case you haven’t heard, there is an election underway. Beyond the circus of campaign controversies are some very real risks—regulatory and reputational—for companies that enter the political fray.
It is easy to buy into the hubbub surrounding the Supreme Court’s controversial Citizen’s United decision and the conventional wisdom/misperception that Corporate America is free to pour buckets of cash into campaigns. The reality is much more complicated, nuanced, and fraught with compliance risks. There are federal campaign finance laws, state laws, IRS regulations, and even internal policies and corporate governance documents to be mindful of. Non-compliance can mean a loss of government contracts, fines, criminal penalties, personal liability, and reputational damage.
“In any political season, but in particular in this one where you have very polarized views and strong feelings on every side of every issue, there are significant risks to companies and things that they need to be paying attention to,” says Tammera Diehm, a shareholder at the law firm Winthrop & Weinstine. “There are some pitfalls. People sometimes see the Citizens United decision as opening the doors to corporate participation. It certainly did create additional opportunities for corporations to participate in the political process, but there are limitations.”
First and foremost, corporations cannot give unlimited contributions directly to candidates, only through the auspices of independent political action committees. From there, things can get very confusing depending on the industry and the states in which they do business. “Unlike other areas of compliance, you can’t just go to one nice and neat section of the law and figure out what to do,” Diehm says.
Broadly speaking, companies should be keenly aware of the reputational risk that may accompany support of a candidate or lobbying for or against an issue or legislation. “In a political climate like we see right now, you need to be very careful,” Diehm says. “For companies that deal with broad groups of the public, no matter what position they take, they are likely to annoy one segment of the population.” Even a membership in a trade group, such as the U.S. Chamber of Commerce or National Association of Manufacturers, can be controversial when it takes a political stance, whether or not a member company and its executives agree with that advocacy.
A case study in political blowback: In 2013 retail giant Target faced protests and boycotts after donating $150,000 to a conservative group that was running ads backing a Republican gubernatorial candidate who opposed same-sex marriage.
On the regulatory front, campaign contribution laws, pay-to-play restrictions, and lobbying guidelines extend across industries and state lines.
Government contractors and those doing business with the government are subject to federal state and local pay-to-play limits, explains John Janicik, a Mayer Brown partner who leads the law firm’s government relations group. Financial advisers have Securities and Exchange Commission rules. Municipal securities dealers and municipal advisers have Municipal Securities Rulemaking Board rules. Swaps dealers need to follow mandates by the Commodity Futures Trading Commission. Broker-dealers will soon have a finalized rule proposal from the Financial Industry Regulatory Authority.
“It is particularly important to be aware of pay-to-play restrictions heading into the election cycle,” says Joe Seliga, also a Mayer Brown partner. “With respect to this year’s presidential election, there are direct linkages to the pay-to-play rules with respect to investor advisers.”
The SEC’s pay-to-play rules, adopted in 2010, prohibit investment advisers from providing compensatory advisory services—either directly to a government client or through a pooled investment vehicle—for two years following a campaign contribution by the firm or certain associates to political candidates or officials in a position to influence the selection or retention of advisers to manage public pension funds or other government client assets.
The issue this year: Donald Trump’s running mate of the Republican presidential ticket, Mike Pence is Governor of Indiana and appoints members of several state pension systems.
“He is therefore an official of these systems for purposes of the SEC’s pay-to-play rule,” Seliga says. “A contribution to the Trump campaign would effectively be made to both he and Pence, triggering the rule. Contributions to the Republican party or a PAC with the intention that those contributions would ultimately benefit the Trump/Pence campaign may also trigger the federal pay-to-play rules.”
Another political pitfall is corporate lobbying and hiring experts at persuading lawmakers to beneficially shape legislation.
The federal Lobbying Disclosure Act defines a lobbyist as any person who makes, or is expected to make, at least two lobbying contacts and spends at least 20 percent of his or her time engaged in lobbying activities on behalf of a client or employer. Meeting those thresholds triggers registration requirements (which can vary on the federal level and state by state) and periodic reports spending disclosures.
Want to offer a gift to a public official or candidate? Consult with state laws before you do. Alabama law, for example, defines a gift as any benefit, favor, service, gratuity, tickets (to an entertainment, social, or sporting event), an unsecured loan, promise of future employment, or honoraria.
Under Delaware state law: “No state employee, state officer, or honorary state official shall accept a gift, payment of expenses, or any other thing of monetary value under circumstances in which such acceptance may result in any of the following: impairment of independence of judgment in the exercise of official duties; an undertaking to give preferential treatment to any person; the making of a governmental decision outside official channels; any adverse effect of the confidence of the public in the integrity of the government of the state.”
In California, state officials may not accept gifts totaling more than $10 in a calendar month from any individual who is registered as a lobbyist.
When considering these laws, be aware that “in kind” donations, such as the use of corporate facilities for candidate events, count as a gift unless that usage is open to all candidates and parties.
Diehm’s advice for staying compliant with myriad laws is to articulate company policies for employees and, if desired, customers and members of the public. Engage in ongoing employee training and conduct periodic audits of any and all political activity, she says.
“The company needs to make sure they are articulating clear policies because you have management, employees, and others at many different levels that could be out there acting and speaking in a way that reflects upon the company,” Diehm says. “It is crucial to communicate policies to everyone who needs to know about them.” As part of that effort, consider publishing a formal policy for political participation.
It is important, Diehm says, to distinguish between corporate activity and the private actions of employees. “For the most part, with very few exceptions, companies do not have the right to regulate off-duty behavior,” she says. “They are free to volunteer for any campaign they want and make donations to anyone they want.”
There can, however, be exceptions. Goldman Sachs, Credit Suisse, and Northern Trust have all instructed employees not to donate to the Trump campaign, fearing pay-to-play rule violations due to Pence’s pension connections.
“The idea of periodically auditing your company’s policies and activities is a very good idea,” Diehm says. “It is an area of law that is constantly changing. Just because you put policies in place for this election cycle, doesn’t mean that those policies are going to be effective two years from now.”