November 1, 1999
Jonathan G. Katz, Secretary
Securities and Exchange Commission
450 Fifth St., NW
Washington, DC 20549-0609
Re: File No. S7-19-99
Dear Mr. Katz:
On August 10, 1999, the Securities and Exchange Commission (SEC) published proposed rules aimed at ensuring that political contributions by investment advisers do not influence the awarding of contracts to advise State and local governmental agencies with respect to public pension plan assets. These rules, when applied to Federal elections, would impose direct and indirect prohibitions that intersect with, or are more restrictive than, the requirements of the Federal Election Campaign Act of 1971, as amended, 2 USC § 431 et seq. (FECA). As such, it is our considered view that these rules encroach upon the exclusive domain of the FECA.1
We offer these comments as individual Members of the Federal Election Commission. They do not represent the views of our non-signatory colleagues or of the Commission as a whole.
The SEC's claimed authority to promulgate the proposed regulations is based upon the Investment Advisors Act of 1940 (IAA), specifically 15 USC § 80b-6(4), which provides as follows:
It shall be unlawful for any investment advisor, by use of the mails or any means or instrumentality of interstate commerce, directly or indirectly-(4) to engage in any act, practice, or course of business which is fraudulent, deceptive or manipulative. The Commission shall, for the purposes of this paragraph (4) by rules and regulations define, and prescribe means reasonably designed to prevent, such acts, practices, and courses of business as are fraudulent, deceptive or manipulative.
The proposed rules provide that an investment adviser that is eligible for registration with the SEC cannot provide advisory services for compensation to a government entity within two years after the adviser (or any of his or her partners, executive officers, or solicitors) makes a contribution to an official of that government entity. Proposed 17 CFR § 275.206(4)-5(a)(1)(i)-(ii).2 This prohibition also applies to any political action committee (PAC) controlled by the investment adviser or any of his or her partners, executive officers, or solicitors. Proposed 17 CFR § 275.206(4)-5(a)(1)(iii).
The regulations would also prohibit an investment adviser that is eligible for registration with the SEC (or any of his or her partners, executive officers, or solicitors) from soliciting any person or PAC to make or coordinate a contribution to an official of a government entity to which the adviser is providing, or seeking to provide advisory services; or (as a loophole closer) "to do anything indirectly which, if done directly, would result in a violation" of the new rules. Proposed 17 CFR § 275.206(4)-5(a)(2)(i)-(ii).
The prohibition on solicitation or coordination is aimed at a number of practices, including "bundling" contributions from employees or by making contributions through a third party, such as in a "swap," i.e., where a soliciting person arranges that the adviser of Plan A give to the trustee of Plan B, while the adviser of Plan B gives to the trustee of Plan A. 64 Fed. Reg. at 43563. The proscription on indirectly doing what cannot be done directly is also aimed at investment advisers who compel contributions by persons who are not covered or who fund contributions made by others. Id.
Finally, the proposed regulations also contain recordkeeping requirements on investment advisers. These records are to be maintained for a period of five years after the end of the fiscal year during which the last entry was made, including two years of maintenance in an appropriate office of the investment adviser. Proposed 17 CFR § 275.204-2(e)(1). The regulations would require the maintenance of records of all direct or indirect contributions or payments by the investment advisor, any of its partners, executives, or solicitors, or PAC controlled by any of the aforementioned persons, to an official, a political party of a State or political subdivision, or a PAC. Proposed 17 CFR § 275.204-2(l)(1)(iv). These must be chronological records of the name and title of each contributor, the name and title (including city, county, State or other subdivision) of the recipient, and the amount and date of the contribution or payment. Proposed 17 § CFR 275.204-2(l)(2)(i)-(iii).
