goods or services that a state, or local, or federal government is purchasing, those are government contracts. We even see in many states that buying or selling land to or from a government entity or leasing space, if you own real estate and you lease space to a government entity, that can all be government contracts that are potentially subject to these pay-to-play restrictions. And what are those pay-to-play restrictions? These are generally heightened disclosure requirements and lowered restrictions that apply to government contractors and vendors, and in some cases, even potential contractors and vendors. And this may include prohibition laws that restrict your eligibility for contracts. If I contribute more than the permitted amount to a candidate, I will be ineligible for government contracts with that jurisdiction. And there are also disclosure laws where I need to disclose my political contributions, in some cases, my government contracts, I need to disclose that publicly for transparency purposes. These disclosure laws may apply on a precontract basis. They may apply on an annual basis, semi-annual basis, quarterly basis, where you have, if you're gonna have the privilege of doing business with the government, you're gonna have to make extra disclosures that other businesses do not have to make. And it's important to understand what your relationship with a government entity is and these laws differ in different states, so you kinda have some relationships or some contracts are gonna be subject to disclosure only, but not prohibition laws. So that means that I may have to disclose my contributions, but I can contribute what I want and I'm not gonna lose eligibility for a contract. In some cases, it's the opposite. I can only contribute up to a certain amount, but I'm not gonna have to disclose anything. Different states have different requirements and it's important to know the rules of the road before you become active with contracting or political activity in a given state. I'm just gonna review quickly. Again, we're gonna focus on the Northeast, but review quickly some of the pay-to-play laws, just to give the flavor of this. Many different states throughout the country have different pay-to-play laws, but this is just a nice sample. So New York state has no pay-to-play laws, so I can give as much as I want within campaign finance limits to a candidate for governor let's say, or state Senator in New York, and that's not gonna jeopardize my eligibility for contracts. I still have to comply with the general limits, but there's no reduced limits if I seek to hold government contracts. However, New York City has doing business limits, it's called, that's their version of pay-to-play, which impose reduced limits on contribution limits to city candidates from city vendors and permit holders. So if I hold a contract with New York City, I have reduced limits on what I can contribute to a candidate for city office beyond what the normal limits are. The state of New Jersey is often called the pay-to-play state. There are statewide prohibition laws and disclosure laws, multiple versions, depending on the type of contract that you're entering. In addition to the statewide laws, there are more than 150 local ordinances in effect in counties, municipalities, many boards of ed in New Jersey have pay-to-play policies. They all say different things these local ordinances and policies, so it's very important if you're gonna be involved in government contracting in New Jersey to really understand the specific restrictions that apply to you because it's very easy to get confused and there's no one-size-fits-all when it comes to New Jersey. As opposed to that, Pennsylvania has a statewide disclosure law for vendors that receive no bid contracts anywhere in Pennsylvania, but there's no prohibition law. So if I hold a no bid contract in Pennsylvania, I need to disclose my contributions one time per year, it's in February each year for the proceeding calendar year, but I can contribute as much as I want and there's no prohibition on eligibility for contracts on a Commonwealth basis in Pennsylvania. However, some municipalities in Pennsylvania have stringent prohibition and disclosure laws. Philadelphia is the big one. Philadelphia has a very stringent prohibition disclosure law and it's very broad and it's very easy to get tripped-up in Philadelphia. So if you're doing business in Philadelphia and seeking to enter government contracts, it's very important to know and understand the pay-to-play laws in Philadelphia. Just continuing with our East Coast tour of pay-to-play. So Maryland has a statewide disclosure law, but no prohibition law. So again, twice a year in Maryland, you need to disclose your political contributions if you hold contracts of a certain size, but you can contribute as much as you want under standard limits and there's no reduced limits for government contractors. Connecticut has a statewide prohibition law and a statewide disclosure law, so I need to both disclose my contributions and there's also a prohibition on making certain contributions if I hold government contracts in Connecticut. Delaware, in contrast, and the last stop on our tour here, has no statewide pay-to-play laws. So you can see that different states have different laws in this regard. It's very important if you're active in different states, not just to understand your home base and what the rules of the road are for that state, but to understand really wherever you're gonna be active, wherever you're gonna hold contracts, wherever you're gonna make political