1. a proposal by Commissioners Michael Toner and Scott Thomas that was a limited version of the proposed rule;
2. a motion by Toner to adopt the portion of the Toner-Thomas proposal dealing with allocation of federal and non-federal funds by a regulated political committee; and
3. a motion by Toner to adopt the proposed rule but delay the effective date until January 2005.

The FEC's discussion of what action it might take at the end of 90 days (mid-August) revealed a wide range of possibilities, including:

1. adopt a new rule on allocation of federal and non-federal funds;
2. issue a new, revised proposed rule for public comment;
3. "codify" their ruling in Advisory Opinion 2000-37, Americans for a Better Country, the controversial proceeding that led to the rulemaking; and
4. seek guidance from Congress.

The commissioners‰?Ámp;#8364;? discussion at their May 13 meeting on the motions and possible future action are helpful, but give no clear indication of what direction they will take. The issues discussed include:

• Treatment of 501(c) Organizations
• Use of the Tax Code and IRS Regulations for Election Law Purposes
• Definitions of the "Major Purpose" of an Organization
• Definitions of "Promote, Support, Attack or Oppose" a Federal Candidate
• Problems the FEC Faces
• Consequences of FEC Action
• Intent of Congress
• Allocation Rules for Regulated Political Committees

The FEC's counsel, Lawrence Norton, explained that he proposed the 90-day delay because the Commission needs to extra time to study the potential consequences of any action taken He said the FEC may issue a new rule, make a new proposed rule or look to Congress for guidance, but should make an effort to come up with final rules. He said they are not foot dragging, and will continue with enforcement proceedings. The Republican National Committee filed enforcement complaints against three groups- American Coming Together (ACT), the Media Fund and America Votes- that have received a lot of press attention for their aggressive anti-Bush agenda.

There are six FEC Commissioners, three Democrats and three Republicans. Their differences of opinion on this issue did not follow party lines. The Commissioners are Chairman Bradley Smith (R), Vice-Chair Ellen Weintraub (D), David Mason (R), Danny McDonald (D), Scott Thomas (D) and Michael Toner (R).

Treatment of 501(c) organizations

Commissioner McDonald expressed concerns about how to treat 501(c)(4) organizations, saying there are "real issues to work through". These include the consequences of over-regulating 527s to the point that many activities are moved to 501(c)(4)s, which do not have to disclose their donors. "It takes [donor information] out of the realm of reporting," said McDonald. Any final rule needs to address the whole package.

Vice-Chair Weintraub noted that 501(c) groups are still on the hook in Toner-Thomas approach.

Commissioner Thomas said he would be willing to amend the proposal to clarify it does not apply to 501(c) organizations. Further, he said the rule or the explanation and justification statement accompanying it could state that FEC will defer to the IRS in defining terms.

Commissioner Mason said he would not offer his amendment for the Toner-Thomas proposal exempting 501(c) groups. He said it was circulated to make the point that if the FEC uses tax status as a basis for regulation it will have to do something like that. He suggested that borrowing tax categories would lead to a bad process. Some reform groups have suggested that 501(c) groups be subject to regulation only if they use "express advocacy" (explicit statements to vote for or against a federal candidate). If a 527 group is not primarily engaged in federal election activity it would need to seek an Advisory Opinion on a case by case basis to figure out what activities are subject to FEC rules and what are not. Mason said this should be avoided.

Use of the Tax Code for Election Law Purposes

Vice-Chair Weintraub said the FEC cannot wish away the complexity of tax law, referring to comments filed by attorneys John Pomeranz and Greg Colvin. She cited examples of 527 groups that are not engaged in activity the FEC should be regulating, such as the Bar Association of the City of New York, which rates judicial candidates, and a good government group that asks candidates to sign a pledge of good conduct during campaigns.

Commissioner Mason said he would like to see a more explicit standard than tax categories. Tax law is too specialized. He noted IRS private letter rulings on what 527s can do within their exempt purpose (influencing elections) have been expansive, prompted by tax lawyers seeking to avoid gift taxes for their clients. This trend has pushed some groups into 527 status and some have actively sought it. He said the nonprofit community does not have completely clean hands, and the IRS is not the only one pushing 527 status.

Commissioner Thomas countered that the FEC can defer to the IRS definitions, leaving regulation of express advocacy for 501(c)s to existing law and precedent.

Commissioner Toner acknowledged that his and Thomas‰?Ámp;#8364;? proposal is "not a panacea", and there are challenges with relying on the tax code.

Definition of "Major Purpose" of an Organization

Note: The Toner-Thomas proposal would have extended FEC regulation to any group whose "major purpose" is to influence federal elections and makes or receives more than $1000 in contributions or expenditures for that purpose in a year.

Commissioner Thomas said IRS guidance could be used to determine what constitutes a "major purpose," either in the regulation itself or their explanation and justification.

Commissioner Toner said the major purpose test comes from the Massachusetts Citizens for Life case, where the Supreme Court ruled that independent groups whose major purpose is issue advocacy must be treated differently. It can be used to distinguish groups focused on elections from those focused on issues. He noted the proposal was for "the" major purpose, not "a" major purpose.