The legislative history of 2 U.S.C. § 453, which provides that the FECA's provisions and Federal Election Commission (FEC) regulations "supersede and preempt any provision of State law with respect to election to Federal office," demonstrate that the FECA is a comprehensive statutory scheme intended by Congress to occupy the field of regulating federal elections. The House committee drafting this provision explained that it is intended "to make certain that the Federal law is construed to occupy the field with respect to elections to federal office and that the Federal law will be the sole authority under which such election will be regulated." H.R. Rep. No. 93-1239, 93d Cong., 2d Sess. 10 (1974). In addition, the conference committee report on the 1974 amendments to the FECA states that "Federal law occupies the field with respect to . . . the source of campaign funds in federal races [and to] the conduct of Federal campaigns." H.R. Rep. No. 93-1438, 93d Cong., 2d Sess. 69 (1974).
In addition, the FECA, at 2 USC § 437c(b)(1), grants to the FEC the sole jurisdiction to enforce the provisions contained within the FECA's covered area:
The Commission shall administer, seek to obtain compliance with, and formulate policy with respect to, this Act and chapter 95 and chapter 96 of title 26. The Commission shall have exclusive jurisdiction with respect to the civil enforcement of such provisions.
This provision demonstrates, at a minimum, an intent by Congress to have a single agency prosecute violations of, among other things, campaign contribution limits and record keeping requirements. See FEC v. National Conservative Political Action Comm., 470 U.S. 480, 505 (J. White, dissenting) ("The reference to `exclusive' [in § 437c(b)(1)] was designed to centralize all governmental enforcement authority in the FEC." (Emphasis in original.)]
In the context of state preemption the FEC has had occasion to address a variety of laws addressed to the activity of state officials in the context of those officials' federal campaign activity. Both the FEC and the courts have consistently held that the FECA forbids the application of state laws to federal campaign activity. See Teper v. Miller, 82 F. 3rd 989 11th Cir. (1996) (invalidating state law prohibiting members of state assembly from accepting political contributions while in session) (as applied to federal contributions); FEC Advisory Opinion 1978-66 (pre-empting state law prohibiting contributions by lobbyists to state officers); Advisory Opinion 1988-21 (preempting a local ordinance limiting contributions from "influence brokers"); Advisory Opinion 1989-12 (preempting state statute prohibiting political contributions by vendors to a state lottery board, and precluding contributors from contracting with the lottery commission); Advisory Opinion 1992-43 (preempting state law restricting solicitation or receipt of contributions for debt retirement during legislative sessions); Advisory Opinion 1993-14 (prohibiting application of state reporting requirements to the federal committee of a state political party.)
It is beyond dispute that a state statute imposing restrictions on investment advisors' contributions to state officials could not be applied to state officials' Federal campaign activity. Thus, an effort by the SEC to impose restrictions on the Federal campaign activity of state officials solely due to their state office is at direct variance with the purpose and intent of the FECA's state preemption.
The FECA carefully enumerates several classes of persons who are prohibited from making contributions to federal election campaigns: labor unions, corporations and national banks (§ 441b); government contractors (§ 441c); and foreign nationals (§ 441e). The SEC effectively proposes to add an additional class of persons - those regulated by the IAA - as prohibited from making contributions to certain federal campaigns, requiring record keeping as to all contributions, and imposing significant penalties for certain contributions. If Congress had wished to extend the FECA contribution prohibition which applies to national banks to investment banks, it could have done so, just as it extended the corporate prohibition to labor unions in 1947.
Even in the specific instances in which certain business entities are prohibited from contributing to Federal campaigns, Congress explicitly permitted employees of those entities to make voluntary political contributions through separate segregated funds, and explicitly permitted corporate solicitation of employees for that purpose (including solicitations for earmarked contributions)(§ 441b(b)(2)(C)). In remarkable contrast, the SEC proposes not only to ban certain contributions by certain business entities, but to extend that ban to SSFs and even to individual employees.