contributions, it's very important to understand what those specific pay-to-play restrictions are. And some people think, "I'll write the check, this political event is tonight. I'm gonna go, I'll write the check. And if it's wrong, I'll just get a refund after." That's generally not the case. While some states do have cure periods to obtain refunds, those time periods are generally short. So if you don't get the refund back within 30 days, and you can imagine that it's difficult in some cases to understand that an error occurred, that a contribution was made that it shouldn't have, and then to actually get the check back and deposit it within 30 days, it's generally tough to do. And some laws and some states have no cure period at all. So if you write a check and the check is deposited, there's no chance to fix that mistake. You potentially have violated the law. And again, this is not just a matter of I'm writing a check for a couple hundred dollars, no big deal. There are reported cases that describe how a $500 contribution to the wrong recipient at the wrong time can render a company ineligible for more than $7 million in state contracts. And you can imagine situations that are much more, government contracting is big business. If you wanna remain eligible for those contracts, you really need to understand what those limits are when it comes to pay-to-play. In this $500 case, a $300 contribution would've been fine, but because they went to 500, that knocked them out of $7 million in state contracts. So we've talked about political activity and political contributions of government contracting. I wanna turn our focus now to ethical interactions with elected officials. The key thing to keep in mind when it comes to government ethics laws are they're specific and they differ based on each jurisdiction. And they're separate rules for federal candidates, separate rules for candidates in each state, and there are even differences between executive branch and legislative candidates or between state and local candidates. So what's permitted for one, if I understand the rules of the road for a governor and understand what's permitted for the governor, that's fine, but the rules are gonna be different for a state Senator or state assemblyman or state representative. You need to understand exactly who you're dealing with because the jurisdiction will change and the laws will change for each separate jurisdiction. So gift rules is something that comes up often, and that a gift really means anything you wanna invite a candidate or an elected official to somewhere to attend a ribbon cutting, to attend an event, to serve food, to provide a plaque, we see that often, is that permissible? So the rule of thumb is nothing of value may be given to an elected official with the intent to influence that individual in his or her official capacity. So it's mostly a corruption and ethical law in prohibition in these cases, so if there's any possibility that first of all, any intent to influence, that's certainly prohibited, but if there's any appearance or any possibility that someone will think that you're giving something of value, and it could be anything, it could be money, it could be, again, a meal, it could be a car ride, it could be lots of things, travel, plaques, honorariums. All of that is potentially a thing of value that may not be given to an elected official if there's any intent to influence that elected official in any official capacity. I'll just note that under different lobbying laws, lobbyists are generally subject to heightened restrictions and disclosure requirements for gifts and entertainment, and you can imagine why that is. If a lobbyist is hanging out at a state capital every day, or in Washington, DC every day, and advocating for certain policies or certain legislation, you don't want lobbyists to be making any gifts, giving anything of value. And so, there are these heightened restrictions and disclosure requirements for any types of gift or entertainment when it comes to lobbyists. Let's talk about political contributions. So you would think that anything of value, that would include a political contribution, if a candidate's running for office, but is also already in office, already is an elected official, how can I give a political contribution to that candidate if I can't give anything of value? A political contribution may influence that elected official as much as anything else. So that takes us back to our First Amendment overview and remember that political contributions are really highly protected under the First Amendment speech protections. So generally speaking under applicable ethics laws, the making and soliciting political contributions are generally exempt from gift laws. Therefore, if you're gonna make a political contribution, that's fine, it's generally not going to implicate any ethics restrictions. It's generally not going to be relevant when it comes to ethics laws provided, and most of the laws are written this way, provided that there's no indication that this was done to engender favoritism or to seek any influence with the elected official. Therefore, we tell people who are making political contributions that less is more when discussing the making of political contributions. Oftentimes, I'll review political contributions, a client will send us an invitation for an event, and say, "Hey, we wanna make a corporate contribution or individuals wanna make a political contribution to this candidate," and I'll review and make sure that it's in compliance with pay-to-play laws, campaign finance laws, making sure