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Testimony on the DISCLOSE Act for the House Admin. Committee

The DISCLOSE Act closes longstanding loopholes that have permitted veiled political actors to escape full transparency. We urge Congress to pass this legislation as quickly as possible in order to ensure the source of corporate money in the upcoming election is fully self-evident.

Published: May 11, 2010

Testi­mony of The Bren­nan Center for Justice at NYU School of Law 1

Before the Commit­tee on House Admin­is­tra­tion, U.S. House of Repres­ent­at­ives

May 11, 2010

Down­load testi­mony [pdf]

Intro­duc­tion:

Citizens United gran­ted corpor­a­tions and unions a novel right to use general treas­ury funds to influ­ence Amer­ican elec­tions.  These new rights should be accom­pan­ied by commen­sur­ate respons­ib­il­it­ies of full trans­par­ency. 

“The Demo­cracy Is Strengthened by Cast­ing Light On Spend­ing in Elec­tions” Act (the DISCLOSE Act) provides this mean­ing­ful trans­par­ency. As illus­trated below, the Act’s report­ing and disclaimer provi­sions are neces­sary to prevent the corrupt use of money in Amer­ican polit­ics and to ensure that voters have enough inform­a­tion to cast informed votes at the polls. These provi­sions build on a century of federal disclos­ure laws seek­ing to reveal money in polit­ics to the voting public.2  And, they stand on solid consti­tu­tional ground—sim­ilar disclos­ure laws have been upheld again and again, includ­ing by eight members of this Supreme Court in Citizens United.

For over 60 years—un­der restric­tions imposed by Taft Hartley, Federal Elec­tion Campaign Act (FECA) and Bipar­tisan Campaign Reform Act (BCRA)—cor­por­a­tions and unions were barred from spend­ing general treas­ury funds on elec­tions. Instead, they used fully-trans­par­ent polit­ical action commit­tees (PACs) to engage in elec­tion-related spend­ing.  Now, any union and any corpor­a­tion in Amer­ica, whether nonprofit or for profit, may spend freely in elec­tions.  With this increase in entrants into the polit­ical sphere, clear report­ing require­ments are crucial.

Simil­arly, history and current events have both demon­strated that Amer­ican elec­tions are too often besieged by polit­ical advert­ise­ments from unnamed sources, making it diffi­cult for citizens to prop­erly weigh these messages. This is partic­u­larly true when those advert­ise­ments take the form of 30 second attack ads where the source is only vaguely iden­ti­fied. As Pres­id­ent Obama recently stated, “the Amer­ican people also have the right to know when some group like ‘Cit­izens for a Better Future’ is actu­ally funded entirely by ‘Cor­por­a­tions for Weaker Over­sight.’”3

Below we describe how the DISCLOSE Act closes disclos­ure loop­holes in current law. Next, we explain that the Supreme Court has repeatedly upheld laws similar to the DISCLOSE Act. We then illus­trate the prob­lems that the DISCLOSE Act is meant to address, includ­ing examples of covert spend­ing at the state level.  Finally, we urge Congress to pass addi­tional reforms to address the prob­lems created by Citizens United, includ­ing the Fair Elec­tions Now Act, which would put in place small donor public finan­cing for Congres­sional races, and the Share­holder Protec­tion Act, which would require share­holder votes to author­ize corpor­ate polit­ical spend­ing.

Part I.            
By Strength­en­ing Report­ing and Disclaimer Require­ments for Campaign-Related Spend­ing, the DISCLOSE Act Plugs Holes in Exist­ing Law

As detailed more below, the flaws in the current federal report­ing require­ments are numer­ous. The DISCLOSE Act closes these loop­holes, which could lead to limit­less veiled corpor­ate and union spend­ing if left unad­dressed. Exper­i­ence from states where corpor­a­tions were permit­ted to engage in unres­tric­ted polit­ical spend­ing before Citizens United illus­trates why it is so crit­ical to pass the DISCLOSE Act. State examples show that if the current federal loop­holes remain open, corpor­a­tions and unions will likely use them to make undis­closed expendit­ures. 

A. Enhanced Report­ing Require­ments

Under the DISCLOSE Act, H.R. 5175, all covered organ­iz­a­tions 4 must report all of their campaign-related spend­ing to the Federal Elec­tion Commis­sion (FEC).  “Campaign-related spend­ing” includes “inde­pend­ent expendit­ures” and “elec­tion­eer­ing commu­nic­a­tions” as those terms are defined by the Act.  The Act clari­fies the defin­i­tion of “inde­pend­ent expendit­ures” to include any commu­nic­a­tion that expressly advoc­ates for the elec­tion or defeat of a clearly iden­ti­fied candid­ate as well as any commu­nic­a­tion that is the “func­tional equi­val­ent of express advocacy.”5 The defin­i­tion of “elec­tion­eer­ing commu­nic­a­tion” is widened slightly by the Act.  This term still covers only broad­cast advert­ise­ments that refer to a clearly iden­ti­fied candid­ate, target the relev­ant elect­or­ate, and air soon before an elec­tion, but expands the report­ing window to 120 days before a general elec­tion.6 Expand­ing these defin­i­tions is key to captur­ing the way modern polit­ical campaigns are run—often, ads lack­ing the clas­sic “vote for” or “vote against” language begin to air many months before an elec­tion.      