The proposed SEC rules regarding de minimis contributions by individuals would also directly conflict with the considered and specific judgments of Congress regarding contribution limits in Federal campaigns. In the context of Federal campaigns, Congress has determined that individual contributions in amounts less than $1,000 do not raise a threat of corruption (or even the appearance of corruption). In the context of state and local elections, which may involve far smaller electoral districts with lower prevailing spending levels, and where in some cases no restrictions are imposed on the size and source of contributions, the SEC may well have reason to impose limitations on investment advisors and, within reason, to calibrate those limits. In the context of Federal elections, the SEC's preliminary judgment that a $250 rather than $1,000 limit is necessary to prevent corruption represents a direct conflict with the judgment of Congress expressed in the FECA.
The SEC's de minimis exception would apply only to contributions to candidates for whom an individual is eligible to vote. Again, this is in direct conflict with the judgment of Congress, which not only permits interstate contributions, but which explicitly pre-empted state laws in part to eliminate bans on interstate contributions. See 2 USC § 453; 11 CFR § 108.7(b)(3).
The proposed regulations also contain direct prohibitions on solicitations by a discrete group of persons or individuals associated with investment advisers. The FECA proscribes solicitation of contributions to separate segregated funds (SSFs) in specific, limited cases, i.e., by corporations and labor organizations beyond a solicitable class, and of Federal contractors and foreign nationals. 2 USC §§ 441b(b)(4), 441c, and 441e. Thus, the proposed regulations add prohibitions with respect to Federal elections that are not found in the FECA.
In addition, the proposed regulation's explicit prohibition on doing anything indirectly that cannot be directly done overlaps with the FECA's prohibitions on contributions in the name of another and with the prohibition on coercing contributions by employees to an SSF (where the contribution is earmarked for, or otherwise directed to, a candidate). 2 USC §§ 441f and 441b(b)(3). Both the proposed solicitation prohibition and the prohibition related to indirect actions make unlawful certain activities that may not necessarily be proscribed by the FECA. These include bundling, which may or may not result in excessive contributions, depending upon whether the bundler exercises direction or control over the contributions; and the above-described "swap," where a mere arrangement to contribute to each other's desired recipients might not quite qualify as a contribution in the name of another, if there is no direct or indirect reimbursement. See 2 USC § 441f and 11 CFR § 110.6(d).
The proposed recordkeeping provisions, as they pertain to Federal contributions, would impose obligations on entities (investment advising companies) that do not have to keep such records under the FECA. Compare 2 USC § 432(c) and (d); 11 CFR § 102.9 and 102.6(c)(6). In addition, they impose a longer retention period and a restriction on the location of the records. Compare 2 USC § 432(d); 11 CFR §§ 102.6(c)(6) and 102.9(c).
The reality and significance of the conflicts between the proposed regulation and the FECA are illustrated by the disparate impact the regulation would have as applied to Federal candidates. As applied to state and local candidates, the contribution prohibitions have the effect of discouraging and penalizing contributions to all candidates. As applied to Federal candidates, some candidates will be affected while other candidates for the same office would not be affected. For instance, the Governors of Delaware and Missouri and the Mayor of New York are currently candidates for the United States Senate; each would find their fundraising affected by the proposed rule while their opponents would not. Congress evidenced significant concern for equity in the FECA (as for instance between corporations and labor unions), and the Supreme Court observed that disparate effects between classes of Federal candidates could give rise to constitutional concerns. Buckley v. Valeo, 424 U.S. 1, 30-35 (1976).
Among incumbent U.S. Senators, four were elected to the Senate while serving as governor, 12 while serving in other statewide office, and five from local office. An additional 21 of the currently serving Senators were first elected to Federal office (often the U.S. House) while serving in their state legislature. Thus, 42 of the 100 incumbent U.S. Senators would have had their first successful federal campaigns affected by the proposed regulation. The two most recent Democratic Presidential nominees (including President Clinton) were sitting Governors while seeking the presidency, as is the apparent front runner for the 2000 Republican nomination. Of course, the SEC has already taken several enforcement actions under Rule G-37 for contributions to Federal campaigns. Thus, the predictable effects of the proposed rule on Federal campaigns are neither conjectural nor insignificant.