that they understand the implications both for eligibility for contracts, both for disclosure purposes, just making sure that they understand the rules of the road. And I'll often scroll down in that email that I get from a client and you'll have a business person or a site supervisor, or a regional manager who says, "Hey, we really need to support this mayor. He was so good to us when we had that contract, and there's a contract renewal coming up, so we need to really support his political campaign coming up. This is a great event. I encourage people to participate." I understand why people have an impulse to do that. You're asking the company, or you're asking individuals to spend their own money to support a candidate. You wanna make sure that it's compelling to people, but that's exactly wrong thing to do. You should not tie any type of political contribution to any type of government action, any type of government contract, any type of official action. That's a good way to get yourself in trouble if you draw that type of connection between your political contributions and an official activity by the recipient. So instead, it's easier just to say, "Hey, I recommend making a contribution to this." If you need to say something, you can say, "We're aligned with their values or we support this candidate, so we think a contribution is appropriate here." But tying any type of official action, tying any type of government contract to a political contribution, that could be a big problem. And it's something that I see too often and recommend that people stay away from. So we've reviewed a lot today, we've reviewed what is political activity? Making contributions, soliciting contributions. We've talked about different federal campaign finance laws. What a corporation can do, what a corporation can't do. We've talked about the changing state of the law and new Supreme Court jurisprudence that's coming along and this whole area of the law has really changed with Citizens United, every couple years, there's a new, big campaign finance case. And it's important to keep abreast of this and understand that this is a changing area of the law, including things like 501 s were not used for political activity 10 years ago, or 15 years ago, or 20 years ago. Now they are, and the law is evolving to catch up with that use of 501 s for political activity. We've also discussed state campaign finance laws with the sampling of states and we've discussed pay-to-play laws, disclosure laws and prohibition laws, understanding that different laws apply in different states and understanding why it's so important to really know the rules and know the laws of your local jurisdiction and anywhere that you're gonna be active to make sure that you don't find yourself in this position where a $500 political contribution is gonna jeopardize millions of dollars of contracts. So your reaction to all this may be, "Hey, this is very overwhelming." And it's true, there's a lot to keep in mind and it's a pretty niche area of the law. So it's important to really understand the rules and talk to people who understand the rules if you don't yourself because there's... Clients tell us that is a minefield, we feel the need to be politically active, we feel the need to, our competitors are supporting candidates for office, we need to be in the room, but one misstep here can knock us out of millions of dollars of contracts. We don't wanna be in the space, but we feel we need to, so let's make sure that we're being very careful. Let's make sure that we are understanding every nuance, make sure that we do our homework before we write any type of political check. And I think that's a true feeling, this area of the law is very complex and it's a limited area that people don't deal with all the time, so it's important to seek out good guidance on this. But what I wanna do with our remaining time today is talk about strategies for compliance and understand really how your clients, if you're in-house, how you can protect your own company, if you're in private practice, how you can protect your clients. And if nothing else, no one to ask the question and slow people down who wanna rush ahead and make political contributions. And we've discussed some of this before, but I wanna take a broad view of this. In today's world, there are really two conflicting trends, there's a trend towards more regulation disclosure. We've seen heightened pay-to-play laws that have gone in effect really in the last 15 years, that really wasn't a commonplace thing a few years ago. But in the last 10, 15, 20 years, there've been this sprouting of pay-to-play laws that place heightened transparency requirements, heightened disclosure requirements and reduced contribution limits, in some cases, even prohibitions, on government contractors. We're also seeing more regulation disclosure when it comes to 501 s where before, this was a so-called dark money entity. We're seeing more and more that 501 s are coming out of the shadows and there is more disclosure with 501 s. In contrast to that, we're seeing more opportunities for political speech. The Supreme Court is pretty expansive in its views on political speech and is skeptical of limitations on political speech. So we have a new world of independent expenditures and Super PACs that really wasn't commonplace before Citizens United was decided in 2010. So that's a conflicting trend that we're seeing is that there are more opportunities for danger, but also more opportunities for political activity. And companies are caught in the cross-hairs of this. It's a very dangerous