federal register

35291

Thursday

July 6, 1995

Part VI

Federal Election

Commission

11 CFR Parts 100, 106, 109, and 114

Express Advocacy; Independent

Expenditures; Corporate and Labor

Organization Expenditures; Final Rule
35292 Federal Register / Vol. 60, No. 129 / Thursday, July 6, 1995 / Rules and Regulations

FEDERAL ELECTION COMMISSION

11 CFR Parts 100, 106, 109, and 114

[Notice 1995–10]

Express Advocacy; Independent

Expenditures; Corporate and Labor

Organization Expenditures

AGENCY: Federal Election Commission.

ACTION: Final rule; Transmittal of

regulations to Congress.

SUMMARY: The Commission is issuing

revised regulations that define the term

‘‘express advocacy’’ and describe certain

nonprofit corporations that are exempt

from the prohibition on independent

expenditures. The new rules implement

portions of several decisions issued by

the Federal courts in recent years. These

rules were originally part of a larger

rulemaking on the scope of permissible

and prohibited corporate and labor

organization expenditures. The

Commission expects to complete the

remaining portions of the original

rulemaking by issuing additional

revisions to the regulations at a later

date.

DATES: Further action, including the

announcement of an effective date, will

be taken after these regulations have

been before Congress for 30 legislative

days pursuant to 2 U.S.C. 438(d).

FOR FURTHER INFORMATION CONTACT: Ms.

Susan E. Propper, Assistant General

Counsel, 999 E Street, N.W.,

Washington, D.C. 20463, (202) 219–3690

or (800) 424–9530.

SUPPLEMENTARY INFORMATION: The

Commission is today publishing the

final text of revisions to its regulations

at 11 CFR 100.17, 106.1(d) and 109.1(b)

and the text of new regulations at 11

CFR 100.22 and 114.10. Generally, these

regulations implement sections 431(17),

431(18) and 441b of the Federal Election

Campaign Act of 1971, as amended, 2

U.S.C. 431 et seq. [‘‘FECA’’ or ‘‘the

Act’’]. These regulations have been

revised in accordance with a number of

Federal court decisions involving

section 441b.

Section 441b prohibits corporations

and labor organizations from using

general treasury monies to make

contributions or expenditures in

connection with Federal elections. The

new regulations provide further

guidance on what constitutes an

expenditure, and describe certain

corporations that are exempt from the

independent expenditure prohibition.

However, these new rules do not apply

to contributions, whether monetary or

in-kind.

In Federal Election Commission v.

Massachusetts Citizens for Life, Inc., 479

U.S. 238 (1986) [‘‘MCFL’’], the Supreme

Court held that expenditures must

constitute express advocacy to be

subject to the prohibition of section

441b. MCFL at 249. In addition, the

Court concluded that the prohibition on

independent expenditures in section

441b cannot constitutionally be applied

to nonprofit corporations having certain

essential features. The Court said that

corporations that (1) are formed for the

express purpose of promoting political

ideas and cannot engage in business

activities; (2) have no shareholders or

other persons affiliated so as to have a

claim on the corporation’s assets or

earnings; and (3) are not established by

a business corporation or labor

organization and have a policy against

accepting donations from such entities,

cannot be subject to the independent

expenditure prohibition.

Based on this decision, the National

Right to Work Committee filed a

Petition for Rulemaking urging the

Commission to revise 11 CFR 114.3 and

114.4 to conform to the statement in the

MCFL opinion that ‘‘express advocacy’’

is the appropriate standard for

determining when independent

communications by corporations and

labor organizations are prohibited under

section 441b. See Notice of Availability

of Petition for Rulemaking, National

Right to Work Committee, 52 FR 16275

(May 4, 1987). Thus, the Petition took

the position that the Commission’s

partisan/nonpartisan standards

governing corporate and labor

organization communications to the

entity’s restricted class and the general

public are unconstitutional under

MCFL.

The Commission subsequently sought

public input on whether to initiate a

rulemaking to determine the extent to

which the MCFL decision necessitated

changes in the Part 114 rules governing

independent expenditures by

corporations possessing the three

essential features, changes in the scope

of the ‘‘independent expenditure’’

provisions at 11 CFR Part 109, or the

implementation of an ‘‘express

advocacy’’ test for all corporations and

labor organizations covered by 11 CFR

Part 114. Advance Notice of Proposed

Rulemaking, 53 FR 416 (January 7,

1988) [‘‘Advance Notice’’ or ‘‘ANPRM’’].

The Commission received over 17,000

comments in response to the Advance

Notice. Nearly all of the commenters

submitted virtually identical letters

urging the Commission to act favorably

on NRWC’s rulemaking petition, and to

limit application of its regulations to

communications expressly advocating

the election or defeat of candidates so as

to avoid impinging upon First

Amendment rights. The Commission

also received detailed comments from

seven sources, and held a public hearing

on November 16, 1988 at which two

commenters testified as to how the

Commission should implement the

MCFL opinion. The detailed comments

and testimony reflect a wide range of

views as to how the Commission should

proceed in response to the MCFL

decision.

In subsequent litigation, two lower

courts relied upon an express advocacy

standard to evaluate corporate

communications under section 441b of

the FECA. In Faucher v. Federal

Election Commission, 743 F. Supp. 64

(D. Me. 1990), the court invalidated the

Commission’s voter guide regulations at

11 CFR 114.4(b)(5)(i). The Court

concluded that the Commission’s voter

guide rule is not authorized by the

FECA ‘‘as interpreted by the Supreme

Court in [MCFL], to the extent that the

regulation makes the permissibility of

voter guides * * * hinge upon on

whether such guides are ‘nonpartisan’

in a broad sense that includes issue

advocacy rather than the narrower test

of ‘express advocacy.’ ’’ Id. at 72.

Similarly, in Federal Election

Commission v. National Organization of

Women, 713 F. Supp. 428 (D.D.C. 1989)

[‘‘NOW’’], another district court applied

an express advocacy test to determine

whether section 441b permitted an

incorporated membership organization

to use general treasury funds for

membership recruitment letters directed

to the general public. The court

concluded that the letters in question

did not go beyond issue discussion to

express electoral advocacy. The

Commission appealed both of these

lower court decisions.

Shortly after the MCFL opinion, a

court of appeals decision held that

speech need not include any of the

specific words listed in Buckley v.

Valeo, 424 U.S. 1, 44 n.52 (1976) to

constitute express advocacy. Federal

Election Commission v. Furgatch, 807

F.2d 857, 862–63 (9th Cir.), cert. denied,

484 U.S. 850 (1987). Instead, the

appropriate inquiry is whether the

communication, when read as a whole

and with limited reference to external

events, is susceptible to no other

reasonable interpretation but as an

exhortation to vote for or against a

specific candidate. Id. at 864.

In addition, the Supreme Court

provided further guidance on the

exception from the independent

expenditure prohibition for nonprofit

corporations in Austin v. Michigan

Chamber of Commerce, 494 U.S. 652

(1990). In Austin, the Court interpreted

a Michigan statute very similar to
Federal Register / Vol. 60, No. 129 / Thursday, July 6, 1995 / Rules and Regulations 35293

section 441b of the FECA. The Austin

decision prompted the Commission to

issue a second notice seeking further

comments on what changes to its

regulations were warranted. Request for

Further Comment, 55 FR 40397 (Oct. 3,

1990), comment period extended 55 FR

45809 (Oct. 31, 1990). This notice also

welcomed comments on the express

advocacy questions raised by the

Faucher and NOW decisions.

Eight commenters responded to the

second notice, including some who

reiterated their earlier positions. Most,

but not all, of the commenters urged the

Commission to adopt an express

advocacy test for expenditures under

section 441b. One comment favored the

development of definitions which

precisely set out what activity will be

deemed within the scope of the FECA

under such a standard, while another

comment supported the use of a case by

case approach. There was also some

support for revising the regulations to

reflect the approach to express advocacy

taken into the Furgatch opinion. The

Commission also received specific

suggestions for delineating the class of

nonprofit corporations falling within

MCFL’s exception from the independent

expenditure prohibition. Two comments

advocated a broad scope for the

exemption, while a third comment

emphasized the narrowness of the group

of organizations possessing the three

essential features delineated in MCFL

and Austin.

Subsequently, the Court of Appeals

for the First Circuit upheld the district

court’s decision in Faucher. Faucher v.

Federal Election Commission, 928 F.2d

468 (1st Cir. 1991). cert. denied sub

nom. Federal Election Commission v.

Keefer et al., 502 U.S. 820 (1991). The

Commission sought certiorari in

Faucher, arguing that the express

advocacy standard should not be made

applicable to the 441b prohibition on

corporate expenditures. On October 7,

1991, the Supreme Court denied the

petition for certiorari, and thus declined

to consider narrowing or otherwise

modifying the statements it made in

MCFL regarding the scope of section

441b. Accordingly, the Commission

moved for the dismissal of its appeal in

NOW and resumed consideration of

several substantial changes to its

regulations necessitated by the MCFL

decision.

The Commission published a Notice

of Proposed Rulemaking on July 29,

1992 seeking public comment on draft

rules codifying the reduced scope of the

prohibition on corporate expenditures.

57 FR 33548 (July 29, 1992). The

proposed language set forth the general

rule that corporations and labor

organizations are prohibited from

making expenditures for

communications to the general public

expressly advocating the election or

defeat of a clearly identified candidate.

The draft regulations also sought to

establish criteria for determining

whether nonprofit corporations qualify

for the exemption from section 441b’s

prohibition on independent

expenditures.