Under exist­ing law, organ­iz­a­tions must report their elec­tion­eer­ing commu­nic­a­tions within 24 hours of spend­ing or contract­ing to spend $10,000 or more for produc­tion or broad­cast­ing costs within a calen­dar year of the elec­tion.7 Under the DISCLOSE Act, elec­tion­eer­ing commu­nic­a­tions are subject to this same sched­ule but, as noted, the period for elec­tion­eer­ing commu­nic­a­tions is expan­ded. 

Under current law, indi­vidu­als and commit­tees report within 48 hours of spend­ing $10,000 on inde­pend­ent expendit­ures until 20 days before an elec­tion. In the 20 days before an elec­tion, indi­vidu­als and commit­tees must report within 24 hours of spend­ing $1,000 on inde­pend­ent expendit­ures. The DISCLOSE Act imposes a similar regime: at any time up to 20 days before an elec­tion, organ­iz­a­tions must report their inde­pend­ent expendit­ures within 24 hours of spend­ing $10,000 or more.8 After that date and until elec­tion day, organ­iz­a­tions must report their inde­pend­ent expendit­ures of $1,000 or more within 24 hours.    

In addi­tion to disclos­ing their own campaign-related spend­ing, organ­iz­a­tions will be required to reveal the iden­tit­ies of their funders. Organ­iz­a­tions are given a choice as to how they want to struc­ture this disclos­ure.  They can either (a) report all donors in the previ­ous year of over $1,000 or $600 (depend­ing on the type of campaign-related spend­ing involved),9 or (b) set up a Campaign-Related Activ­ity Account through which to fund their campaign-related spend­ing. If an organ­iz­a­tion chooses this second option, it is only required to report donors of $1,000 or $600 (again, depend­ing on the type of campaign-related spend­ing involved) who donate specific­ally to the organ­iz­a­tion’s Campaign-Related Activ­ity Account. Accord­ingly, if an organ­iz­a­tion exclus­ively receives and disburses campaign-related expendit­ures through its Campaign-Related Activ­ity Account, it need not report the iden­tit­ies of those who donated to the organ­iz­a­tion’s general treas­ury. This closes a major loop­hole in current FEC report­ing. As discussed in greater detail in Part III, present FEC rules do not require polit­ical advert­isers to identify their funders unless a funder expressly earmarks his or her contri­bu­tion.

The bill contains two provi­sions geared to prevent circum­ven­tion of the above-described disclos­ure require­ments. First, if an organ­iz­a­tion trans­fers money to another entity for the purpose of enga­ging in campaign-related spend­ing, that organ­iz­a­tion will be treated as if it engaged in campaign-related spend­ing directly.10 Second, if an organ­iz­a­tion trans­fers $10,000 or more from its general treas­ury funds to its Campaign-Related Activ­ity Account, the organ­iz­a­tion must then disclos­ure the identify of donors of unres­tric­ted funds over $10,000 or $6,000 (depend­ing on the type of campaign-related spend­ing involved). This, of course, is neces­sary to prevent an organ­iz­a­tion from shield­ing polit­ical funders by simply moving money around.11 These require­ments will be partic­u­larly import­ant to close another loop­hole under current law—the use of trade asso­ci­ations, organ­ized under 501(c)(6) of the tax code, to cloak dona­tions from for profit busi­ness corpor­a­tions. This trade asso­ci­ation prob­lem is explained more fully below. 

If a donor specifies in writ­ing that he or she does not want to fund any campaign-related spend­ing, an organ­iz­a­tion is strictly prohib­ited from using his or her dona­tion in that way. In such a case, that donor’s iden­tity would not be revealed to the FEC, even if the organ­iz­a­tion chooses to use other general treas­ury funds for campaign-related spend­ing. This provi­sion protects donors who wish to give to nonprofits but do not want to fund polit­ical ads.12

Finally, any organ­iz­a­tion that submits regu­lar, peri­odic reports to its share­hold­ers, members or donors, must include inform­a­tion about any campaign-related spend­ing during the period covered by the report.  Specific­ally, the organ­iz­a­tion must disclose the date of the inde­pend­ent expendit­ure or elec­tion­eer­ing commu­nic­a­tions, how much it cost, the name of iden­ti­fied candid­ates, and any trans­fer of funds to another organ­iz­a­tion for the purpose of campaign-related spend­ing. In addi­tion to includ­ing this inform­a­tion in peri­odic reports, an organ­iz­a­tion must post inform­a­tion detail­ing campaign-related expendit­ures on its website within 24 hours of report­ing such to the FEC.13 This addresses the current lack of disclos­ure between compan­ies and their share­hold­ers which will be explained in Part III.   