Curiously, the proposed rule would appear to have little purpose in the context of Federal campaigns. Assuming any contributions achieved the intended purpose of electing a state or local official to federal office, the official would quickly lose any ability to reward or favor contributors through actions of the state or local government. Conversely, the SEC rule would provide no protection against an incumbent state or local officeholder taking retaliatory actions on the basis of contributions to an opponent for Federal office.
The disparate impact as applied to federal candidates and the dubious utility of the rules in that context indicate that the proposed rule is not well tailored to avoid unnecessary conflicts with the FECA in advancing whatever interests may be served by this proposed extension of the IAA.
In sum, the conflicts between the proposed regulations and the FECA are pervasive as to the overall scheme of the FECA, and direct on many specific points. The proposed regulation would prohibit certain activities explicitly permitted by the FECA (such as certain corporate solicitations of employees). Attempts by the SEC to enforce several aspects of the proposed regulations would inescapably trespass on the FEC's exclusive jurisdiction to enforce the FECA. An attempt by the SEC to punish an investment advisor for making a reimbursed or conduit contribution to a Federal campaign would directly conflict with the FEC's exclusive jurisdiction to enforce section 441f. An attempt to regulate solicitations of employees by an incorporated investment advisor would conflict with the FEC's exclusive jurisdiction as to section 441b(b) (permitting such solicitations, but prohibiting coercion, requiring certain notices, and limiting the methods and persons who may be solicited).
Were the issue of whether the FECA occupies the field of federal campaign finance regulation submitted to a federal court, the principles resolving the question are clear. The Supreme Court has stated that statutes containing specific remedies control general remedies in the absence of evidence to the contrary:
It is a basic principle of statutory construction that a statute dealing with a narrow, precise, and specific subject is not submerged by a later enacted statute covering a more generalized spectrum. "When there is no clear intention otherwise, a specific statute will not be controlled or nullified by a general one, regardless of the priority of enactment."
Radzanower v. Touche Ross & Co., 426 U.S. 148, 153 (1976) (quoting Morton v. Mancari, 417 U.S. 535, 550-51 (1974); see also Brown v. General Servs. Admin., 425 U.S. 820, 834 (1976) ("In a variety of contexts the Court has held that a precisely drawn, detailed statute pre-empts more general remedies."). When Congress focuses on a subject with specificity, these intentions must prevail over instances when the same subject is treated with less precision:
"The reason and philosophy of the rule is, that when the mind of the legislator has been turned to the details of a subject, and he has acted upon it, a subsequent statute in general terms, or treating the subject in a general matter, and not expressly contradicting the original act, shall not be considered as intended to affect the more particular or positive previous provisions, unless it is absolutely necessary to give the later act such a construction, in order that its words shall have any meaning at all." [Radzanower, 426 U.S. at 153 (quoting T. Sedgwick, The Interpretation and Construction of Statutory and Constitutional Law 98 (2d ed. 1874).]
These principles were applied in Galliano v. United States Postal Service, 836 F.2d 1362 (D.C. Cir. 1988), where the FECA was alleged and held to occupy the field vis-à-vis a Postal Service statute with respect to the name identification and disclaimer provisions the FECA specifically regulates. There, an unauthorized political committee advocating the re-election of a U.S. Senator brought an action seeking review of a Postal Service decision applying its statute to mailings by the PAC that it considered to be devices for obtaining money by means of false representations in its mailed solicitations. The key issue at the appellate level was whether the Postal Service could impose constraints on the names and disclaimers of the unauthorized committee beyond those imposed by the FECA (and hence, by the Commission). The court discussed the tension between the general false representation claims of the postal statute and the specific disclaimer and name identification provisions of the FECA and focused on two competing principles.