time for a company to understand, it's very important for companies to understand what the rules are and make a decision on whether political activity is gonna be helpful or not. As I mentioned before, a lot of clients feel the need to engage in political activity or their employees want to. Some companies think that they're not engaged in political activity at all, but it turns out that their employees don't agree with that approach. We're seeing lots of controversial issues and really politics coming to the forefront in the workplace. So how do you navigate that? Companies need to be concerned about increased political participation by their officers, directors and employees who aren't content necessarily to sit on the sidelines when it comes to important political issues. But on the other hand, companies need to be concerned about reputational risk that comes with political activity. We've seen lots of companies that will support candidates of either party really, and they'll turn off 1/2 their customer base. So how do you navigate that? Some companies view that as a strategy, they'll say, "We're gonna be known as good Democrats or good Republicans. So we're gonna be very overt in our political messaging and our political participation." That doesn't work for every company. And it's important to know which type of company you are and have a strategy in place before you get labeled with a political label to understand, first of all, what's legal? But also thinking more broadly about your communications and branding strategy to understand the implications of your political activity. Generally speaking, employees, officers and directors may participate in the political process in their own capacities. That means that if someone wants to go to a fundraiser or write a political check, in most cases, I would say that that's fine. You just can't do it on behalf of the company, you need to do that in your individual capacity. Sometimes, it's difficult to separate what's individual and what's company, but again, we've spoken about things like don't use your company ID or company title when you're engaged in political activity, don't wear a company hat, or t-shirt when you're at a political event, that all gives the impression that you're really engaging on this political activity on behalf of the company. And when it comes to individual political contributions, they must all be voluntary. That means that basically in every state, there are laws against making political contributions in the name of another, or on behalf of another, it's important to know who's actually making a decision to contribute and only that person can contribute. So it's very important that any individual political contributions are voluntary. In our law firm, for example, sometimes, our senior partners will ask other people to consider making a political contribution, but they're very careful only to ask other partners. A senior partner would never ask a first year associate to support a given candidate or to support an event because that first year associate's not gonna feel comfortable saying no, and that would undermine the idea that any political contribution needs to be voluntary. So never ask a political contribution, never ask someone else to make a political contribution, unless that person feels comfortable saying no to you essentially is the rule of thumb here. And as we've discussed before, employees, officers and directors, really anyone involved in a company, should not use company resources for individual political activity. In some cases, it's permitted for the company itself to say, "I'm gonna write a contribution check. I'm gonna do X, Y and Z to support a candidate. I'm gonna let a candidate use my conference room in the states where that's permitted." That's all fine, but the company needs to decide that, and that's company political activity. If the company has a policy, and I think it's a good idea to say, "You can only do company or corporate political activity with approval from the legal department, from government affairs, from the CEO." Whatever it is, it's important that people not use any company resources, any corporate resources, for their individual political activity. And as we're thinking about how to navigate this minefield, it's very important to identify the goals that you have. Is your goal eligibility for government contracts? For some companies, yes. For some companies, no. Some have no government contracts. Some think that they don't have government contracts until a real estate company has a new tenant who's a government entity and then all of a sudden, they have to complete pay-to-play forms and realize that they're not eligible for this lease with a government entity, because they made a contribution to the governor two years ago, I've seen that come up. So even if you think you may not be interested in government contract, it's becoming a bigger, bigger part of the economy. And both federal government, different states, government contracting is very important for many businesses these days. It's important to know what you're looking to do before you start engaging in any political contributions. Some people may say, "No, I'm never gonna do government contracting, but instead, I'm really interested in gift rules and government ethics role." I have a new arena, I have a new real estate development. I have a new whatever it is, tourist attraction, and I wanna invite the governor or a mayor over for a ribbon cutting or for a tour, is that permitted, is that not permitted? There are lots of ways that that can go wrong and lots of