The Commission received 35 separate

comments on the NPRM from 32

commenters between July 29, 1992 and

November 22, 1993. The Commission

also received 149 form comments

during that period. The Commission

held a public hearing on October 15 and

16, 1992, at which 15 of these

commenters testified on the issues

presented in the MCFL decision and the

proposed rules. The comments and

testimony are discussed in more detail

below.

As indicated above, this rulemaking

process has involved a broader range of

issues regarding the scope of

permissible and prohibited corporate

and labor organization expenditures

than is reflected in the final rules being

promulgated today. The rulemaking

with regard to the other issues is

continuing, and the Commission

expects to issue additional new rules

revising 11 CFR Parts 110 and 114 at a

later date. These subsequent changes

will replace the partisan/nonpartisan

standards in sections 110.13, 114.1,

114.2, 114.3, 114.4 and 114.12(b) with

language prohibiting corporations and

labor organizations from making

expenditures for communications to the

general public expressly advocating the

election or defeat of clearly identified

candidates. Specifically, these

provisions govern candidate debates,

candidate appearances, distributing

registration and voting information,

voter guides, voting records, conducting

voter registration and get-out-the-vote

drives and use of meeting rooms. At the

same time, the Commission intends to

address issues which have arisen

regarding activities undertaken by

incorporated colleges and universities,

the use of logos, trademarks and

letterheads, endorsements of candidates,

activities which facilitate the making of

contributions, and coordination

between candidates and corporations or

labor organizations which results in inkind contributions. These issues, not

previously addressed in the rules,

involve activities that are also impacted

by the express advocacy standard and

the case law in this area.

Section 438(d) of Title 2, United

States Code requires that any rules or

regulations prescribed by the

Commission to carry out the provisions

of Title 2 of the United States Code be

transmitted to the Speaker of the House

of Representatives and the President of

the Senate 30 legislative days before

they are finally promulgated. These

regulations were transmitted to

Congress on June 30, 1995.

Explanation and Justification

Generally, the new and amended

rules contain the following changes.

First, the definitions of ‘‘express

advocacy’’ and ‘‘clearly identified’’ at 11

CFR 109.1 (b)(2) and (b)(3) have been

moved to new 11 CFR 100.22 and

revised 11 CFR 100.17, respectively.

They have been reworded to provide

further guidance on what types of

communications constitute express

advocacy of clearly identified

candidates, in accordance with the

judicial interpretations found in

Buckley, MCFL, Furgatch, NOW and

Faucher.

Second, new section 114.10 has been

added to implement the MCFL Court’s

conclusion that nonprofit corporations

possessing certain essential features

may not be bound by the restrictions on

independent expenditures contained in

section 441b. This new section

expressly permits certain corporations

to use general treasury funds for

independent expenditures, and sets out

the reporting obligations for these

corporations.

Part 100—Scope and Definitions (2

U.S.C. 431)

Section 100.17 Clearly Identified (2

U.S.C. 431(18))

The definitions of ‘‘clearly identified’’

in 11 CFR 106.1(d) and ‘‘clearly

identified candidate’’ in 11 CFR

109.1(b)(3) have been removed and

replaced by a revised definition in

section 100.17. It is not necessary for

this definition to appear in multiple

locations throughout these regulations.

The NPRM sought comments on two

alternative approaches regarding the

requirement that the candidates be

‘‘clearly identified.’’ Alternative A–1

indicated that this would include

candidates of a clearly identified

political party and a clearly identified

group of candidates, such as the ‘‘prolife’’ candidates in the MCFL case.

Alternative A–2 did not specifically

mention clearly identified groups of

candidates or candidates of clearly

identified political parties.

Several commenters and witnesses

argued that under Alternative A–1, it

could be too difficult to determine the

candidates in the group. Examples cited

were buttons that read ‘‘Elect Women
35294 Federal Register / Vol. 60, No. 129 / Thursday, July 6, 1995 / Rules and Regulations

for a Change’’ or ‘‘Vote Pro-Choice,’’

without more. The language was

intended to apply to a situation, for

example, where one insert in a mailing

lists voting records or positions on

specific issues and clearly indicates

which of the named candidates shares

the speaker’s views. If another insert

urges the reader to vote in favor of

candidates who share its views, this is

considered to be advocating the election

of those clearly identified candidates.

Similarly, the MCFL case involved a

flyer which urged voters to vote for

‘‘pro-life’’ candidates, and included a

list of ‘‘pro-life candidates.’’ Thus, in

this example, several ‘‘pro-life’’

candidates were clearly identified to the

reader.

In light of comments, the wording of

new section 100.22(a) has been

reworked to refer to ‘‘one or more

clearly identified candidate(s)’’ to more

clearly state what was intended. In

addition, section 100.17 has been

modified to provide some additional

examples of when candidates are

considered to be ‘‘clearly identified.’’

Section 100.22 Expressly Advocating

The definition of express advocacy

previously located in 11 CFR 109.1(b)(2)

has been replaced with a revised

definition in new section 100.22. The

placement of the definition of express

advocacy in Part 100—Scope and

Definitions is intended to ensure that

the reader will be able to locate it more

easily. Also, while express advocacy is

an important component of any

independent expenditure, it is also the

legal standard used in determining

whether other types of activities are

expenditures by corporations or labor

organizations under 11 CFR Part 114.

Please not that the terms

‘‘communication containing express

advocacy’’ and ‘‘communication

expressly advocating the election or

defeat of one or more clearly identified

candidates’’ have the same meaning.

The NPRM presented the possibility

of creating a separate definition of

‘‘express advocacy’’ for inclusion in Part

114 that would apply only to

corporations and labor organizations

governed by that Part. The NPRM

indicated that the purpose of

promulgating a separate definition

would be to focus more specifically on

implementing the MCFL Court’s dictate

that ‘‘express advocacy’’ is the standard

when determining what is an

expenditure under 2 U.S.C. § 441b. The

Notice suggested that a separate

definition could center on whether a

communication urged action with

respect to a federal election rather than

on whether the communication also

related to a clearly identified candidate.

Thus, this approach would have taken

a different view of ‘‘express advocacy’’

for organizations subject to the

prohibitions of section 441b.

There was little support for separate

definitions from the comments and

testimony. The difficulty the

commenters and witnesses had in trying

to determine what the courts meant by

‘‘express advocacy,’’ and what they

thought the Commission had in mind,

amply demonstrate that it would be

extremely confusing to work with

separate definitions for corporations and

labor organizations on one hand, and

candidates, committees and individuals

on the other. Consequently, separate

definitions of express advocacy have not

been included in the final rules.

1. Alternative Definitions Presented in

the NPRM

The NPRM sought comments on two

alternative sets of revisions to the

definition of express advocacy.

Alternatives A–1 and A–2 were similar

in several respects. They both continued

to list the specific phrases set forth in

the Buckley opinion as examples of

express advocacy. Both alternatives

recognized that all statements and

expressions included in a

communication must be evaluated in

terms of pertinent external factors such

as the context and timing of the

communication. In addition, both

proposed definitions clearly indicated

that communications consisting of

several pieces of paper will be read

together.

The alternative definitions in the

NPRM differed in several respects.

Under Alternative A–1, express

advocacy included suggestions to take

actions to affect the result of an election,

such as to contribute or to participate in

campaign activity. In contrast,

Alternative A–2 indicated that express

advocacy constitutes an exhortation to

support or oppose a clearly identified

candidate, and that there must be no

other reasonable interpretation of the

exhortation other than encouraging the

candidate’s election or defeat, rather

than another type of action on a specific

issue. Nevertheless, Alternative A–2

also specifically stated that ‘‘with

respect to an election’’ includes

references such as ‘‘Smith ’92’’ or ‘‘Jones

is the One.’’

There was no consensus among the

commenters and witnesses regarding

either alternative definition of express

advocacy. While there was more

support for Alternative A–2 than A–1,

specific portions of both alternatives

troubled a number of commenters and

witnesses. Some objected that

Alternative A–1 was too narrow in that

it did not cover all express, implied, or

reasonably understood references to an

upcoming election. Others argued

Alternative A–1 was too broad, and

preferred Alternative A–2. However,

there was also considerable sentiment

expressed that Alternative A–2 was also

too broad, and should be further limited

to avoid running afoul of the First

Amendment considerations that are

involved.

To illustrate the difficulty involved in

applying an ‘‘express advocacy’’

standard, the Commission included

Agenda Document #92–86–A in the

rulemaking record. This document

contained seven hypothetical

advertisements, each of which is

assumed to be published within two

weeks of an election. Several written

comments and witnesses mentioned

these examples in analyzing the

proposals contained in this Notice, but

there was no consensus as to which

examples, if any, contained express

advocacy.

In commenting on the proposed rules,

the Internal Revenue Service indicated

that 26 U.S.C. § 501(c)(3) prohibits

certain nonprofit organizations from

participating or intervening in political

campaigns on behalf of or in opposition

to candidates for elective public office.

The IRS stated that prohibited political

activity under the Internal Revenue

Code is much broader in scope than the

express advocacy standard under the

FECA. The Commission expresses no

opinion as to any tax ramifications of

activities conducted by nonprofit

corporations, since these questions are

outside its jurisdiction.

The definition of express advocacy

included in new section 100.22 includes

elements from each definition, as well

as the language in the Buckley, MCFL

and Furgatch opinions emphasizing the

necessity for communications to be

susceptible to no other reasonable

interpretation but as encouraging

actions to elect or defeat a specific

candidate. Please note that exhortations

to contribute time or money to a

candidate would also fall within the

revised definition of express advocacy.

The expressions enumerated in Buckley

included ‘‘support,’’ a term that

encompasses a variety of activities

beyond voting.