B. Enhanced Disclaimer Require­ments

The Act also imposes enhanced disclaimer require­ments on broad­cast inde­pend­ent expendit­ures and on elec­tion­eer­ing commu­nic­a­tions (which, by defin­i­tion, are broad­cast via radio or tele­vi­sion). Specific­ally, the Act imposes a new “stand-by-your-ad” rule that requires the highest rank­ing offi­cial of an organ­iz­a­tion to announce his or her name and posi­tion and then expressly approve of the message.  In addi­tion, if the advert­ise­ment was substan­tially paid for by another person or organ­iz­a­tion, that funder must also “stand by the ad” by making a similar state­ment. Finally, an organ­iz­a­tion must list the top five funders whose dona­tions paid for the advert­ise­ment. This should prevent corpor­a­tions or unions from using a “sham” group to run polit­ical ads, and will inform the voting public of the major finan­cial back­ers in one snap­shot.  

Part II.           
The DISCLOSE Act’s Disclos­ure Provi­sions are Consti­tu­tional

As explained above, the DISCLOSE Act imposes enhanced report­ing and disclaimer require­ments on busi­ness corpor­a­tions, labor unions, and nonprofit organ­iz­a­tions engaged in campaign-related spend­ing. The Act thus ensures that those respons­ible for such expendit­ures—­namely, the spon­sor and those who fund the activ­ity—are repor­ted to the FEC and clearly iden­ti­fied to the public. As explained below, Supreme Court preced­ent leaves little doubt that the Act’s report­ing and disclaimer require­ments are consti­tu­tion­ally sound.        

In Citizens United, this Supreme Court upheld the disclos­ure and disclaimer require­ments imposed by BCRA by an eight to one vote.14  By so hold­ing, the Court added to a long line of cases approv­ing laws requir­ing the disclos­ure of money in federal elec­tions.15      

The Court’s first signi­fic­ant exam­in­a­tion of federal disclos­ure laws occurred in 1934 in the case of Burroughs v. United States. There, the Court upheld the report­ing require­ments imposed by the Federal Corrupt Prac­tices Act of 1925. In uphold­ing this law, the Court emphas­ized that disclos­ure of campaign spend­ing serves crucial anti-corrup­tion interests:

To say that Congress is without power to pass appro­pri­ate legis­la­tion to safe­guard such an elec­tion from the improper use of money to influ­ence the result is to deny to the nation in a vital partic­u­lar the power of self-protec­tion. Congress, undoubtedly, possesses that power, as it possesses every other power essen­tial to preserve the depart­ments and insti­tu­tions of the general govern­ment from impair­ment or destruc­tion, whether threatened by force or by corrup­tion.16

In the 1976 case of Buckley v. Valeo, the Court again embraced robust disclos­ure—this time, by valid­at­ing the extens­ive report­ing require­ments imposed by FECA.17 The Buckley Court recog­nized that FECA’s disclos­ure provi­sions could burden indi­vidual rights and might even deter some indi­vidu­als from enga­ging in polit­ical activ­ity.  Despite the possib­il­ity that disclos­ure might curb some polit­ical activ­ity, the Court concluded that disclos­ure is gener­ally “the least restrict­ive means of curb­ing the evils of campaign ignor­ance and corrup­tion…”18

The Buckley Court also found that disclos­ure serves three key govern­mental interests, which typic­ally justify any burden imposed on polit­ical rights:

(1) “disclos­ure provides the elect­or­ate with inform­a­tion as to where polit­ical campaign money comes from and how it is spent”;

(2) “disclos­ure require­ments deter actual corrup­tion and avoid the appear­ance of corrup­tion by expos­ing large contri­bu­tions and expendit­ures to the light of publi­city;” and

(3) “disclos­ure require­ments are an essen­tial means of gath­er­ing the data neces­sary to detect viol­a­tions” of other campaign finance regu­la­tions. 19

In 2003, the Court affirmed this trium­vir­ate of state interests in McCon­nell v. FEC  when it upheld BCRA’s elec­tion­eer­ing commu­nic­a­tions report­ing provi­sions by a vote of eight to one.20 The McCon­nell Court—­fol­low­ing the lead of the district court in the case­—paid partic­u­lar atten­tion to voters’ inform­a­tional interest in know­ing who funds polit­ical ads so that they can make informed decisions at the ballot box.  The Court was troubled by evid­ence that inde­pend­ent spend­ers regu­larly shield their true iden­tit­ies while trying to influ­ence federal elec­tions:

BCRA’s disclos­ure provi­sions require [] organ­iz­a­tions to reveal their iden­tit­ies so that the public is able to identify the source of the fund­ing behind broad­cast advert­ise­ments influ­en­cing certain elec­tions… Curi­ously, Plaintiffs want to preserve the abil­ity to run these advert­ise­ments while hiding behind dubi­ous and mislead­ing names like: “The Coali­tion-Amer­ic­ans Work­ing for Real Change” (funded by busi­ness organ­iz­a­tions opposed to organ­ized labor), “Citizens for Better Medi­care” (funded by the phar­ma­ceut­ical industry), “Repub­lic­ans for Clean Air” (funded by broth­ers Charles and Sam Wyly). Given these tactics, Plaintiffs never satis­fact­or­ily answer the ques­tion of how “unin­hib­ited, robust, and wide-open” speech can occur when organ­iz­a­tions hide them­selves from the scru­tiny of the voting public…21

Given this line of preced­ent, it is not surpris­ing that the Supreme Court in Citizens United reaf­firmed the consti­tu­tion­al­ity of BCRA’s report­ing and disclaimer provi­sions for elec­tion­eer­ing commu­nic­a­tions.  In so ruling, the Court reit­er­ated that such disclos­ure require­ments impose no ceil­ing on campaign-related activ­it­ies and prevent no one from speak­ing.22  Disclaim­ers, the Court explained, play a partic­u­larly import­ant role in keep­ing voters fully informed.  By clearly identi­fy­ing who is paying for polit­ical advert­ise­ments, BCRA’s disclaimer require­ments ensure that voters are in the best posi­tion to eval­u­ate compet­ing argu­ments in the months before elec­tion day.23

Clari­fy­ing an unsettled area of law, 24 Citizens United also specified that disclos­ure require­ments may be imposed in contexts where other regu­la­tion would be imper­miss­ible:

The Court has explained that disclos­ure is a less restrict­ive altern­at­ive to more compre­hens­ive regu­la­tions of speech…In Buckley, the Court upheld a disclos­ure require­ment for inde­pend­ent expendit­ures even though it inval­id­ated a provi­sion that imposed a ceil­ing on those expendit­ures.  In McCon­nell, three Justices who would have found [the corpor­ate expendit­ure ban] to be uncon­sti­tu­tional nonethe­less voted to uphold BCRA’s disclos­ure and disclaimer require­ments.  And the Court has upheld regis­tra­tion and disclos­ure require­ments on lobby­ists, even though Congress has no power to ban lobby­ing itself.25

By expressly approv­ing of disclos­ure in connec­tion with a vari­ety of campaign-related expendit­ures, the Citizens United Court thus sanc­tioned expans­ive disclos­ure.  It is there­fore likely find the DISCLOSE Act’s disclos­ure provi­sions consti­tu­tional as well.

Part III.         
The DISCLOSE Act Will Limit Current “Black Box” Polit­ical Spend­ing

The DISCLOSE Act is designed to address several loop­holes in the current federal disclos­ure regime that allow polit­ical spend­ers to hide their true iden­tity and shield exactly who is fund­ing inde­pend­ent polit­ical spend­ing. Currently, busi­ness corpor­a­tions and other organ­iz­a­tions can spend through inter­me­di­ar­ies such as confid­en­tial trade asso­ci­ations.  If the result­ing advert­ise­ments are not funded through a PAC, the FEC’s lax report­ing require­ments rarely capture the under­ly­ing donors.  Simil­arly, current disclaimer require­ments do not always catch who is paying for polit­ical advert­ise­ments.  Moreover, for share­hold­ers and investors, there is a lack of trans­par­ency surround­ing corpor­ate polit­ical activ­ity.

A.    Voters, Share­hold­ers, and Investors in the Dark

    Today voters and share­hold­ers often know very little about the bene­fi­ciar­ies of corpor­ate polit­ical expendit­ures.26 This matter is partic­u­larly prob­lem­atic for publicly traded compan­ies which are currently under no legal duty to disclose polit­ical spend­ing directly to share­hold­ers.27 Accord­ingly, as one legal scholar has explained, “[p]olit­ical contri­bu­tions are gener­ally not disclosed to the board or share­hold­ers, nor are polit­ical expendit­ures gener­ally subject to over­sight as part of a corpor­a­tion’s internal controls.”28  An aver­age share­holder thus has little hope of fully under­stand­ing the scope of the compan­ies’ polit­ical expendit­ures.29 Even worse, share­hold­ers may unwit­tingly fund polit­ical spend­ing at odds with their own polit­ical philo­sophies.30

    More robust disclos­ure from corpor­ate spend­ers is needed to remedy this lack of inform­a­tion between a corpor­a­tion, its share­hold­ers, and the voting public.  Share­hold­ers need peri­odic disclos­ure of where corpor­ate money is being spent during elec­tions, includ­ing the names of candid­ates suppor­ted or opposed, party affil­i­ation and office sought and it should be repor­ted directly to share­hold­ers and members.  And, this is precisely what Section 327 of the DISCLOSE Act would do. 