ways that that can go right and it's important to know what you're doing and identify your goals before you start doing it. Is your company gonna be engaged in lobbying? If yes, there are certain disclosure requirements and certain registration requirements, but also that has implications for your activity. That has implications for your gift roles and entertainment roles and your political contribution roles. Is your goal generally to participate in the electoral process? Again, are you gonna be engaged in political statements, even without making a contribution? If you're a nonprofit, how involved are you gonna get? It's very important to know where you're looking to go so that you can understand the rules of the road. It's also key to identify who's a covered person for this. So we didn't get into the details too much, but when it comes to pay-to-play, it's very important to know who's covered and who's not. And the laws differ depending on the jurisdiction and depending on the type of entity. So take New Jersey, for example, if you wanna have government contracts with the state of New Jersey and you're an LLC, then the political contributions of any equity member of that LLC are gonna be attributed to the business. With a law firm that has many equity partners, any of those people who make one contribution can jeopardize the eligibility for state of New Jersey contracts. If it's a corporation, we're only worried about 10% owners and officers for the most part. But again, it's important to know who's covered, what type of entity you are, what the laws are in that jurisdiction, so that you can understand, for pay-to-play purposes, whose individual political contributions are gonna be relevant for reduced limits, for disclosure, to understand who needs to be educated on this. Once you identify those people, you need to alert them of the restrictions, prohibitions and disclosure requirements under the relevant laws. They need to know, and you need to train them and teach them, you need to ask the question before you make a political contribution because you're covered by this law. Your individual activity, it's gonna be relevant for the company, no one wants to be that person to jeopardize eligibility for contracts and it costs the company millions of dollars. But we often see, oh, this person's never politically active. He didn't know the laws, he was absent the day of our training, but his college roommate decided to run for office, so he was invited and wrote a check and now we're in trouble. People who people think that they may not be politically active until something comes up and they become politically active. It's also very important as people enter new roles, that they're made aware of new restrictions that may apply. So if someone's promoted to an officer position, if someone becomes an owner of the company, again for an LLC, it could be any percentage, for a corporation, it may be higher, different states have different rules, but understand who's covered. And then when new people are entering those roles, they need to be trained on an ongoing basis. You can't just do a training once every five years and leave it to that. You're gonna have new people come in, laws will change, training and education must be ongoing. It's also very important to remember the basics when it comes to political activity. So always know the exact name and type of recipient committee to which you're contributing. I spoke about that company that lost $7 million of contracts based on a $500 contribution. So that's a perfect example. If they wrote that $500 contribution to this type of committee, to this type of candidate, as opposed to this type of committee, if you contribute to a candidate, in some cases, not a political party, that may be fine, the $500 may be fine. And I've seen situations where a check went to the wrong place. The check, if it went to the right place, would've been fine and no issue, but it went to the wrong place. The payee line on the check was not clear. And all of a sudden, a company is out millions of dollars of government contracts because the contribution went to the wrong place. The contributor didn't know who the recipient was, didn't know the exact name, didn't know the type of recipient, they thought it was a PAC, who's really a political party. All those things matter when it comes to these pay-to-play laws and understanding limits. And that's also important to be mindful of applicable limits, and that includes both campaign finance laws and pay-to-play laws. In many jurisdictions, a candidate can receive X number of dollars per election, but an election may stretch over two or three years. So if I run for office every four years, the period for that primary election may be 3 1/2 years, and the general election may only be six months. So in that case, anything that I contribute over the term of 3 1/2 years is gonna count towards one limit. And so it's not enough to just look in some cases and say, "Oh, I didn't contribute anything this year." It's not just about this year, you have to look back and understand the entire limit per election cycle. Understanding those limits are very important. We recommend to clients that they use contribution cover letters with protective language that really provides a record of who the contribution is being made from, who the contribution is being made to, the amount, the relevant election, so that you have a physical record that you hold onto, you have a copy of, to understand exactly the specific details of the contribution. We'll often also include language that tries to protect the