2. Examples of Phrases That Expressly

Advocate

The previous definition of express

advocacy in 11 CFR 109.1(b)(2)

included a list of expressions set forth

in Buckley. Both alternatives in the

NPRM would have largely retained this

list of phrases that constitute express
Federal Register / Vol. 60, No. 129 / Thursday, July 6, 1995 / Rules and Regulations 35295

advocacy. The revised definition in 11

CFR 100.22(a) includes a somewhat

fuller list of examples. The expressions

enumerated in Buckley, such as ‘‘vote

for,’’ ‘‘Smith for Congress,’’ and ‘‘defeat’’

have no other reasonable meaning than

to urge the election or defeat of clearly

identified candidates.

3. Communications Lacking Such

Phrases

The NPRM also addressed

communications that contain no

specific call to take action on any issue

or to vote for a candidate, but which do

discuss a candidate’s character,

qualifications, or accomplishments, and

which are made in close proximity to an

election. An example is a newspaper or

television advertisement which simply

states that the candidate has been

caring, fighting and winning for his or

her constituents. Another example is a

case in which a candidate is criticized

for missing many votes, or for specific

acts of misfeasance or malfeasance

while in office.

Under Alternative A–2, these types of

communications would have

constituted exhortations if made within

a specified number of days before an

election, and if they did not encourage

any type of action on any specific issue,

such as, for example, supporting pro-life

or pro-choice legislation. Comments

were requested as to what an

appropriate time frame should be—as

short as 14 days, or as long as six

months, prior to an election, or some

other time period considered

reasonable.

Some commenters opposed treating

these communications as express

advocacy on the grounds that there is

not a clear call to action. Others argued

that such communications, particularly

when made by a candidate’s campaign

committee, were clearly intended to

persuade the listener or reader to vote

for the candidate.

Communications discussing or

commenting on a candidate’s character,

qualifications, or accomplishments are

considered express advocacy under new

section 100.22(b) if, in context, they

have no other reasonable meaning than

to encourage actions to elect or defeat

the candidate in question. The revised

rules do not establish a time frame in

which these communications are treated

as express advocacy. Thus, the timing of

the communication would be

considered on a case-by-case basis.

4. Communications Containing Both

Issue Advocacy and Electoral Advocacy

The final rules, like the proposed

rules, treat communications that include

express electoral advocacy as express

advocacy, despite the fact that the

communications happen to include

issue advocacy, as well. Several

comments pointed out that the

legislative process continues during

election periods, and argued that if a

legislative issue becomes a campaign

issue, the imposition of unduly

burdensome requirements on those

groups seeking to continue their

legislative efforts and communicate

with their supporters is

unconstitutional. These concerns are

misplaced, however, because the

revised rules in section 100.22(b) do not

affect pure issue advocacy, such as

attempts to create support for specific

legislation, or purely educational

messages. As noted in Buckley, the

FECA applies only to candidate

elections. See, e.g., 424 U.S. at 42–44,

80. For example, the rules do not

preclude a message made in close

proximity to a Presidential election that

only asked the audience to call the

President and urge him to veto a

particular bill that has just been passed,

if the message did not refer to the

upcoming election or encourage

election-related actions. In contrast,

under these rules, it is express advocacy

if the communication described above

urged the audience to vote against the

President if the President does not veto

the bill in question.

Nevertheless, to alleviate the

commenters’ concerns, the definition of

express advocacy in new section

100.22(b) has been revised to

incorporate more of the Furgatch

interpretation by emphasizing that the

electoral portion of the communication

must be unmistakable, unambiguous

and suggestive of only one meaning, and

reasonable minds could not differ as to

whether it encourages election or defeat

of candidates or some other type of nonelection action.

Both alternative definitions of express

advocacy included consideration of the

context and timing of the

communication, and indicated that

communications consisting of several

pieces of paper will be read together.

Several commenters and witnesses were

troubled by the perceived vagueness

and uncertainty inherent in the use of

the phrases ‘‘taken as a whole,’’ ‘‘in light

of the circumstances under which they

were made,’’ and ‘‘with limited

reference to external events.’’ They

argued that they would not be able to

ascertain in advance which facts and

circumstances would be considered by

the Commission. Some of the

commenters and witnesses

acknowledged the difficulty of crafting

a clear and precise standard in the First

Amendment context.

The final rules in section 100.22

retain the requirement that the

communication be read ‘‘as a whole and

with limited reference to external

events’’ because MCFL makes clear that

isolated portions of a communication

are not to be read separately in

determining whether a communication

constituted express advocacy. See 479

U.S. at 249–50. Further, the Furgatch

opinion evaluated the contents of the

communication in question ‘‘as a whole,

and with limited reference to external

events.’’ 807 F.2d at 864. The external

events of significance in Furgatch

included the existence of an upcoming

presidential election and the timing of

the advertisement a week before the

general election. However, please note

that the subjective intent of the speaker

is not a relevant consideration because

Furgatch focuses the inquiry on the

audience’s reasonable interpretation of

the message. Furgatch, 807 F.2d at 864–

65.

5. ‘‘Vote Democratic’’ or ‘‘Vote

Republican’’

In the NPRM, Alternative A–2 treated

as express advocacy messages such as

‘‘Vote Republican’’ or ‘‘Vote

Democratic’’ if made within a specified

period prior to a special or general

election or an open primary. Again,

comments were sought on time periods

ranging from 14 days to 6 months prior

to an election, or any other time period

considered reasonable. Alternatively,

the period between the primary and

general elections was suggested as the

time when such messages refer to

clearly identified candidates. In

contrast, Alternative A–1 treated these

phrases as express advocacy if made at

any time after specific individuals have

become Republican or Democratic

candidates within the meaning of the

FECA in the geographic area in which

the communication is made. The NPRM

also sought comments on when a

message such as ‘‘Vote Democratic’’ or

‘‘Vote Republican’’ refers to one or more

clearly identified candidates, rather

than being just a message of support for

a party.

The views of the commenters and

witnesses reflected little consensus

regarding these messages. Several were

supportive of Alternative A–2, and

suggested that a 90 day time frame

would be appropriate. Others felt that

such messages are always express

advocacy because they aim at

influencing the outcome of elections.

Conversely, some commenters argued

that these messages cannot be express

advocacy if there are no declared

candidates yet running for the party’s
35296 Federal Register / Vol. 60, No. 129 / Thursday, July 6, 1995 / Rules and Regulations

nomination or if the nominee of the

party has not yet been selected.

Section 100.22 of the final rules does

not specify a time frame or triggering

event that will cause these messages to

be considered express advocacy.

Instead, messages such as ‘‘Vote

Democratic’’ or ‘‘Vote Republican’’ will

be evaluated on a case-by-case basis to

determine whether they constitute

express advocacy under the criteria set

out in 11 CFR 100.22(b).

Part 106—Allocations of Candidate and

Committee Activities

Section 106.1 Allocation of expenses

between candidates

A conforming amendment has been

made to paragraph (d) of section 106.1.

Previously, this paragraph restated the

definition of ‘‘clearly identified.’’ It has

been revised to refer the reader to the

definition located in 11 CFR 100.17.

Part 109—Independent Expenditures (2

U.S.C. 431(17), 434(c))

Section 109.1 Definitions (2 U.S.C.

431(17))

The revised rules incorporate a

technical amendment to the definition

of ‘‘person’’ in the independent

expenditure provisions in section

109.1(b)(1). The revision clarifies that

‘‘person’’ includes qualified nonprofit

corporations, which are discussed more

fully below. This change reflects that in

MCFL, the Court upheld the right of

qualified nonprofit corporations to make

independent expenditures, but this

decision did not extend to other

corporations.

Conforming amendments have also

been made to paragraphs (b)(2) and

(b)(3) of section 109.1. These sections

had contained definitions of ‘‘expressly

advocating’’ and ‘‘clearly identified

candidate.’’ As explained above, they

have been revised to refer the reader to

the definitions located in sections

100.22 and 100.17, respectively.

Part 114—Corporate and Labor

Organization Activity

Section 114.2 Prohibitions on

Contributions and Expenditures

Paragraph (b) of section 114.2 has

been revised to reflect the exception

recognized in the MCFL decision, which

allows certain nonprofit corporations to

use their general treasury funds to make

independent expenditures. The

Commission anticipates making further

changes to this provision when it

completes the remaining portions of this

rulemaking.

Section 114.10 Qualified Nonprofit

Corporations

In MCFL, the Supreme Court reviewed

the application of the independent

expenditure prohibition in section 441b

to MCFL, a small, nonprofit corporation

organized to promote specific

ideological beliefs. The Court concluded

that, because MCFL did not have the

potential to exert an undesirable

influence on the electoral process, it did

not implicate the concerns that

legitimately prompted regulation by

Congress. Consequently, the Court

found section 441b unconstitutional as

applied to MCFL.

The Court cited ‘‘three features

essential to [its] holding that [MCFL]

may not constitutionally be bound by

§ 441b’s restriction on independent

spending.’’ 479 U.S. at 264. First, MCFL

was formed for the express purpose of

promoting political ideas and cannot

engage in business activities. Second, it

has no shareholders or other persons

affiliated so as to have either a claim on

the corporation’s assets or earnings, or

any other economic disincentives to

disassociate with the corporation. Third,

it was not established by a business

corporation or a labor union, and it has

a policy of not accepting contributions

from such entities. MCFL at 264. The

Court said that section 441b’s

prohibition on independent

expenditures is unconstitutional as

applied to nonprofit corporations with

these three characteristics.

Section 114.10 of the final rules is

based on this part of the MCFL decision,

and on the Court’s subsequent decision

in Austin v. Michigan Chamber of

Commerce, 494 U.S. 652 (1990). Section

114.10 lists the features of those

corporations that are exempt from

section 441b’s prohibition on

independent expenditures. It also sets

out the reporting requirements for these

corporations. A detailed explanation of

section 114.10 is set out below.