    B.    Holes in FEC Report­ing

    1.      Disclos­ure Holes

      Even before Citizens United, a small class of ideo­lo­gical non-profits spent in federal elec­tions under the “MCFL exemp­tion.”31  Since 1986, MCFL 501(c)(4)s—called  “Qual­i­fied Nonprofit Corpor­a­tions” (QNCs) by the FEC—­could already use general treas­ury funds to pay for inde­pend­ent expendit­ures and elec­tion­eer­ing commu­nic­a­tions in federal elec­tions.  But there was a major gap in what was disclosed: the FEC’s forms only required MCFLs to report earmarked contri­bu­tions.[32]  In other words, so long as a donor does not earmark the dona­tion for the ad, that donor remains anonym­ous. [33]

      Nonprofit organ­iz­a­tions have  made signi­fic­ant amounts of inde­pend­ent expendit­ures in federal races without ever having to disclose the iden­tity of their funders.  For example, in 2008, the NRA and the Defend­ers of Wild­life, both 501(c)(4)s, spent $17 million and $3 million respect­ively on inde­pend­ent expendit­ures advoc­at­ing for the elec­tion or defeat of federal candid­ates.[34]  The current disclos­ure regime, however, does not require disclos­ure of the sources of the funds used to pay for such expendit­ures—as a result, the funders of these ads remain unknown. 

      Simil­arly, the Commit­tee for Truth in Polit­ics, a 501(c)(4) iron­ic­ally dedic­ated to “honesty in govern­ment,” aired decept­ive tele­vi­sion advert­ise­ments attack­ing finan­cial reform and Senat­ors Max Baucus and Jon Tester just this year.  The Commit­tee for Truth in Polit­ics has refused to make the minimal disclos­ures required by current law. [35]  But even if it had complied with exist­ing law, it still would not have to identify the source of its funds.

      Federal disclos­ure require­ments need to be strengthened so that those who fund these ads are actu­ally disclosed to the public.  Section 211 of the DISCLOSE Act ends this anonym­ous donor prob­lem by requir­ing, for the first time, that all donors over certain dollar thresholds be named in public reports to the FEC. 

      2.      Disclaimer Flaws

        Currently, federal disclaim­ers only require iden­ti­fic­a­tion of the spon­sor­ing organ­iz­a­tion.  Too often, however, this organ­iz­a­tional name is that of a benign-sound­ing shell entity created solely for the elec­tion.  Use of front groups veil that under­ly­ing funders are actu­ally busi­ness corpor­a­tions with specific, profit-driven agen­das.  Examples from the states illus­trate this prob­lem.

        In a recent Color­ado ballot meas­ure elec­tion, for example, a group called “Littleton Neigh­bors Voting No” spent $170,000 to defeat a zoning restric­tion that would have preven­ted a new Wal-Mart. When the disclos­ure reports for these groups were filed, it was revealed that “Littleton Neigh­bors” was exclus­ively funded by Wal-Mart, and not a grass roots organ­iz­a­tion. The DISCLOSE Act’s top donor disclaimer approach would have made Wal-Mart’s parti­cip­a­tion evid­ent on the face of the advert­ise­ments and empowered voters with the inform­a­tion neces­sary to make an informed decision.

        The top five donor disclaimer would also have helped identify that in Flor­id­a’s 2006 gubernat­orial primary, the US Sugar Corpor­a­tion funneled approx­im­ately $1 million in inde­pend­ent expendit­ures through decept­ively-named fronts—“Flor­id­a’s Work­ing Famil­ies” and “The Coali­tion for Justice and Equal­ity.”[36]  US Sugar was the largest contrib­utor to each of these commit­tees, provid­ing $700,000 of the $1 million spent by the Coali­tion for Justice and Equal­ity and $200,000 of Flor­id­a’s Work­ing Famil­ies’ $275,000 budget.[37]  These expendit­ures were all made in support of Candid­ate Rod Smith and totaled 30% of the expendit­ures that candid­ate Smith spent in the primary.[38]  Had Flor­ida required disclaim­ers analog­ous to the DISCLOSE Act’s major donor disclaim­ers, the public would have been well aware of US Sugar’s lead­ing role in these seem­ingly grass­roots commit­tees, thereby provid­ing valu­able voter inform­a­tion and allow­ing detec­tion of any quid pro quo arrange­ments. 

        Similar ads from veiled polit­ical actors could be seen in the federal sphere as soon the midterm elec­tions.  This is yet another reason that the DISCLOSE Act is neces­sary. 

        C.    Hidden Spend­ing through Trade Asso­ci­ations

          The DISCLOSE Act will also address a very seri­ous prob­lem that has allowed trade asso­ci­ations to shield corpor­ate polit­ical spend­ing from the public eye.  Trade asso­ci­ations organ­ized under section 501(c)(6) of Internal Revenue Code are currently not required to divulge the iden­tity of those fund­ing their polit­ical activ­it­ies; simil­arly, most corpor­a­tions do not reveal how much they have given to trade asso­ci­ations.[39]  Thus, corpor­a­tions have long made anonym­ous contri­bu­tions to trade asso­ci­ations, allow­ing them to engage in polit­ical spend­ing for corpor­ate interests.[40]  The effects are severely troub­ling:

          The use of trade asso­ci­ations as conduits for polit­ical spend­ing allows compan­ies to give polit­ical money and then claim they didn’t know that it ended up support­ing organ­iz­a­tions and candid­ates with which they may not want to be publicly asso­ci­ated. It also prevents investors and direct­ors from learn­ing about indir­ect corpor­ate polit­ical spend­ing and being able to eval­u­ate the risks that trade asso­ci­ation spend­ing creates for share­holder value.[41]

          Trade asso­ci­ations pose a partic­u­larly trouble­some prob­lem after Citizens United.  As noted above, federal law pre-Citizens United required trade asso­ci­ations to pay for express advocacy through a PAC.[42]  Now, trade asso­ci­ations can spend directly out of their corpor­ate treas­ur­ies which, in turn, can be funded by the corpor­ate treas­ur­ies of their members. [43]  Thus, trade asso­ci­ations hold the poten­tial for an end-run around disclos­ure of unres­tric­ted corpor­ate elec­tion-related spend­ing.

          The threat of secret­ive trade asso­ci­ation spend­ing is not a theor­et­ical fear.  This is already a demon­strated prob­lem in several states.  For instance, in a 2000 Michigan senate race, Microsoft used the US Cham­ber of Commerce to fund $250,000 in attack ads against a candid­ate.  Microsoft’s involve­ment in the elec­tion would have gone unre­por­ted but for the efforts of an invest­ig­at­ive journ­al­ist who exposed the expendit­ure.[44]  Unfor­tu­nately, the Cham­ber has been allowed to keep the under­ly­ing contrib­ut­ing corpor­a­tions secret.  Consequently, “the public will never know who is fund­ing the Cham­ber’s attack ads and get-out-the-vote efforts because the Cham­ber … is not required to item­ize its polit­ical activ­it­ies.”[45]

          Moreover, as the Cham­ber acts as a black box cloak­ing the polit­ical spend­ing of its corpor­ate members, the Cham­ber itself can cloak its role in polit­ics by hiding behind other groups.  A recent example of this was revealed in the case Voters Educa­tion Commit­tee v. Wash­ing­ton State Public Disclos­ure Commis­sion.[46]   As this litig­a­tion unearthed, the Cham­ber had given $1.5 million dollars to a group called the “Voters Educa­tion Commit­tee,” which spent the money on polit­ical tele­vi­sion advert­ise­ments in a state attor­ney general elec­tion without disclos­ing inform­a­tion about its contri­bu­tions and expendit­ures.[47]  The DISCLOSE Act’s trans­fer provi­sions would have made spend­ing like this trans­par­ent in the federal context.

          Finally, there is already evid­ence that these covert spend­ing examples from the states may repeat them­selves in federal elec­tions as soon as this Fall.  Just a few weeks after Citizens United, one of the coun­try’s largest law firms advised its corpor­ate clients that trade organ­iz­a­tions could provide “suffi­cient cover” from disclos­ure.[48]  The press has also repor­ted that the Cham­ber plans to spend at least $50 million on polit­ical races and related activ­it­ies in 2010—a 40% increase from 2008.  It expects to focus on about 10 Senate races and up to 40 House districts where it will target vulner­able Demo­crats with campaign advert­ise­ments, among other efforts.[49]  Since corpor­ate contri­bu­tions to federal candid­ates are banned, it is almost certain a signi­fic­ant portion of this money will be spent on inde­pend­ent expendit­ures.  The shear magnitude of the Cham­ber’s spend­ing capab­il­it­ies makes disclos­ure of the Cham­ber’s funders essen­tial, espe­cially when that spend­ing is compared to aver­age expendit­ures by candid­ates.  (In 2008, winning Senate candid­ates spent $7.5 million on aver­age, and winning house candid­ates spent $1.4 million—­far less than the Cham­ber’s capab­il­it­ies.[50])   

          Indeed, some veiled spend­ing by trade organ­iz­a­tions in the 2010 elec­tions is already under­way.  Amer­ic­ans for Job Secur­ity, a 501(c)(6), has reportedly spent over $1 million on advert­ise­ments attack­ing a candid­ate in the Arkan­sas demo­cratic congres­sional primary.[51]  Although Amer­ic­ans for Job Secur­ity need not disclose the iden­tity of its contrib­ut­ors under current law, the targeted candid­ate has filed a complaint with the FEC demand­ing that the under­ly­ing donors be iden­ti­fied.[52]  The DISCLOSE Act would elim­in­ate this black box spend­ing by requir­ing trade asso­ci­ations who fund elec­tion­eer­ing commu­nic­a­tions and inde­pend­ent expendit­ures to name their donors over a certain dollar threshold. 

          Part IV.          
          Beyond Disclos­ure to Full Reform

          The public anger surround­ing Citizens United[53] provides Congress with a ripe oppor­tun­ity to strengthen federal disclos­ure and disclaimer provi­sions to ensure that voters are fully aware of who is trying to sway their vote in national elec­tions.  There is no doubt that the DISCLOSE Act will improve our system of fund­ing elec­tion­s—­Con­gress should certainly pass it without hesit­a­tion.  By itself, however, it cannot remedy our demo­cracy’s deeper malfunc­tions. To put voters back in the center of our demo­cratic process, addi­tional reforms are neces­sary.

