Advisory by lonyoo


									       Arnold & Porter LLP
What the New Campaign Finance Regime Means
for Businesses: Potential Traps for the Unwary
February 2004


On December 10, 2003, the U.S. Supreme Court upheld the constitutionality of most provisions
of the new federal campaign finance law, the Bipartisan Campaign Reform Act of 2002
(“BCRA”). BCRA significantly changes the way political money may be raised and spent in
connection with federal elections. The Federal Election Commission (“FEC”) already has issued
hundreds of pages of new regulations implementing BCRA and plans more rulemaking in the

The new campaign finance law regime could affect you and your company, whether or not your
organization has a political action committee (“PAC”) or a Washington presence.

These are just some of the reasons why.

Individual Executives Increasingly Are Under Pressure To Raise Funds for Federal

•     BCRA eliminated most corporate and union money in connection with federal elections (so-
      called “soft money”)1 and at the same time increased individual contribution limits. These
      changes, combined with the decision by leading Presidential candidates to forgo public
      financing during the primary election season, means executives are under enormous
      pressure not only to make contributions, but also to raise funds from colleagues and friends.
      One prime example is the Bush campaign’s successful “Rangers” and “Pioneers”
      fundraising program, whereby top executives each have pledged to raise six figure amounts.
      It is therefore important to not only understand BCRA’s new rules, but also the existing rules
      that will be even more in play in this new fundraising environment.

 “Soft money” is a term historically defined as the large and unlimited donations made by corporations, labor unions
and wealthy individuals to parties and other entities for non-candidate-specific federal campaign activities, such as
party building, generic party ads, voter registration and get-out-the-vote drives, issue ads, and state election activity.
“Hard money” historically has meant money spent on an activity that is more directly linked to electing or defeating
specific federal candidates, such as direct contributions to campaigns and ads expressly advocating a candidate’s
election or defeat.

    WASHINGTON                 NEW YORK                     LONDON                           BRUSSELS
    202.942.5000               212.715.1000                 +44 (0)20 7786 6100              +32 (0)2 517 6600

    LOS ANGELES                CENTURY CITY                 NORTHERN VIRGINIA                DENVER
    213.243.4000               310.552.2500                 703.720.7000                     303.863.1000

    Arnold & Porter LLP
This New Fundraising Climate Raises a Host of Legal and Compliance Issues, Not Only
for Executives, But for the Businesses That Employ Them.

•   For example, busy executives pressed to raise campaign funds will be tempted to delegate
    this activity to staff or to engage in it personally at the office. The FEC has delineated rules
    on how and under what conditions this activity is permissible. If these rules are not followed,
    the employer, as well as the employee, may be deemed to have violated federal law.

Despite BCRA, Businesses Still Will Be Asked To Write Large Corporate Checks.

While corporations and unions may no longer contribute to the national party committees, soft
money raised and spent by nonparty entities is still alive and well under the new law. But with
possibly hundreds of these organizations poised to step in to fill the void left by the two major
parties, it will be even harder to navigate the rules of the road. This has already started to
happen with the controversy over so-called section 527 organizations – named after a section in
the tax code – discussed below. Businesses therefore should seek to ensure that they
contribute money only to those organizations that are following the rules detailed herein.

BCRA also allows state party committees to raise from corporations limited amounts of soft
money, as discussed below. But because no aggregate limits apply, this is almost certain to
become its own cottage industry.

The Penalties for Violations of Federal Campaign Finance Law Have Increased

Violations involving more than $25,000 now trigger penalties of up to 5 years in jail and
$500,000 in fines. Certain types of violations (such as reimbursing employees for political
contributions) are singled out for increased fines, and in many cases, jail time. Finally, the DOJ
has identified knowing and willful violations of the campaign finance law as a top priority for
federal prosecutors, and the U.S. Sentencing Commission recently adopted a policy of
mandatory jail time for such knowing and willful violations involving transactions exceeding

With this backdrop, we offer you the following due diligence guidance in the form of a BCRA
checklist of “Potential Traps for the Unwary.” This checklist is necessarily general and not fact-
specific, and thus is not a substitute for legal counsel.

                                                    What the New Campaign Finance Regime Means for
                                                          Businesses: Potential Traps for the Unwary 2
     Arnold & Porter LLP

BCRA CHECKLIST: Potential Traps for the Unwary

ü Do Not Give Corporate, Labor Union, or Federal Contractor Money to National
  Political Party Committees. This includes the DNC, RNC, and their congressional
  arms. The parties no longer have “nonfederal accounts.” Individuals and PACs,
  however, may still contribute “hard money” to the party committees in accordance with
  the law’s new contribution limits.

ü Ask Questions Before Writing a Corporate Check to a State Party Committee.
  State party committees may raise a limited amount of funds from corporations and
  others for “federal election activities” 2 (so-called “Levin Amendment funds”). If the
  Virginia State Democratic Party Committee, for example, asks your company to write a
  check from its corporate – not PAC – funds, you should answer the following questions
  before you agree do so.

    (1) Is this a state that allows corporate contributions? If not, go no further.
    (2) What is the money to be used for? If simply to support state candidates, state law
        will govern. If there is a mixed purpose use (i.e., voter registration, get-out-the-vote
        activity in connection with a federal/state election), BCRA’s new $10,000 limit per
        state political party may apply.
    (3) Did the solicitation for funds come from a federal official or national party official? If
        so, the solicitation is impermissible.