1. General Issues Raised by the NPRM

and the Commenters

a. The name given to exempt

corporations. One preliminary question

is the name to be used for corporations

that are exempt from the independent

expenditure prohibition. The

Commission specifically sought

comments on this issue in the Notice of

Proposed Rulemaking. The NPRM

referred to them as ‘‘exempt

corporations.’’ However, the

Commission and some of the

commenters expressed concern that this

name might cause confusion, because

the term ‘‘exempt’’ is so closely

associated with the Internal Revenue

Code.

The NPRM contained an alternative

version of proposed section 114.10 that

used the phrase ‘‘qualified corporation’’

as the name for these organizations. The

Commission believes this phrase is easy

to use, and clearly distinct from terms

used in other areas of the law. However,

the Commission has also added the

word ‘‘nonprofit’’ to make this phrase

more descriptive. Thus, the name

‘‘qualified nonprofit corporation’’ or

‘‘QNC’’ will be used to refer to

organizations that are exempt from the

independent expenditure prohibition.

b. General concerns expressed by

commenters. Some of the comments

received contained general observations

on the Commission’s efforts to

promulgate rules regarding the

exemption recognized in MCFL. One

commenter objected to any Commission

effort to issue rules in this area, arguing

that Commission action will inevitably

narrow the standards that were clearly

stated in MCFL and Austin, and would

make the Commission an arbiter of First

Amendment rights. The commenter

alleges that this is a role for which the

Commission has no constitutional or

Congressionally conferred authority.

However, the Commission disagrees,

and has decided to issue regulations in

this area. Although the MCFL opinion

may be quite specific by judicial

standards, it leaves many administrative

questions unanswered. Without new

rules, the Commission would have to

apply the MCFL decision on an ad hoc

basis, which could result in

inconsistency and would provide no

guidance to the regulated community. In

addition, the Commission’s regulations

are more readily available to the

regulated community than the text of

court decisions, and serve as the

primary reference for Commission

policy. Consequently, the rules should

reflect court decisions that significantly

affect the application of the FECA.

Many of the commenters felt that the

proposed rules were too restrictive. One

commenter said that the essence of the

decision is that organizations more like

voluntary political associations than

business firms cannot be subjected to

section 441b. This commenter argued

that the three stated features should

provide organizations with a safe harbor

but should not be absolutely required.

As will be discussed further below,

several provisions specifically criticized

as too restrictive by the commenters

have been eliminated from the final

rules. However, it is important that the

three features enunciated by the

Supreme Court be included in the final

rules as a threshold requirement for an
Federal Register / Vol. 60, No. 129 / Thursday, July 6, 1995 / Rules and Regulations 35297

exemption from the independent

expenditure prohibition. The MCFL

Court described these three features as

‘‘essential to [its] holding that [MCFL]

may not constitutionally be bound by

§ 441b’s restriction on independent

spending.’’ 479 U.S. at 263–64. The

clear implication is that a corporation

that does not have all three of these

features can be subject to this

restriction.

The U.S. Court of Appeals decision in

Day v. Holahan, 34 F.3d 1356 (8th Cir.

1994), does not affect this conclusion. In

that case, the Eighth Circuit decided

that a Minnesota statute that closely

tracked the Supreme Court’s three

essential features was unconstitutional

as applied to a Minnesota nonprofit

corporation. The Commission believes

the Eighth Circuit’s decision, which is

controlling law in only one circuit, is

contrary to the plain language used by

the Supreme Court in MCFL, and

therefore is of limited authority.

The Notice sought comments on two

versions of section 114.10 that represent

contrasting approaches for defining the

MCFL exemption. The first version set

out the essential features listed in the

MCFL opinion as threshold

requirements for an exemption from the

independent expenditure prohibition.

By following the long-standing

presumption that all incorporated

entities are subject to the independent

expenditure prohibition in section 441b,

and requiring corporations that claim to

be exempt from that prohibition to

demonstrate that they are entitled to an

exemption, this version sought to fit the

MCFL decision into the existing

statutory framework.

The second version took the opposite

approach. It presumed a broad class of

corporations would be exempt from

section 441b’s independent expenditure

prohibition, unless they have a

characteristic that would bring them

within the Commission’s jurisdiction.

The Commission has decided to

follow the first approach and

incorporate the rules into the existing

framework for section 441b. The

Supreme Court did not conclude that all

of section 441b is unconstitutional on

its face. Rather, it held that one portion

of section 441b, the prohibition on

independent expenditures, is

unconstitutional as applied to a narrow

class of incorporated issue advocacy

organizations. The Court explicitly

reaffirmed the validity of section 441b’s

prohibition on corporate contributions.

479 U.S. at 259–60. Thus, the broad

prohibition on the use of corporate

treasury funds contained in section

441b still exists, and the Commission’s

responsibility for enforcing that

provision remains in place.

The Commission is aware that most of

the comments were in accord with the

second version. These commenters

argued that all organizations are entitled

to unlimited First Amendment rights

regardless of whether they are

incorporated, and that any Commission

action that has the effect of limiting

those rights is unconstitutional. They

felt that the first version would define

the category of exempt corporations too

narrowly, and would burden the speech

activity of corporations that are entitled

to an exemption.

However, there is a long history of

regulating the political activity of

corporations, and the Supreme Court

has recognized the compelling

governmental interest in regulating this

activity on numerous occasions. ‘‘The

overriding concern behind the

enactment of the [statutory predecessor

to section 441b] was the problem of

corruption of elected representatives

through the creation of political debts.

* * * The importance of the

governmental interest in preventing this

occurrence has never been doubted.’’

First National Bank of Boston v. Belotti,

435 U.S. 765, 788, n.26 (1978). ‘‘This

careful legislative adjustment of the

federal electoral laws . . . to account for

the particular legal and economic

attributes of corporations and labor

organizations warrants considerable

deference. . . . [I]t also reflects a

permissible assessment of the dangers

posed by those entities to the electoral

process.’’ FEC v. National Right to Work

Committee, 459 U.S. 197, 209 (1982).

The MCFL decision reaffirms, rather

than casts doubt upon, the validity of

Congressional regulation of corporate

political activity. In its opinion, the

MCFL Court said ‘‘[w]e acknowledge the

legitimacy of Congress’ concern that

organizations that amass great wealth in

the economic marketplace not gain

unfair advantage in the political

marketplace.’’ MCFL, 479 U.S. at 263.

The Court found the application of

section 441b to MCFL unconstitutional

not because this governmental interest

was not compelling in general, but

because MCFL was different from the

majority of entities addressed by section

441b. Consequently, this governmental

interest was not implicated by MCFL’s

activity. Id. The Court also

acknowledged that MCFL-type

corporations are the exception rather

than the rule, saying that ‘‘[i]t may be

that the class of organizations affected

by our holding today will be small.’’ Id.

at 264. Thus, the Commission’s task is

to incorporate this narrow exception to

the independent expenditure

prohibition into the regulations so that

they protect the interests of

organizations that are like MCFL

without undermining the FECA’s

legitimate legislative purposes. The

Commission has concluded that the first

approach is better suited to this task.

2. Scope and Definitions

Paragraph (a) is a scope provision that

explains, in general terms, the purposes

of section 114.10. Paragraph (b) defines

four terms for the purposes of this

section.

a. The promotion of political ideas.

The first term is the phrase ‘‘the

promotion of political ideas.’’ The MCFL

Court said one of MCFL’s essential

features was that ‘‘it was formed for the

express purpose of promoting political

ideas, and cannot engage in business

activities.’’ 479 U.S. at 264. Paragraph

(b)(1) clarifies what this phrase means

for the purposes of section 114.10.

Under paragraph (b)(1), the promotion

of political ideas includes issue

advocacy, election influencing activity,

and research, training or educational

activity that is expressly tied to the

organization’s political goals.

The Commission added the last

phrase, which is based on language in

the Austin decision, in response to

several commenters who felt that the

proposed definition was too narrow.

These commenters said that many

organizations engage in certain activities

that are not pure advocacy but are

directly related to their advocacy

activities. They argued that

organizations should be allowed to

conduct these activities without losing

their exemption from the independent

expenditure prohibition. The

Commission agrees, and has added the

last phrase to the final rules to serve this

purpose.

b. Express purpose. Paragraph (b)(2)

defines the term ‘‘express purpose,’’ as

that term is used in section 114.10. As

indicated above, the Supreme Court said

that MCFL was formed for the express

purpose of promoting political ideas

and cannot engage in business activities.

Id. Paragraph (b)(2) states that a

qualified nonprofit corporation’s

express purpose is evidenced by the

purpose stated in the corporation’s

charter, articles of incorporation, or

bylaws. It also may be evidenced by any

purpose publicly stated by the

corporation or its agents, and any

activities in which the corporation

actually engages.

Generally, if an organization’s organic

documents set out a purpose that cannot

be characterized as issue advocacy,

election influencing activity, or

research, training or educational activity
35298 Federal Register / Vol. 60, No. 129 / Thursday, July 6, 1995 / Rules and Regulations

expressly tied to political goals, the

organization will not be a qualified

nonprofit corporation. However,

paragraph (b)(2)(i) contains an exception

to this rule. If a corporation’s organic

documents indicate that the corporation

was formed for the promotion of

political ideas and ‘‘any lawful

purpose’’ or ‘‘any lawful activity,’’ the

latter statement will not preclude a

finding under paragraph (c)(1) that the

corporation’s only express purpose is

the promotion of political ideas. The

Commission recognizes that it is

common for corporations to use

boilerplate purpose statements elicited

from their state’s incorporation statute

when they prepare their articles of

incorporation. These statements will not

prevent such an organization from being

a qualified nonprofit corporation.