          First, as we have detailed in previ­ous testi­mony before this Commit­tee, Congress has the author­ity to modify the secur­it­ies law to address the prob­lem of corpor­ate managers using other people’s money in polit­ics. [54]  Congress should provide share­hold­ers in publicly traded compan­ies the right to vote on corpor­ate polit­ical expendit­ures and require that corpor­ate boards author­ize partic­u­larly large polit­ical expendit­ures.  The Share­holder Protec­tion Act, H.R. 4790, would provide these safe­guards for share­hold­ers who are presently unwit­tingly foot­ing the bill for corpor­ate polit­ical spend­ing.

          Further­more, and on a more funda­mental level, Congress should embrace small donor public finan­cing like that proposed by the Fair Elec­tions Now Act (FENA), H.R. 1826.  FENA would provide qual­i­fied candid­ates an initial grant, plus a four-to-one match of indi­vidual contri­bu­tions of up to $100.  The multiple match­ing funds compon­ent would not only amplify the influ­ence of small-donor citizens, it would encour­age candid­ates to seek contri­bu­tions from a broad, and presum­ably more diverse, constitu­ent base. 

          We encour­age this Commit­tee to hold hear­ings on FENA as soon as possible so that members and the public can learn more about this vital reform meas­ure. Moreover, Congress should push FENA to the front of its legis­lat­ive agenda—our demo­cracy is in urgent need of a systemic reform to improve the dynam­ics of campaign fundrais­ing and cannot afford to wait any longer.

          Conclu­sion

          The DISCLOSE Act closes long­stand­ing loop­holes that have permit­ted veiled polit­ical actors to escape full trans­par­ency. We urge Congress to pass this legis­la­tion as quickly as possible in order to ensure the source of corpor­ate money in the upcom­ing elec­tion is fully self-evid­ent.

           

          Appendix A – History of Federal Disclos­ure Laws

           

          Corpor­ate contri­bu­tions were outlawed in 1907 to prevent excess­ive corpor­ate influ­ence during the Gilded Age.  As illus­trated below, corpor­ate polit­ical spend­ing was restric­ted from then on, until Citizens United turned history on its head. 

          A.        Early Disclos­ure Laws

          In the words of Professor Frank Pasquale,

          The story of campaign finance reform prop­erly begins in the “Gilded Age,” when a vari­ety of polit­ical reform move­ments began to ques­tion the grow­ing influ­ence of trusts and other organ­ized economic interests within the Amer­ican demo­cratic system. Polit­ical devel­op­ments of this era alarmed many. Graft and corrup­tion had reached aston­ish­ing levels.[55]

          Or, as satir­ist Mark Twain put it in 1873, “I think I can say, and say with pride that we have some legis­latures that bring higher prices than any in the world.”[56]

          From that time on, corpor­a­tions have used their enorm­ous coffers to wield signi­fic­ant control over govern­ment.  Since as early as 1890, reports surfaced that the rail­road industry in Pennsylvania wiel­ded so much influ­ence that it “dictated who shall repres­ent the state in the United States Senate, selects its own candid­ates for Governor.” [57]  A news­pa­per even repor­ted that the employ­ees of rail­road compan­ies would often speak and some­times preside over legis­lat­ive sessions, despite the fact that they were not elec­ted offi­cials.  Refer­ring to William Latta, then General Agent of the Pennsylvania Rail­road, The New York Times repor­ted that

          [Latta] for many years worked openly and above board as the recog­nized repres­ent­at­ive of the Pennsylvania Road and has a seat in the select coun­cil cham­ber at its regu­lar meet­ings every Thursday, and uses his priv­ilege with so much free­dom that he calls the pages, sends notes to the members, and simply indic­ates to them what he wants done and directs what they shall do.[58]

          Despite the troub­ling, outsized influ­ence corpor­a­tions yiel­ded, it took decades and the New York Life Insur­ance Scan­dal of 1905 before Congress would step in to try to address the prob­lem through federal contri­bu­tion limits and disclos­ure laws.

          The prob­lem of veiled corpor­ate polit­ical expendit­ures domin­ated the national conscious­ness in 1905.[59]  This was the year when the public discovered that the biggest insur­ance compan­ies in the coun­try had given vast sums of money to the Repub­lican Party using policy holder money, includ­ing for the 1904 re-elec­tion of Theodore Roosevelt.[60]  Besides the prob­lem of using other people’s money in polit­ics, the public was outraged when they learned that this spend­ing had been done covertly as a series of secret back­room deals.