ü Make Sure That Any Funds Given to Convention Host Committees Meet New FEC
  Regulations. The FEC has interpreted BCRA to permit local host committees planning
  the political parties’ 2004 nominating conventions to raise unrestricted contributions from
  corporations, unions, and individuals. But these donations still must be for the
  enumerated purposes laid out in recently amended FEC regulations.

ü Be Wary of Giving Corporate Money to Third-Party Organizations, such as Section
  527 Groups, Before Checking the Law and the Facts. With most party soft money
  now gone for the foreseeable future, and with the Democrats reportedly unable to raise
  as much “hard money” as the Republicans, these emergent groups are likely to flourish.
  However, the FEC recently advised that 527 groups who are registered as federal PACs
  must use only hard money – meaning no corporate and union funds – for messages that
  support or oppose federal candidates and related voter mobilization efforts. But these
  groups can use a combination of hard and soft money when referring to both state and
  federal candidates or when conducting generic voter mobilization drives. Whether such
  activity itself triggers registration for a section 527 organization not currently registered
  as a federal PAC has been left to a broader rulemaking in the spring.

  “Federal election activities” include any communication that promotes, supports, attacks or opposes any clearly
identified federal candidate (even if there is no “express advocacy,” i.e., “vote for/against candidate X”), as well as
certain general campaign activities occurring proximate to, or in connection with, an election in which a federal
candidate appears on the ballot, including voter registration (within 120 days of the election), get-out-the-vote efforts,
and generic campaign activity (such as “Vote Republican”).

                                                                What the New Campaign Finance Regime Means for
                                                                      Businesses: Potential Traps for the Unwary 3
    Arnold & Porter LLP
ü Be Cognizant of Increased Hard Money Contribution Limits for Individuals.
  • To Candidates: $2,000 per election (the primary and general elections are
     considered separate elections).
  • To National Parties: $25,000 per year.
  • To State Parties: $10,000 in hard money (as opposed to “Levin Amendment” soft
     money, above) per year in the aggregate to a state party and local and county
     committees established and maintained by the state party.
  • To PACs: Remains at $5,000 per PAC per calendar year and will not be indexed for
  • Annual aggregate contribution limits for individuals: This includes contributions
     to candidates, PACs, and parties and was raised from $25,000 per year to $95,000
     per two-year-period (from January 1 of each odd numbered year to December 31 of
     the following year) – $37,500 for candidates and $57,500 for parties and PACs (only
     $37,500 of which may go to PACs and state party committees).

ü Be Aware of Special Contribution Rules when a Candidate Is Opposed by a Self-
  financed “Millionaire.” The so-called “Millionaires’ Amendment” raises the individual
  contribution limits (up to $12,000 per person, per election) for congressional candidates,
  depending on the amount that opposing candidates expend from personal funds for their

ü Do Not Give Corporate Funds to Any Entity if the Solicitation Comes from a
  Federal Official or Candidate. Federal officeholders and candidates are prohibited
  from raising or spending corporate or union funds for any “federal election activity” (but
  can be featured guests at such events). They, however, may raise funds for state and
  local candidates or officials for non-federal election activities, but only if very strict
  conditions set forth in the new law are met.

ü Do Not Engage in “Electioneering” Unless It Is Through Your PAC, and Ask
  Questions Before Making Contributions to Third Parties Who Engage in
  Electioneering. Corporations and unions may not engage, directly or indirectly, in so-
  called “electioneering communications” – the broadcast of any ad (not print or Internet)
  that refers to a federal candidate and is aired within the applicable election area within
  60/30 days of a general/primary election – unless they use PAC funds to do so. For
  example, a company could not broadcast an ad in Candidate Smith’s district within this
  time period, even if the ad refers simply to the “Smith health bill” and makes no
  reference to his candidacy. Contributions to third parties who may engage in
  electioneering also raise potential liability issues for the contributor.

ü Do Not “Coordinate” Your Company’s Political Communications with any
  Candidate or Party Committee. FEC regulations have complicated new provisions on
  when a communication is considered “coordinated” with a candidate or party committee
  and thus is really an in-kind contribution. This could even include issue advocacy if it
  occurs within the “electioneering” window.

                                                  What the New Campaign Finance Regime Means for
                                                        Businesses: Potential Traps for the Unwary 4
    Arnold & Porter LLP

Federal prosecutors’ intention to seek criminal penalties for violation of these rules and the
increased penalties imposed under BCRA should serve as a warning to companies. A
compliance program for government affairs, including political giving, is just as important as any
program for securities regulations, environmental, antitrust or other laws governing business
activities. We would welcome the opportunity to assist you with BCRA compliance or in
designing and implementing a government affairs compliance program.

                                            * * * * *

If you have questions about this advisory, or other issues related to campaign finance, please
feel free to contact Sonia Fois at 202.942.5751 or, Leslie Nickel at
202.942.5330 or, or your Arnold & Porter LLP attorney.

                                                   What the New Campaign Finance Regime Means for
                                                         Businesses: Potential Traps for the Unwary 5

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