One commenter objected to including

those purposes evidenced by the

activities in which the corporation

actually engages. The commenter argued

that this rule would allow the

Commission to analyze the motives

behind the corporation’s activities.

The Commission has decided to

include this provision in the final rules.

Generally, corporations engage in

activities that further the goals of the

corporation. Thus, the corporation’s

activities tend to provide a more

objective and complete indication of the

corporation’s reasons for existing. In

contrast, if the Commission could look

only to a corporation’s organic

documents for the corporation’s

purpose, a corporation with an

appropriate purpose statement in its

organic documents would be exempt

from the independent expenditure

prohibition, regardless of whether the

activities in which it actually engages

were consistent with its stated purpose

or with the exemption recognized in the

MCFL opinion.

The Commission does not intend to

engage in extensive speculation about

the motivations of qualified nonprofit

corporations. However, it is necessary

for the Commission to consider the

activities in which a corporation

actually engages in order to completely

assess the corporation’s purpose.

c. Business activities. Paragraph (b)(3)

defines the term ‘‘business activities’’

for the purposes of these rules. Under

paragraph (b)(3), ‘‘business activities’’

generally includes any provision of

goods and services that results in

income to the corporation. It also

includes any advertising or promotional

activity that results in income to the

corporation, other than in the form of

membership dues or donations. Thus, a

corporation that publishers a newsletter

or magazine and sells advertising space

in that publication will be engaging in

business activities, and will not be a

qualified nonprofit corporation.

However, the definition specifically

excludes fundraising activities that are

expressly described as requests for

donations that may be used for political

purposes, such as supporting or

opposing candidates. Fundraising

activities conducted under these

circumstances will not be considered

business activities under these rules.

This definition reflects a critical

distinction made by the Supreme Court

in MCFL. The definition includes those

activities that closely resemble the

commercial activities of a business

corporation because these activities

generate financial resources that, like

those of a business corporation, ‘‘are not

an indication of popular support for the

corporation’s political ideas * * * [but]

reflect instead the economically

motivated decisions of investors and

customers.’’ 479 U.S. at 258. Thus, these

‘‘resources amassed in the economic

marketplace’’ can create ‘‘an unfair

advantage in the political marketplace.’’

Id. at 257.

In contrast, the definition specifically

excludes activities that generate

resources that reflect ‘‘popular support

for the corporation’s political ideas.’’ Id.

at 257. Fundraising activities that are

described to potential donors as

requests for donations that will be used

for political purposes will generate

donations that reflect popular support

for the corporation’s political ideas.

Consequently, they do not pose the risk

of giving the corporation an unfair

advantage in the political marketplace.

In some cases, the fundraising

activities of a qualified nonprofit

corporation closely resemble business

activities in that they involve a

provision of goods that results in

income to the corporation. For example,

a qualified nonprofit corporation may

sell T-shirts or calendars in order to

generate funds to support its political

activity. MCFL itself held garage sales,

bake sales and raffles to raise funds for

these purposes. However, if the

corporation discloses that the activities

are an effort to raise funds for its

political activities, such as supporting

or opposing candidates, the activities

will not be considered business

activities for the purposes of these rules,

notwithstanding their close resemblance

to ordinary business transactions.‘‘This

ensures that political resources reflect

political support.’’ NCFL at 264.

The Commission notes that this

exclusion is limited to direct

fundraising by the corporation. If a

corporation sells items through a third

party, such as a retail store or catalog

mail order outlet, this will generally be

considered a business activity, even if

the item is accompanied by a

notification that a portion of the

proceeds will be used to support the

corporation’s political activities. The

sale of items by a third party that is not

a qualified nonprofit corporation

justifies the application of the

independent expenditure prohibition.

d. Shareholders. Paragraph (b)(4)

states the term ‘‘shareholder’’ has the

same meaning as the term

‘‘stockholder,’’ as defined in section

114.1(h) of the Commission’s current

rules.

4. The Essential Features

The Supreme Court said ‘‘MCFL has

three features essential to our holding

that it may not constitutionally be

bound by § 441b’s restriction on

independent spending.’’ MCFL at 263–

64. These features have been

incorporated into paragraph 114.10(c) of

the final rules. A qualified nonprofit

corporation is a corporation that has all

the characteristics set out in this

paragraph. Corporations that do not

have all of these characteristics are not

qualified nonprofit corporations, and

therefore are bound by the independent

expenditure prohibition.

a. Purpose. Paragraph (c)(1) states that

a qualified nonprofit corporation is one

whose only express purpose is the

promotion of political ideas. In other

words, if a corporation’s organic

documents, authorized agents, and

actual activities indicate that its purpose

is issue advocacy, election influencing

activity, or research, training or other

activity expressly tied to the

organization’s political goals, the

corporation may be a qualified nonprofit

corporation. However, if the documents,

agents or activities indicate any other

purpose, the corporation will be subject

to the independent expenditure

prohibition.

As indicated above, the rules contain

an exception for boilerplate purpose

statements in a corporation’s organic

documents. If a corporation’s organic

documents indicate that the corporation

was formed for the promotion of

political ideas and ‘‘any lawful

purpose’’ or ‘‘any lawful activity,’’ the

latter statement will not preclude a

finding under paragraph (c)(1) that the

corporation’s only express purpose is

the promotion of political ideas.

One commenter argued that requiring

the promotion of political ideas to be an

organization’s only express purpose

would exclude organizations that do

educational and research work on

political topics with which they are

concerned. It would also exclude
Federal Register / Vol. 60, No. 129 / Thursday, July 6, 1995 / Rules and Regulations 35299

organizations that train people in

advocacy techniques, an important part

of the activities of many nonprofit

corporations. The Commission has

addressed these concerns by broadening

the definition of the phrase ‘‘the

promotion of political ideas’’ in

paragraph (b)(1) to include these

activities. This definition is discussed in

detail above.

b. Business activities. Under

paragraph (c)(2), a corporation must be

unable to engage in business activities

in order to be a qualified nonprofit

corporation. Paragraph (c)(2) tracks the

language of the MCFL decision in that it

limits the exemption to corporations

that cannot engage in business

activities. Thus, in order to be exempt,

business activities must be proscribed

by the corporation’s organic documents

or other internal rules.

However, as indicated above,

fundraising activities that are expressly

described as requests for donations to be

used for political purposes are not

business activities. Consequently, a

qualified nonprofit corporation can

engage in fundraising activities without

losing its exemption, so long as it makes

the appropriate disclosure.

Most of the commenters objected to a

complete prohibition on business

activities. One commenter argued that

the presence of minimal business

activities would not have changed the

result in MCFL. This commenter said

that, despite the Supreme Court’s

reliance on the absence of business

activities, a prohibition should not be

read into the opinion, since it would

unreasonably limit the activities of these

organizations.

However, the plain language of the

MCFL opinion endorses a complete

prohibition on business activities. The

Court said ‘‘MCFL has three features

essential to our holding that it cannot

constitutionally be bound by § 441b’s

restriction on independent spending.

First, it was formed for the express

purpose of promoting political ideas,

and cannot engage in business

activities.’’ MCFL, 479 U.S. at 264

(emphasis added). This statement

clearly supports a total ban on business

activities.

In addition, other parts of the opinion

make it clear that the Court based its

conclusion on the complete absence of

any business activities, and strongly

suggest that the presence of business

activities would have changed the

result. Earlier, the Court said that ‘‘the

concerns underlying the regulation of

corporate political activity are simply

absent with regard to MCFL. It is not the

case * * * that MCFL merely poses less

of a threat of the danger that has

prompted regulation. Rather, it does not

pose such a threat at all.’’ 479 U.S. at

263. In order to pose no such threat, a

corporation must be free from resources

obtained in the economic marketplace.

Only those corporations that cannot

engage in business activities are free

from these kinds of resources.

This approach will not unreasonably

limit the activities of a qualified

nonprofit corporation. The corporation

has at least two options for generating

revenue under the final rules. First, the

corporation can engage in unlimited

fundraising activities, so long as it

informs potential donors that it is

seeking donations that will be used for

political purposes, such as supporting

or opposing candidates. Second, the

corporation can establish a separate

segregated fund and make its

independent expenditures exclusively

from that fund.

Several other commenters also felt

that a limited amount of business

activity should be allowed, and argued

that the Commission should incorporate

the tax law concepts of related and

unrelated business activity into the final

rules. Under this approach, income from

activity that is related to the

corporation’s mission would not be

considered business activity, and as

such, would not affect its qualified

nonprofit corporation status. In

addition, qualified nonprofit

corporations would be permitted to

engage in some unrelated business

activity, so long as it does not become

the organization’s primary purpose.

However, reliance on these tax law

concepts would be inappropriate here

because the tax code was drafted to

serve different purposes. Section

501(c)(4) of the tax code grants tax

exempt status to organizations that

promote the social welfare. In exercising

its administrative discretion, the

Internal Revenue Service has concluded

that it is appropriate to allow social

welfare organizations to engage in some

unrelated business activity so long as it

does not become their primary purpose,

apparently believing that a limited

amount of business activity is not

incompatible with the promotion of

social welfare.