Vice-Chair Weintraub expressed concern about the "non-federal" part of a group's major purpose, saying it should not be considered in the threshold because the FEC has no jurisdiction over it. She said the Toner-Thomas proposal was problematic because it does not define "major purpose" adequately. Is it 51%? Once that question is answered she said another arises- what goes into the 51% and what does not?

Commissioner Thomas said no 501(c) groups would meet the test major purpose test because it is a "more than 50% test.‰?Ámp;#8364;? In his view the definition of "major purpose" is understood from the FEC's historical treatment of the term, saying they have been dealing with this test for years.

Definition of "Promote, Support, Attack or Oppose" a Federal Candidate (PSAO Test)

Commissioner Thomas said the PSAO test, coupled with the-more-than 50% major purpose test, addresses obvious flaws in the current regulations. He noted that this concept was approved in the ABC Advisory Opinion.

Vice-Chair Weintraub cited lack of definition of PSAO as a major problem with the Toner-Thomas proposal. She said the Supreme Court‰?Ámp;#8364;?s McConnell opinion held the PSAO standard is not overly vague only in the context of communications by political parties. She also noted that many commentors in the rulemaking said they do not know what PSAO means, and "we owe them an explanation."

Commissioner Thomas noted the ABC allocation of PSAO communications, suggesting the approach could improve allocation. He asked what has ABC done to comply and will they challenge that requirement?

Vice Chair Weintraub said it is not practical to change rules in the middle of an election cycle, and the ABC AO is not necessarily the basis of a new rule. Although that opinion approved the use of the PSAO standard for committees already regulated by the FEC under current rules, it created massive confusion. The PSAO standard needs to be more comprehensible and be well explained.

Commissioner Toner defended the approach he and Commissioner Thomas proposed, saying it is consistent with the McConnell decision, which upheld the PSAO standard against a vagueness challenge (BCRA only uses it in the context of political parties). The court said such communications have a dramatic effect on Presidential elections, as does partisan voter mobilization activity.

Problems the FEC Faces

The Counsel's office noted that the FEC needs to know more about what role money will play in the 2004 campaign, such as:

1. who donates
2. who gets contributions
3. how are contributions spent
4. what is the nexus with decision makers and office holders and money
5. what data are available
6. what examples are known

   Commissioner Thomas wants to see the FEC doing something about a "serious problem" (which he did not describe or define). He noted that his and Toner's proposal would not please anyone, but is "a first step" in dealing with a serious problem. He acknowledged that it is unusual to change rules in the middle of an election year, but feels the problem is serious enough to warrant action, and this is the FEC's last chance to have an impact on the 2004 election.

   Vice Chair Weintraub countered that no record has been established to define a threat of corruption, and general policy should not be made on the basis of one example. Referring to the status quo, she noted that independent political committees are not connected to officeholders and do not coordinate with them or raise money with them. She asked if no officeholder is involved in an independent group, where is the risk of corruption? Again, she said there is no record that such groups are a source of corruption.

   Commissioner McDonald also addressed the corruption issue, noting that Congress chose to deal with independent groups by passing the electioneering communications provision of BCRA, so the problem is more than just getting federal candidates out of fundraising. Mason said a total lack of action could be a problem, and he is troubled by the aggressive stance of some 527s and having no rule to deal with them.

   Consequences of FEC Action or Inaction

   Commissioner Thomas said outside groups will escalate their soft money fundraising if no action is taken.

   Commissioner Toner felt that not making a decision is a decision and asked for a vote up or down rather than delay, which would be a decision by default. He is concerned that these activities (not defined or described) will become institutionalized.

   Commissioner McDonald noted that individuals can still spend all the money they want on federal election activity. He is concerned that the Toner-Thomas proposal would cause 527s to move their activities to a 501(c)(4), asking how would these groups would be monitored. He expressed frustration with statements about dire consequences of rejecting the Toner-Thomas approach and does not necessarily agree. He likes the General Counsel's approach as a way ‰?Ámp;#8364;?to get it right,‰?Ámp;#8364;? and does not see it as an effort to stall. He is offended by statements that the FEC is stalling, noting there legitimate issues to be considered and no position is more right than another. He does not feel situation warrants pressure to act this year, but the FEC has a "serious obligation to get it right."

   Vice-Chair Weintraub noted that the FEC has a five-year statute of limitations, so that anyone can file a complaint against a nonprofit five years from now for conduct in 2004. The make up of the FEC will change by then, and the regulated community cannot rely on statements of intention or interpretation by current commissioners to protect them. As a result, unintended consequences must be addressed in the rule itself. She is worried about arbitrary and discriminatory application of a new rule, saying "be careful what you ask for". Rules that are too open ended are an "invitation to mischief." Any action taken must have specificity. She said the Toner-Thomas proposal would nearly eliminate current IRS reporting (under the Stealth PAC law).

   Intent of Congress

   Commissioner McDonald noted letters from members of Congress to the FEC on this rulemaking were not consistent about Congress‰?Ámp;#8364;? intent in passing BCRA and on whether its soft money ban was intended to address only political parties or all soft money. However, he felt Congress was clear in not mandating changes in the middle of an election cycle (i.e. the mandated rulemaking schedule concluded well in advance of 2004.) He said all colleagues on the FEC have great points, but also the other side does. There are very substantive issues on Congressional intent.

