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When C-Suite Executives Wade Into the Political Swamp

7 June 2017
Corporate Counsel

Politics can be perilous for many companies—especially for companies with executives who are politically active. In June, Intel CEO Brian Krzanich abruptly canceled a private fundraiser at his home for presidential candidate Donald Trump after an inquiry from the New York Times. Krzanich responded to public criticisms through Twitter, saying he did not intend to endorse a presidential candidate.

Howard Schultz, CEO of Starbucks at the time, endorsed Hillary Clinton for president. Trump called on his supporters to boycott Starbucks.

While some executives avoid public endorsements, their active support for a candidate is public knowledge nonetheless. The Clinton campaign publicly touted its "Hillblazers"—individuals who raised at least $100,000 for the campaign. The list included top executives from Columbia Sportswear, Facebook, Netflix, The Walt Disney Co., and Yahoo!, among others.

The growing patchwork of pay-to-play rules

Political activity by a company's executives poses not just reputational and business risks, but also compliance challenges. Political activity is increasingly regulated at all levels of government. More and more companies are subject to pay-to-play rules, which limit campaign contributions by companies that do business with government and by their executives, owners, employees and affiliates.

Congress first enacted a ban on federal campaign contributions by government contractors in 1940 in response to what one senator described as the "greatest source of corruption in American politics." But the federal rule does not prohibit contributions by a company's political action committee or by its owners, executives or employees.

Over the past decade, a slew of new pay-to-play rules have been issued, which affect not just companies but also individuals associated with those companies. The patchwork of federal, state and local rules grows after each public corruption scandal—from the arrest of Illinois Gov. Rod Blagojevich (2008), to corruption charges in the New York State Comptroller's Office (2009), to allegations of improper gifts at California's largest public pension system (2010). The rules cover myriad industries—from vendors, to regulated industries, to investment firms that manage public pension funds.

The expansion of pay-to-play rules comes as other campaign finance laws are under attack. While courts have invalidated contribution limits in other cases, like the U.S. Supreme Court's recent decisions in Citizens United v. Federal Election Commission and McCutcheon v. Federal Election Commission, courts have upheld pay-to-play limits against First Amendment challenges because the rules purport to stop public corruption. Pay-to-play limits have been easier to defend against judicial attack and may become the new norm in campaign finance regulation.

Company policies on political activity of executives and employees

Faced with new rules limiting the political activity of executives and employees, many companies have adopted policies requiring pre-clearance of personal campaign contributions. This can be an internal challenge, particularly when many individuals consider their political activity and beliefs to be private. But because most pay-to-play rules impose strict liability, the consequences for a violation are costly, including debarment, disgorgement and fines, as well as the potential voiding of public contracts. For example, in January the SEC announced fines of up to $100,000 against 10 investment firms for campaign contributions of as little as $400.

Identifying the executives and employees who may need to pre-clear their contributions is itself a challenge. The rules are inconsistent in who they cover. Take for example an investment firm that manages public pension funds. The SEC rule applicable to investment advisers does not apply to nonexecutive owners of the firm, while Illinois's pay-to-play law applies to any owner of more than 7.5 percent of the firm and certain executives regardless of ownership interests. And while the Illinois law does not apply to marketing staff unless their compensation is contingent on the investment, the SEC rule applies to any employee who solicits a government entity, regardless of their compensation arrangements.

Practically, companies that require pre-clearance may apply the requirement to all executives and employees or, alternatively, with respect to employees, to large subsets including senior managers, marketing personnel and employees who work with government clients. Companies that prefer to more precisely define the list of covered executives and employees must survey jurisdictions in which they do government business, and then be mindful of frequent changes in federal, state and local laws, as well as changes in employee responsibilities and titles.

To reduce the burden of compliance, companies that require pre-clearance rely on simple forms to gather basic information about the contribution and the recipient. Legal counsel or compliance staff identify whether the recipient holds or is seeking a public office that is subject to a pay-to-play rule. It is important to check not just the office the candidate is seeking, but also any office the candidate might currently hold. If the recipient is subject to a pay-to-play rule, counsel or compliance staff determine the applicable donation limit. While some rules prohibit contributions altogether, others allow small contributions. This process can be executed efficiently and quickly.

In addition to candidate contributions, companies need to be mindful of contributions to political action committees, independent expenditure committees and politically active nonprofit organizations. Many pay-to-play rules prohibit contributions to third-party organizations that are earmarked to support a candidate to whom the donor may not directly contribute. In December, New York City enacted new restrictions on donations to nonprofit advocacy organizations controlled by city officials.

Companies should also clear any use of company resources to avoid inadvertently making an in-kind campaign contribution. In many jurisdictions, the cost of hosting a fundraiser or campaign event is considered a contribution. Companies often prohibit political events on company premises altogether. Alternatively, the company can require the individual hosting such an event or the campaign to pay a reasonable charge for the room and catering. Companies should also limit time spent by individuals during work hours on campaign or political activities and their use of company resources. Goldman Sachs paid $12 million to settle alleged violations of the SEC pay-to-play rule caused by an employee who volunteered for a candidate for Massachusetts governor during work hours using the firm's phones and email.

As we enter the next election cycle, the risks to companies from political activities of executives and employees continue to grow. But proactive counsel and compliance managers can keep current with the rules and manage those risks with sound policies and by offering thoughtful advice to their executives and employees.

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Reprinted with permission from the June 7, 2017 edition of Corporate Counsel © 2017 ALM Properties, Inc. All rights reserved. Further duplication without permission is prohibited.

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