In contrast, section 441b seeks to

prevent the use of resources amassed in

the economic marketplace to gain an

unfair advantage in the political

marketplace. The MCFL Court

concluded that a complete prohibition

on the use of resources amassed in the

economic marketplace is necessary to

serve this purpose. Thus, the

Commission has incorporated this

prohibition into the final rules.

c. Shareholders/disincentives to

disassociate. The second feature that

distinguished MCFL from other

corporations was that ‘‘it ha[d] no

shareholders or other persons affiliated

so as to have a claim on its assets or

earnings.’’ 479 U.S. at 264. The Supreme

Court said this ‘‘ensures that persons

connected with the organization will

have no economic disincentive for

disassociating with it if they disagree

with its political activity.’’ Id. Later, in

Austin, the Court said that persons other

than shareholders may also face

disincentives to disassociate with the

corporation. ‘‘Although the Chamber

also lacks shareholders, many of its

members may be similarly reluctant to

withdraw as members even if they

disagree with the Chamber’s political

expression, because they wish to benefit

from the Chamber’s nonpolitical

programs. * * * The Chamber’s

political agenda is sufficiently distinct

from its educational and outreach

programs that members who disagree

with the former may continue to pay

dues to participate in the latter.’’ 494

U.S. at 663.

These characteristics have been

incorporated into paragraph (c)(3) of the

final rules. In the interests of clarity, the

rules separate these two characteristics

into separate subparagraphs. Only those

corporations that have the

characteristics set out in both

subparagraphs are exempt from the

independent expenditure prohibition.

i. Shareholders. Under paragraph

(c)(3)(i), a qualified nonprofit

corporation is one that has no

shareholders or other persons affiliated

in a way that could allow them to make

a claim on the organization’s assets or

earnings. Thus, if any of the persons

affiliated with a corporation have an

equitable or ownership interest in the

corporation, the corporation will not be

a qualified nonprofit corporation.

One commenter said the limitation on

persons with claims against the

corporation is unnecessary, and also

said it should be coupled with an

explanation that this restriction will not

deprive a corporation of the right to

have dues-paying members.

The Commission believes this

limitation is necessary to ensure that

associational decisions are based

entirely on political considerations.

However, this limitation will not

adversely affect corporations with duespaying members. In most cases, dues

payments are not investments made

with an expectation of return or

repayment. They do not give members

any right to the corporation’s assets or

earnings. Consequently, the existence of
35300 Federal Register / Vol. 60, No. 129 / Thursday, July 6, 1995 / Rules and Regulations

dues-paying members will not affect the

corporation’s exempt status.

Two commenters expressed concern

that paragraph 114.10(c)(3)(i) could be

read to deny exempt status to

corporations with employees or

creditors, because an employee of a

qualified nonprofit corporation could

have a claim against the corporation for

wages, and a creditor could have a claim

against the corporation on a debt.

The Commission has revised this

provision in accordance with these

comments. Claims held by employees

and creditors with no ownership

interest in the corporation arise out of

arms-length employment or credit

relationships, rather than an equitable

interest in the corporation.

Consequently, they will not be treated

as claims on the corporation’s assets or

earnings that affect the corporation’s

exemption from the independent

expenditure prohibition.

ii. Disincentives to disassociate.

Paragraph (c)(3)(ii) limits the exemption

to corporations that do not offer benefits

that are a disincentive for recipients to

disassociate themselves with the

corporation on the basis of its position

on a political issue. Thus, if the

corporation offers a benefit that

recipients lose if they end their

affiliation with the corporation, or

cannot obtain unless they become

affiliated, the corporation will not be a

qualified nonprofit corporation. This

provision ensures that the associational

decisions of persons who affiliate

themselves with the corporation are

based exclusively on political, rather

than economic, considerations.

The rule contains examples of

benefits that will be considered

disincentives to disassociate with the

corporation. First, credit cards,

insurance policies and savings plans

will be considered disincentives to

disassociate. Consequently, corporations

that offer such things as affinity credit

cards or life insurance will not be

qualified nonprofit corporations.

Second, training, education and

business information will be considered

disincentives to disassociate from the

corporation, unless the corporation

provides these benefits to enable the

persons who receive them to help

promote the group’s political ideas. This

provision allows a qualified nonprofit

corporation to provide its volunteers

with the training and information they

need to advocate its issues. However, if

the corporation provides other kinds of

training or information that is not

needed for its issue advocacy work, the

corporation will not be a qualified

nonprofit corporation.

One commenter objected to paragraph

(c)(3)(ii), saying that it would prevent

most organizations from qualifying for

the exemption. Other commenters urged

the Commission to distinguish between

benefits that are related to the

corporation’s issue advocacy work, or

grow out of it, and those that are

unrelated to that work, saying that only

the latter should be regarded as

disincentives to disassociate. These

commenters also recommended that a

substantiality test be used, so that

benefits that are insubstantial or create

an insignificant disincentive to

disassociate would not disqualify the

corporation.

The Commission has revised this

section to address some of the concerns

raised by the commenters. As indicated

above, paragraph 114.10(c)(3)(ii) has

been revised to say that, if a corporation

provides training or education that is

necessary to promote the organization’s

political ideas, the training will not be

considered an incentive to associate or

disincentive to disassociate.

However, the Commission has

decided against including a

substantiality test for benefits that

ostensibly create a less significant

disincentive to disassociate with the

corporation. Any disincentive, no

matter how small, can influence an

individual’s associational decisions,

particularly where the ‘‘cost’’ to the

individual of obtaining the benefit is

only a small yearly donation to the

corporation. For example, a corporation

might offer donors access to affinity

credit cards with no annual fee.

Although the actual dollar value of such

a benefit may be insignificant, it could

easily offset the donor’s annual

donation to the corporation. Thus,

membership levels would partially

reflect the popularity of the benefit

being offered, rather than exclusively

reflecting the popularity of the group’s

political ideas.

Including a substantiality test would

also force the Commission to determine

which benefits are substantial enough to

influence a particular individual’s

decision whether or not to continue

associating with an organization. The

Commission is reluctant to make these

difficult subjective determinations if

they can be avoided. Consequently, the

final rule does not contain a

substantiality threshold for

disincentives to disassociate with the

corporation.

e. Relationship with business

corporations and labor organizations.

The Supreme Court said that one of the

reasons MCFL was exempt from the

independent expenditure prohibition

was that it ‘‘was not established by a

business corporation or labor union, and

it is its policy not to accept

contributions from such entities.’’

MCFL, 479 U.S. at 264. This

characteristic has been incorporated

into paragraph (c)(4) of the final rules.

The final rule has been broken down

into three subparagraphs for purposes of

clarity.

Paragraph (c)(4)(i) implements the

first part of the Court’s statement. Only

corporations that were not established

by a business corporation or labor

organization can be eligible for an

exemption from, the independent

expenditure prohibition. Thus,

corporations that are set up by business

corporations or labor organizations

cannot be qualified nonpropfit

corporations.

Paragraph (c)(4)(ii) limits the

exemption to corporations that do not

directly or indirectly accept donations

of anything of value from business

corporations or labor organizations. This

includes donations received directly

from these entities, and donations that

pass through a third organization. Thus,

if a corporation accepts donations from

an organization that accepts donations

from these entities, the corporation will

not be a qualified nonprofit corporation.

The rule also limits the exemption to

corporations that can provide some

assurance that they do not accept

donations from business corporations or

labor organizations. Under paragraph

(c)(4)(iii), if the corporation can

demonstrate, through accounting

records, that it has not accepted any

donations from business corporations

and labor organizations in the past from

business corporations and labor

organizations in the past, it will be

eligible for the exemption. If it is

unable, for good cause, to make this

showing, it can provide adequate

assurance by showing that it has a

documented policy against accepting

donations from these entities. In order

to be documented, this policy must be

embodied in the organic documents of

the corporation, the minutes of a

meeting of the governing board, or a

directive from the person that controls

the day-to-day operation of the

corporation.

Most of the commenters objected to

an absolute ban on the acceptance of

business corporation and labor

organization donations, arguing that a

ban is not necessary and is not

supported by the court decisions.

Several commenters argued that MCFL’s

third requirement is met when an

organization is free from the influence

of business corporations. Others urged

the Commission to focus not on the

level of donations but on whether the
Federal Register / Vol. 60, No. 129 / Thursday, July 6, 1995 / Rules and Regulations 35301

corporation is acting as a ‘‘conduit’’ for

business corporation and labor

organization funds. One commenter

suggested that the Commission engage

in factual analyses to determine whether

an organization is under the influence of

a business corporation or labor

organization or is acting as a conduit for

the funds of such an organization.

However, the language of the MCFL

opinion supports a prohibition on

business corporation and labor

organization donations. The MCFL

Court said that one of the features

‘‘essential to [its] holding that [MCFL]

may not constitutionally be bound by

§ 441b’s restriction on independent

spending’’ was that ‘‘MCFL was not

established by a business corporation or

a labor union, and it is its policy not to

accept contributions from such

entities.’’ 479 U.S. at 263–64 (emphasis

added). The Court concluded that the

existence of this policy ‘‘prevents

[qualified nonprofit] corporations from

serving as conduits for the type of direct

spending that creates a threat to the

political marketplace.’’ Id. Thus,

although the MCFL Court was

concerned that business corporations

and labor organizations could

improperly influence qualified

nonprofit corporations and use them as

conduits to engage in political spending,

the Court saw MCFL’s policy of not

accepting business corporation or labor

organization donations as the way to

address these concerns.

The Austin decision explains why a

complete prohibition on these donations

is necessary to serve the purposes of

section 411b. In concluding that the

Michigan Chamber of Commerce was

not an MCFL-type corporation, the

Court recognized that the danger of

‘‘unfair deployment of wealth for

political purposes’’ exists whenever a

business corporation or labor

organization is able to funnel donations

through a qualified nonprofit

corporation. ‘‘Because the Chamber

accepts money from for-profit

corporations, it could, absent

application of [Michigan’s version of

section 441b], serve as a conduit for

corporate political spending.’’ Austin,

494 U.S. at 664. ‘‘Business corporations

* * * could circumvent the

[independent expenditure] restriction

by funneling money through the

Chamber’s general treasury.’’ Id.