          Congress’ response was two-fold.  First, it passed the Till­man Act in 1907, prohib­it­ing corpor­a­tions from making contri­bu­tions to candid­ates for federal office.[61]  Shortly there­after, Congress passed the Publi­city Act of 1910, the first federal law to require public disclos­ure of finan­cial spend­ing by polit­ical parties.[62]  This law required polit­ical commit­tees to disclose the names of all contrib­ut­ors of $100 or more and iden­ti­fic­a­tion of recip­i­ents of expendit­ures of $10 or more was also required.[63]  In 1911, the Act was revised to include conven­tions and primary campaigns.[64]

          Follow­ing the Teapot Dome scan­dal, a pay-to-play scheme where oil compan­ies gave payoffs to federal offi­cials in exchange for oil leases, the federal disclos­ure require­ments were expan­ded in the Federal Corrupt Prac­tices Act of 1925.[65]  That Act required polit­ical commit­tees to report total contri­bu­tions and expendit­ures, includ­ing the names and addresses of contrib­ut­ors of $100 or more and recip­i­ents of $10 or more in a calen­dar year.[66]  The 1925 Act was largely a dead letter because of lack of enforce­ment.[67]

          B.        FECA

          The Federal Elec­tion Campaign Act of 1971 (“FECA 71”) replaced the 1925 law.[68]  It was signed into law by Repub­lican Pres­id­ent Richard Nixon who would soon be entangled in its mech­an­isms.[69] FECA 71 estab­lished proced­ures for monit­or­ing and audit­ing campaign funds and applied to both primary and general elec­tions. 

          One of the many unseemly revel­a­tions from the invest­ig­a­tion of Nixon’s Water­gate scan­dal was the extent of corpor­ate polit­ical involve­ment, despite the corpor­ate contri­bu­tion ban:

          [O]ne of the most disturb­ing find­ings was the large number of illegal corpor­ate campaign contri­bu­tions.  Nine­teen compan­ies pleaded guilty to charges by the Water­gate special prosec­utor that they had viol­ated a federal crim­inal statue barring corpor­a­tions from contrib­ut­ing their funds to candid­ates for federal office.[70]

          Moreover, the Water­gate invest­ig­a­tions revealed that corpor­a­tions were not prop­erly disclos­ing how their money was being spent, leav­ing investors and voters in the dark.  For example, oil compan­ies were caught giving large, illegal and secret­ive contri­bu­tions to Nixon’s Commit­tee to Re-Elect the Pres­id­ent (CREEP).[71]  But the oil compan­ies were hardly unique.  Other indus­tries also gave covert and illegal contri­bu­tions too.[72]

          Post-Water­gate, FECA was amended in 1974 to address these prob­lems as well as others.  Under FECA 74, corpor­a­tions and labor unions were prohib­ited from using their general treas­ury funds to “make a contri­bu­tion or expendit­ure in connec­tion with any elec­tion to any polit­ical office.”[73]  FECA 74 also estab­lished a compre­hens­ive disclos­ure regime, requir­ing that contri­bu­tions to candid­ates and polit­ical commit­tees by fully disclosed and that inde­pend­ent spender disclose money spent on express advocacy.[74]  Finally, the law created the Federal Elec­tion Commis­sion (FEC) as an inde­pend­ent agency with the author­ity to admin­is­ter and enforce campaign finance laws.

          C.        BCRA

          While corpor­ate bans were in place in the 1990s, corpor­a­tions found two loop­holes to insert their money into the elect­oral process.  One was by giving soft money dona­tions to polit­ical parties.  Another tactic was fund­ing sham issue ads—ads which purport to be about an issue but attack or praise a candid­ate for federal office right before his or her elec­tion.  Funders of these sham ads often hid behind fake or mislead­ing names.[75]

          In spite of these prob­lems, it took the implo­sion and bank­ruptcy of Enron, a huge campaign contrib­utor to both polit­ical parties, before BCRA was finally passed after years of attempts.76 BCRA closed both the soft money and the sham issue ad loop­holes.  Of partic­u­lar relev­ance here, BCRA created regu­la­tions for elec­tion­eer­ing commu­nic­a­tions, includ­ing a compre­hens­ive disclos­ure regime for such commu­nic­a­tions.  As explained above, these provi­sions were upheld by the Court in McCon­nell and Citizens United eight to one.

          As this histor­ical review shows, there have been long cycles of grave scan­dals followed by reform efforts.  Congress need not wait for a crisis, however, before it acts.  Instead, given what we have learned from the past, Congress should set reas­on­able disclos­ure rules now so that the next scan­dal is preven­ted or mitig­ated.

           


          Full foot­notes avail­able in pdf docu­ment: Down­load testi­mony [pdf]

          1 This testi­mony is the product of the collab­or­at­ive efforts of several lawyers at the Bren­nan Center includ­ing Susan Liss, Demo­cracy Program Director; Ciara Torres-Spel­liscy, Coun­sel; Angela Migally, Coun­sel; and Mimi Marzi­ani, Katz Fellow and Coun­sel.

          2  A full discus­sion of the history of federal campaign finance disclos­ure laws is set forth in Appendix A.