contributor and say, "Our understanding is that this is in line with relevant pay-to-play laws. It's our understanding that you're not gonna use this for any political purpose, if I'm donating to a 501 or a 501 ." That gives notice to the recipient to say, "Hey, wait a second," and I've seen this happen. "Hey, wait a second, this person has contracts, maybe we should not accept this check." And it saves companies millions of dollars just using a cover letter, putting people on notice, "Hey, don't accept this check, don't deposit this check if my understanding here is incorrect." We also tell people to use memo lines of checks strategically. So a cover letter can get separated, we still think it's a good idea, but the memo line of the check is always gonna be there. So you can say things like, "2022 primary election," or, "Federal account only," or, "Do not use for political purposes." Whatever message you wanna send, you can use the memo line of the check to help communicate that message. We always recommend to people that it's important to adopt a policy. So all companies have employee handbooks, all companies have policies and guidelines for day-to-day employment purposes. But it's also important to consider a political activity policy. That policy can govern the making and solicitation of political contributions, both on a company level with corporate contributions, let's say, or corporate station, but also for individuals. It's important to distribute that policy to relevant people and it's also important to train those people on the content of those policies. It's not enough to just send out an email or put it in a company handbook, you need to actually do training. Last week, before I'm recording this, I attended a board meeting and did a training so that they understand that their political activity done individually can have an impact on the business itself. What does that political activity include? Contents generally would include a political contribution compliance procedure. In some cases that's pre-clearance of contributions, in some cases that's disclosure after the fact, depending on the nature of the government contracting and the jurisdiction. But in some cases, we have clients that every single political contribution that any employee makes needs to be vetted with their legal team, vetted with the outside counsel, to ensure that they're not gonna jeopardize contracts for anyone. The political activity policy can also include a prohibition on use of company resources for political activities. It can include gifts and government ethics laws, gifts and entertainment for elected officials, government ethics laws more broadly. It can include charitable contributions requested by candidate or government officials. Sometimes you'll have a mayor or elected officials say, "Hey, can you support this charity? Is that permitted or not?" It's important to think about before it comes up. And the political activity policy, last, can also include lobbying and understanding who's registered as the lobbyist? Who needs to register? Who can engage in government relations activities? And just to wrap up here, a couple last compliance tips, it's very important that political contributions may not be reimbursed in any way, shape or form. You can read news stories about businesses that basically got put outta business because they were reimbursing and hiding political contributions. That's obviously a criminal matter. But often this comes up when a high level employee will want to attend a golf outing or a cocktail party or a dinner, and not realize that it's a political contribution and put the expense of that on their expense form or expense report and say, "Company, please reimburse me the $200 that I spent at this dinner." Just like any other networking or marketing event, that's okay in most cases, but not when it comes to a political fundraiser. In that case, if you make the contribution, you can't be reimbursed for that. If you pay for the ticket for the political fundraiser, you can't be reimbursed for that. It's prohibited and it can lead to a lot of trouble. The second last point here is get all the information that you need to make an informed decision. We often get clients calling up and saying, "Hey, we have this event tonight. Can we go? Can we not go?" And I'll say, "We'll figure it out, we'll get back to you as soon as we can. But if you can't bring a check with you tonight, they'll still take your check tomorrow." It's very important before you make your contribution decision or your activity decision, to do your homework and really get all the information that you need. They'll still accept your check tomorrow and you can still attend the event in most cases. But as we discussed before, a lot of these cases don't have refund provisions, don't have cure periods, so if you write that check and they accept it, it may be too late. You need to do all your homework before you write that check. And the last piece of advice here that I have here is you can have a great policy in place, but it's not worth the paper it's written on if cover people are not educated and trained, and that includes on an ongoing basis. Thank you for joining us today for an overview of political activity. Again, this is a minefield, clients know that it's a minefield, businesses know that it's a minefield, some cases they wanna participate anyway for various reasons, but it's very important to know and understand all aspects of what you're doing before you get involved in political activity, thank you.

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