Therefore, the Commission has

limited the exemption to corporations

that do not accept donations from

business corporation or labor

organizations. The Commission believes

it would be impractical to engage in

factual analyses to determine whether

an organization is actually influenced

by a business corporation or labor

organization or is acting as a conduit for

the funds of these entities. Furthermore,

nothing in the Court’s decisions

suggests that the Commission must

engage in such an inquiry. In fact, the

Court has specifically said that, with

regard to the application of section

441b, it will not ‘‘second-guess a

legislative determination as to the need

for prophylactic measures where

corruption is the evil feared.’’ FEC v.

National Right to Work Committee, 459

U.S. 197, 210 (1982) (‘‘NRWC’’).

Two commenters said it is impossible

to screen out all such donations, and

asserted that incidental or inadvertent

business corporation or labor

organization receipts should be

permitted. One commenter suggested a

de minimis test for a qualified nonprofit

corporation’s overall level of corporate

or labor support, and limits on the

percentage that could be accepted from

a single contributor. Another

commenter said the Commission should

allow qualified nonprofit corporations

to accept a de minimis amount of

corporate or labor organization

donations, so long as the corporation

segregates these donations in a separate

account and allocates expenses so that

the corporate funds are not used to

make independent expenditures.

In applying this rule, the Commission

will distinguish inadvertent acceptance

of prohibited donations from knowing

acceptance of a de minimis amount of

prohibited donations. Inadvertently

accepted prohibited donations will not

affect a corporation’s qualification for an

exemption from the independent

expenditure prohibition. However,

knowingly accepted prohibited

donations will void a corporation’s

exemption, even if the corporation

accepts only a de minimis amount. The

Commission notes that political

committees are required to screen their

receipts for prohibited contributions.

Most committees do so successfully,

even though many of them are small

and have limited resources. Qualified

nonprofit corporations will also be

expected to adopt a mechanism for

screening their receipts for prohibited

contributions in order to remain exempt

from the independent expenditure

prohibition.

Finally, the Commission notes that, in

most cases, the prohibition on indirect

business corporation and labor

organization donations in paragraph

(c)(4)(ii), discussed above, will not affect

qualified nonprofit corporations that

receive grants from organizations that

are tax exempt under section 501(c)(3).

Some qualified nonprofit corporations,

all of which are section 501(c)(4) tax

exempt organizations under the final

rules, may receive grants from section

501(c)(3) organizations. Because section

501(c)(3) organizations can accept

donations from business corporations

and labor organizations, paragraph

(c)(4)(ii) could be read to disqualify an

otherwise qualified nonprofit

corporation if it receives a grant from a

section 501(c)(3) organization.

However, under IRS rules, section

501(c)(4) organizations that receive

funds from a section 501(c)(3)

organization are required to use those

funds in a way that is consistent with

the section 501(c)(3) organization’s

exempt purpose. Since political

campaign intervention is never

consistent with a section 501(c)(3)

organization’s exempt purpose, the

recipient section 501(c)(4) organization

is not supposed to use the grant for

campaign activity. ‘‘[O]therwise, public

funds might be spent on an activity that

Congress chose not to subsidize.’’ Regan

v. Taxation With Representation, 461

U.S. 540, 544 (1982). So long as these

safeguards exist, the Commission will

not regard a grant from a section

501(c)(3) organization to a qualified

nonprofit corporation as an indirect

donation from a business corporation or

labor organization. Consequently, the

grant will not affect the organization’s

exemption from the independent

expenditure prohibition.

f. Section 501(c)(4) status. Paragraph

(c)(5) of the final rules limits the

exemption from the independent

expenditure prohibition to corporations

that are described in 26 U.S.C. 501(c)(4).

Section 501(c)(4) describes a class of

organizations known as social welfare

organizations that are exempt from

certain tax obligations. Under section

501(c)(4), a social welfare organization

is not organized for profit but is

operated exclusively for the promotion

of social welfare. A corporation must be

a social welfare organization in order to

be exempt from the prohibition on

independent expenditures.

IRS regulations state that the

promotion of social welfare does not

include ‘‘direct or indirect participation

or intervention in political campaigns

on behalf of or in opposition to any

candidate.’’ 26 CFR 1.501(c)(4)–

1(a)(2)(ii). However, the rules also state

that an organization is operated

exclusively for the promotion of social

welfare if it is ‘‘primarily’’ engaged in

promoting the common good and

general welfare of the people of the

community. 26 CFR 1.501(c)(4)–

1(a)(2)(i). Thus, the rules allow social

welfare organizations to engage in a

limited amount of political activity.
35302 Federal Register / Vol. 60, No. 129 / Thursday, July 6, 1995 / Rules and Regulations

The commenters expressed varying

views on this provision and its

relationship to the rest of the proposed

rules. Two commenters argued that

section 501(c)(4) organizations should

be presumptively exempt, regardless of

whether they have any of the other

characteristics of a qualified nonprofit

corporation. In contrast, two other

commenters said that the additional

characteristics should be included in

the final rules. These two commenters

noted that the Internal Revenue Code

allows business corporations and labor

organizations to make direct donations

to section 501(c)(4) organizations. Thus,

the additional characteristics must be

included in order to limit the exemption

from the independent expenditure

prohibition to the kind of organizations

described in the MCFL opinion.

The Commission has decided not to

recognize a presumption that social

welfare organizations are qualified

nonprofit corporations solely because of

their section 501(c)(4) status. Although

the characteristics of a social welfare

organization overlap to some extent

with MCFL’s three essential features,

they are not identical. This difference

results from the fact that the tax code

was written to serve different purposes

than the FECA. Thus, it would be

inappropriate to presume that all social

welfare organizations are entitled to an

exemption from the independent

expenditure prohibition.

Furthermore, the Internal Revenue

Service often uses general legal

principles to enforce the provisions of

the tax code. Thus, there will often be

no clearly stated IRS rule or policy that

the Commission can refer to in making

its determinations. In addition, filing for

formal recognition of tax exempt status

under section 501(c)(4) is permissive,

not required. As a result, the

Commission will not be able to rely on

the IRS for verification of an

organization’s tax exempt status.

Therefore, the Commission has

decided to include the additional

characteristics in the final rules, and

limit the exemption from the

independent expenditure prohibition to

corporations with these characteristics.

5. Other Requirements Not Included in

the Final Rules

The Notice of Proposed Rulemaking

contained a number of proposed

requirements that are not included in

the final rules. These proposals are

summarized below.

a. Affiliation with a separate

segregated fund. One proposal would

have denied the exemption to

corporations that have a separate

segregated fund. This proposal would

have the effect of requiring corporations

that have separate segregated funds to

make independent expenditures solely

from that fund, regardless of whether

they have the characteristics of a

qualified nonprofit corporation.

The commenters were universally

opposed to this proposal. One

commenter said such a rule would be

impossible to apply, and would lead to

a nonsensical result whereby small,

unsuccessful groups would be able to

make independent expenditures with

general treasury funds, while larger,

more successful groups would be

required to use their separate segregated

funds. Another commenter said that

there is no governmental interest in

denying the exemption to organizations

with separate segregated funds, because

the existence of such a fund does not

create a danger that the organization

will flood the electoral process with

business profits. A third commenter

objected to this criterion, arguing that

the constitutional theory underlying the

MCFL decision did not rely upon

MCFL’s allegations of the difficulty

faced by small nonprofits attempting to

comply with FEC regulations.

Although a bright line rule such as

this one would be very useful in

implementing the Court decisions, the

Commission has not included this

proposal in the final rules.

Consequently, corporations with these

characteristics will be exempt from the

independent expenditure prohibition

regardless of whether they have a

separate segregated fund.

b. Eligibility to file IRS Form 990EZ.

The NPRM proposed to limit the

exemption from the independent

expenditure prohibition to corporations

with limited financial resources by

requiring them to be eligible to file their

tax returns on Internal Revenue Service

Form 990EZ. Form 990EZ is available to

organizations that have gross receipts

during the year of less than $100,000

and total assets at the end of the year of

less than $250,000.

Most commenters objected to this

proposal. Several commenters observed

that an organization’s size was not

included in the list of essential features,

and also said that it has no relationship

to the justification given for the

regulation of corporate political speech.

One commenter argued that the filing

eligibility levels are so low that most

‘‘substantial’’ organizations would not

qualify for an exemption.

In contrast, one commenter supported

the use of the Form 990EZ eligibility

thresholds as a criterion for an

exemption from the independent

expenditure prohibition. This

commenter thought it should be used to

prevent groups with extensive financial

resources from exacting political debts

from candidates by giving them

significant support. He argued that there

is a compelling state interest in

preventing organizations from seeking a

quid pro quo.

The Commission is concerned that

this proposal may be difficult to

administer, and so has decided not to

include it in the final rules. The Internal

Revenue Service submitted comments

in which it noted that only those section

501(c)(4) organizations that are formally

recognized as tax exempt can file Form

990 or 990EZ. Organizations that are not

formally recognized must file as taxable

organizations, usually on Form 1120.

Consequently, there may not be an easy

way to confirm an organization’s

eligibility to file Form 990EZ. In

addition, organizations with less than

$25,000 in annual gross receipts have no

real need to seek formal recognition,

since they are not required to file tax

returns at all. Thus, there will be no way

to confirm the filing eligibility of these

organizations.

The IRS also noted that the eligibility

requirements for filing Form 990EZ may

change from time to time. This would

have the effect of changing the

eligibility requirements for an

exemption from the independent

expenditure prohibition.