   Vice-Chair Weintraub said the FEC must look at what members of Congress have said. She noted 150 signed a letter opposing the proposed rule. She said Congress looked at independent political committee issue in 2000 and 2002 and chose to act through the IRS disclosure requirements.

   Commissioner Thomas said he believes his proposal reflects the intent of Congress.

   Commissioner Mason said BCRA did not mandate this rulemaking. He noted some claim the issues go beyond BCRA and stem from the original Federal Election Campaign Act. Congress could have addressed independent political committees in BCRA, but they did not do it. But he said BCRA is a major barrier to this argument, in part because it addressed independent groups in the electioneering communications provision. (This provision bans corporations, including nonprofits, from mentioning federal candidates in paid broadcasts 60 days before an election or 30 days before a primary. There are some exceptions- -FEC rules exempt 501(c)(3) organizations and some 501(c)(4) broadcasts are subject to disclosure rather than a ban.) Mason noted that many types of groups are not addressed in BCRA. The Toner-Thomas proposal does not resolve the inconsistencies with BCRA. He feels Congress was conscious of what the Supreme Court might do, and had more room to act than they thought. But Congress should then be the one to go back in light of the McConnell decision. He agrees that the Toner-Thomas approach would defeat the purpose of the Stealth PAC law. He said "There may be ways to resolve these issues, but Toner-Thomas is snot the way." If Congress feels strongly it should act and use the latitude given it by the Supreme Court in its McConnell ruling.

   Allocation Rules for Regulated Political Committees

   Note:About half the pages in the Toner-Thomas proposal were devoted to a re-write of the FEC's allocation rules. These rules govern the political committees whose activities only partially fall under Commission regulation. For example, many committees work on state and local elections as well as federal elections. These groups allocate their budgets between federally regulated and non-federally regulated contributions and expenses according to 11 C.F.R. Sec. 106.6. It says, ‰?Ámp;#8364;?expenses shall be allocated based on the ratio of federal expenditures to total federal and non-federal disbursements made by the committee during the two-year federal election cycle‰?Ámp;#8364;?.or upon the committee‰?Ámp;#8364;?s reasonable prediction of its disbursements for the coming two years.‰?Ámp;#8364;? Some work that focuses on federal elections but does not use "express advocacy" (specifically calling for election or defeat of a federal candidate) is not regulated under current FEC rules.

   Much of the controversy over unregulated activities of political committees like America Coming Together (ACT) has stemmed from the allocation ratios they declared. ACT says 98% of its funds are not subject to FEC regulation, but critics point out statements and publications from the group that make it clear they are focused on defeating President Bush in 2004. The proposed expansion of FEC regulation was in large part driven by an effort to address what seemed like a disconnect between reality and the rules. The Toner-Thomas proposal's allocation rule would have dramatically changed the allocation formula.

   Commissioner Toner said the Toner-Thomas proposal would set a 50% minimum for non-connected groups for administrative costs and the expenses of generic voter mobilization. He said the current rules "are inadequate," noting that ACT's allocation is probably legal under current rules. As a result, he said it is important for the FEC to focus on the allocation issue. Toner said the flaw in the current allocation rule is that is based on express advocacy, a standard the McConnell decision said is not the required threshold.

   Commissioner Thomas cited ACT's 2% declared allocation of funds subject to FEC rules, noting it is 65% for House and Senate campaign committees.

   Vice-Chair Weintraub agreed that the allocation rule needs a new look but was not convinced 50% is the way to go. She would like to see a new, targeted Notice of Proposed Rulemaking on allocation. She noted that the ABC Advisory Opinion (AO 2003-37) requires that 100% of costs of public communications that promote, support, attack or oppose a federal candidate must be paid for with hard (regulated) money.

   Commissioner McDonald agreed that the allocation rules need attention.

   Chairman Smith said the FEC could change the allocation ratios but was not ready to go forward right away. He said there are problems with the percentages in the Toner-Thomas proposal, and more work needs to be done to work out a rule that can withstand a court challenge. He was concerned that the 50% figure was pulled out of thin air rather than based on evidence or data, making it arbitrary and capricious under administrative law standards. He said the FEC needs to know the actual spending by groups. For example, what goes into a ballot initiative? He suggested the FEC compare the situation to a FDA case where a rule challenging lobbying laws was upheld because the agency had supporting data. He asked what happens to committees whose federal activities are small, saying they should not be subjected to a 50% allocation. The FEC should approach the issue on a factual basis. In the meantime the established enforcement powers of the FEC can be used to address instances of improper allocation.

   Commissioner Mason reacted to Toner's allocation proposal by saying he does not see any statutory barriers to going forward but has questions about the details. He asked if it would have a retroactive effect as drafted, and Toner said that was not his intention.

   Commissioner Thomas said the 50% allocation rule should only apply after an effective date, but the ABC Advisory Opinion is in effect now, and groups similarly situation should be complying with it.
   
   

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