The first, as mentioned above, is that "a precisely drawn, detailed statute pre-empts more general remedies," and that "[w]hen there is no clear intention otherwise, a specific statute will not be nullified by a general one, regardless of the priority of enactment." Galliano, 836 F.2d at 1367 (citations omitted). The second is that "when two statutes are capable of co-existence, it is the duty of the courts, absent a clearly expressed congressional intention to the contrary, to regard each as effective," and "that when two regulatory systems are applicable to a certain subject matter, they are to be reconciled and, to the extent possible, both given effect." Id. (citations omitted).
The court noted that, unlike the general postal statutes on fraud, the "`precisely drawn, detailed' prescriptions of FECA" "were framed with the particular problems Congress identified in political solicitations in clear focus, and with first amendment concerns in plain view." Id. at 1368. The court discussed the above-cited legislative history and stated that it was consistent with the Commission's view that "responsibility for the civil enforcement of matters specifically covered by the Act" were placed "exclusively in the Commission's hands in the first instance." Id. The court resolved the case by concluding that the Commission is the "exclusive arbiter" of questions concerning the name identifications and disclaimers of organizations soliciting political contributions but that false representations that are not covered by the FECA within the mailings, e.g., statements as to what the committee raised and contributed, would be subject to the more general postal law. Id. at 1370.
The principles that can be gleaned from this decision are the FECA's specificity as to the conduct to be governed by the proposed rules and the constitutional principles specifically considered in the enactment of the FECA. The court stated that, in enacting the name identification and disclaimer principles, Congress specifically focused on First Amendment concerns. Congress deliberately struck a fine balance of interests, and the FECA's provisions were meant to provide a safe haven from further restraints for candidates and political committees with respect to names and disclaimers, such as the more general restraints imposed by the postal statute. Id. at 1370.
In this case, the more specific statute is clearly the FECA, not the IAA. The FECA applies specifically to receipts and disbursements for the purpose of influencing a Federal election, while the relevant text of the IAA, upon which the proposed regulations are based, are anti-fraud, deception and manipulation provisions that do not specifically address elections or election-influencing activity. Only by regulation does the SEC put itself into a position to regulate such activity. Indeed, the IAA does not even mention the underlying evil sought to be addressed by the FECA's contribution limits -- "prevention of corruption and the appearance of corruption spawned by the real or imagined coercive influence of large financial contributions on candidates' positions and on their actions if elected to office." Buckley v. Valeo, 424 U.S. 1, 25 (1976). In this sense, the FECA and the IAA are not in tension. Rather, the proposed regulations, as applied to federal campaigns, are beyond the authority of the SEC to promulgate. See 5 USC § 706(2)(C).
In addition, the IAA was not drawn with the First Amendment even on the horizon. Unlike the general SEC statute addressing fraud, deception and manipulation, the "'precisely drawn, detailed' prescriptions of FECA" were framed with the particular problems Congress identified with contributions, solicitations for the same, and record keeping in clear focus, and with First Amendment concerns in plain view. Consequently, the FECA occupies the field on which the SEC proposes to tread.
For the foregoing reasons, the undersigned three members of the Federal Election Commission suggest that the proposed regulations not be applied to persons making contributions to federal campaigns.
Darryl R. Wold
Lee Ann Elliott
David M. Mason
1 The proposed prohibitions are modeled after Municipal Securities Rulemaking Board Rule G-37, which was approved by the SEC in 1994 to end the so-called "pay-to-play" practices by broker-dealers in the municipal securities market. While these rules generally govern contributions by regulated entities to the campaigns of state and local officials who have authority over bond issues, they have been interpreted to apply to contributions to Federal campaign committees of any affected state or local officials. The rule was challenged on constitutional grounds and upheld. Blount v. SEC, 61 F.3d 938 (D.C. Cir. 1995). The plaintiff, however, did not raise, and the court did not consider, any arguments regarding statutory conflicts with the FECA.
2 Included in this group is anyone who becomes a partner, executive officer, or solicitor within two years after the contribution is made.