Consequently, the Commission has

excluded this proposal from the final

rules. Corporations with the

characteristics in paragraph (c) will be

exempt regardless of whether they are

eligible to file Form 990EZ.

c. Less sophisticated fundraising

techniques. The narrative portion of the

NPRM indicated that the Commission

was considering limiting the exemption

to groups that use the less sophisticated

fundraising techniques typically

employed by grass roots organizations.

One criterion considered would deny

the exemption to organizations that

utilize more formalized fundraising

methods such as direct mail solicitation.

However, the Commission has

decided not to include this in the final

rules. Corporations with the

characteristics set out in paragraph (c)

will be exempt from the independent

expenditure prohibition regardless of

how they raise funds, so long as their

fundraising activity is not business

activity under paragraph (b)(3) of the

final rules.

6. Reconstituting as a Qualified

Nonprofit Corporation

The Commission recognizes that some

corporations that are not qualified

nonprofit corporations may wish to

reconstitute themselves so that they
Federal Register / Vol. 60, No. 129 / Thursday, July 6, 1995 / Rules and Regulations 35303

qualify for an exemption from the

independent expenditure prohibition. In

order to become a qualified nonprofit

corporation, a corporation must adopt

the essential characteristics set out in

paragraph (c) of the final rules. In

addition, the corporation must purge its

accounts of corporate and labor

organization donations and implement a

policy to ensure that it does not accept

these donations in the future. Once it

adopts the essential characteristics,

purges its accounts, and implements

such a policy, the corporation will

become a qualified nonprofit

corporation.

7. Permitted Corporate Independent

Expenditures

Paragraph (d) states that qualified

nonprofit corporations can make

independent expenditures, as defined in

11 CFR Part 109, without violating the

prohibitions on corporate expenditures

in 11 CFR Part 114. However, this

paragraph also emphasizes that

qualified nonprofit corporations remain

subject to the other requirements and

limitations in Part 114, in particular, the

prohibition on corporate contributions,

whether monetary or in-kind.

The Commission received no

comments on this provision, and has

retained it in the final rules.

8. Reporting Requirements

Paragraph (e) requires a corporation

that makes independent expenditures to

certify that it is a qualified nonprofit

corporation under this section and

report its independent expenditures.

The procedures for certifying exempt

status are set out in paragraph (e)(1).

The requirements for reporting

independent expenditures are set out in

paragraph (e)(2).

Under paragraph (e)(1), the

corporation must certify that it is

eligible for an exemption from the

independent expenditure prohibition.

This certification must be submitted no

later than the date upon which the

corporation’s first independent

expenditure report is due under

paragraph (e)(2), which will be

described in detail below. However, the

corporation is not required to submit

this certification prior to making

independent expenditures. The

certification can be made as part of FEC

Form 5, which the Commission will be

modifying for use in this situation. Or,

the corporation can submit a letter that

contains the name, address, signature

and printed name of the individual

filing the report, and certifies that the

corporation has the characteristics set

out in paragraph (c).

One of the alternatives set out in the

NPRM would have required qualified

nonprofit corporations to submit much

more detailed information in order to

qualify for exempt status. The

Commission decided not to include

these requirements in the final rules in

order to minimize the reporting burdens

on qualified nonprofit corporations.

Instead, the Commission has decided to

require only that corporations certify

that they have the characteristics of a

qualified nonprofit corporation when

they make independent expenditures.

This will ensure that corporations

claiming to be exempt are aware of the

characteristics required to qualify for an

exemption.

Paragraph (e)(2) states that qualified

nonprofit corporations must comply

with the independent expenditure

reporting persons who make

independent expenditures in excess of

$250 in a calendar year to report those

expenditures using FEC Form 5. This

report must include the name and

mailing address of the person to whom

the expenditures was made, the amount

of the expenditure, an indication as to

whether the expenditure was in support

of or in opposition to a candidate, and

a certification as to whether the

corporation made the expenditure in

cooperation or consultation with the

candidate. The names of persons who

contributed more than $200 towards the

expenditure must also be reported.

Thus, the final rules treat qualified

nonprofit corporations as individuals

for the purposes of the reporting

requirements. This is one of the least

burdensome reporting schemes

contained in the FECA. The MCFL Court

specifically endorsed this approach

when it said that the disclosure

provisions of 2 U.S.C. 434(c) will

‘‘provide precisely the information

necessary to monitor [the corporation’s]

independent spending activity and its

receipt of contributions.’’ MCFL, 479

U.S. at 262. None of the commenters

discussed the proposed independent

expenditure reporting requirements.

In another part of its opinion, the

MCFL Court also said that ‘‘should

MCFL’s independent spending become

so extensive that the organization’s

major purpose may be regarded as

campaign activity, the corporation

would be classified as a political

committee.’’ MCFL, 479 U.S. at 262. The

proposed rules set out a test for

determining a corporation’s major

purpose, and also contained proposed

reporting requirements related to that

test. These reporting requirements were

set out in paragraph (e) of the proposed

rules.

As will be discussed further below,

the Commission has decided not to

address this part of the Court’s opinion

in the final rules being promulgated

today, preferring to do so at a later date

as part of a separate rulemaking.

Consequently, the reporting

requirements related to the major

purpose test have been deleted from

paragraph (e) of the final rules.

However, these rules may eventually be

amended to require reporting of

information related to the major purpose

concept. Any such changes will be

made as part of the separate rulemaking.

9. Solicitation Disclosure

Section 114.10(f) of the final rules

states that when a qualified nonprofit

corporation solicits donations, the

solicitation must inform potential

donors that their donations may be used

for political purposes, such as

supporting or opposing candidates. This

rule, which has been modified slightly

from the proposed rule, requires

qualified nonprofit corporations to

include a disclosure statement in their

solicitations for donations.

One commenter called this an

‘‘unjustifiable roadblock’’ to the exercise

of constitutional rights by small

nonprofit corporations, and speculated

that the people who run these

organizations won’t know about this

requirement until after a complaint is

filed against them.

However, this disclosure requirement

directly serves the purposes of the MCFL

exemption. In carving out this

exemption, the Supreme Court said

‘‘[t]he rationale for regulation is not

compelling with respect to independent

expenditures by [MCFL]’’ because

‘‘[i]ndividuals who contribute to

appellee are fully aware of its political

purposes, and in fact contribute

precisely because they support those

purposes.’’ MCFL at 260–61. ‘‘Given a

contributor’s awareness of the political

activity of [MCFL], as well as the readily

available remedy of refusing further

donations, the interest [of] protecting

contributors is simply insufficient to

support § 441b’s restriction on the

independent spending of MCFL.’’ Id. at

262 (emphasis added).

The MCFL Court went on to endorse

the disclosure requirement as a way to

ensure that persons who make

donations are aware of how those

donations may be used. The Court said

the need to make donors aware that

their donations may be used to ‘‘urge

support for or opposition to political

candidates’’ can be met by ‘‘simply

requiring that contributors be informed

that their money may be used for such

a purpose.’’ MCFL, 479 U.S. at 261.
35304 Federal Register / Vol. 60, No. 129 / Thursday, July 6, 1995 / Rules and Regulations

Furthermore, the Commission does

not regard anticipated ignorance of a

regulation as a legitimate argument

against the promulgation of that

regulation, particularly when the

regulation will implement the

Commission’s statutory mandate and

the holding of a Supreme Court

decision.

Therefore, the Commission has

included this requirement in the final

rules. The Commission does not expect

this requirement to impose a significant

burden on qualified nonprofit

corporations. For example, corporations

need not say anything more than

‘‘donations to xyz organization may be

used for political purposes, such as

supporting or opposing candidates,’’ or

similar language, in order to satisfy this

requirement. This will ensure that

donors are aware of the corporation’s

campaign activity.

10. Non-authorization Notification

Paragraph (g) of the final rules

requires qualified nonprofit

corporations that make independent

expenditures to comply with the

disclaimer requirements in 11 CFR

110.11. Section 110.11 requires any

person financing an express advocacy

communication to include a statement

in the communication identifying who

paid for it. 11 CFR 110.11(a)(1). This

statement must also identify the

candidate or committee who authorized

the communications, unless the

communications was not authorized by

any candidate or committee, in which

case, it must so indicate. 11 CFR

110.11(a)(1)(iii). Thus, a qualified

nonprofit corporation that finances an

independent expenditure must include

a disclaimer that states the name of the

corporation and indicates that the

communication was not authorized by

any candidate or candidate’s committee.

The Commission received no comments

on this provision.

11. Major Purpose

In MCFL, the Court said that ‘‘should

MCFL’s independent spending become

so extensive that the organization’s

major purpose may be regarded as

campaign activity, the corporation

would be classified as a political

committee. * * * As such, it would

automatically be subject to the

obligations and restrictions applicable

to those groups whose primary objective

is to influence political campaigns.’’ 479

U.S. at 262 (citation omitted).

The NPRM sought comments on a

number of issues related to this part of

the Court’s opinion. For example, the

notice set out two alternative versions of

a test for determining whether a

qualified nonprofit corporation’s major

purpose is making independent

expenditures. The notice also

specifically sought comments on

whether these tests should turn on

whether independent expenditures are

‘‘a’’ major purpose or ‘‘the’’ major

purpose of the corporation. As

discussed above, the notice also

contained proposed requirements for

reporting the information that the

Commission would need for these tests.

Several commeters submitted views on

these issues.

The Commission has decided not to

address this part of MCFL in the final

rules. In its administration of the Act,

the Commission is applying a major

purpose concept in other contexts that

do not involve qualified nonprofit

corporations. The Commission would

prefer to promulgate a major purpose

test that will govern in all of these

situations. Such a rule is beyond the

scope of this rulemaking.

Therefore, the Commission has

decided to initiate a separate

rulemaking to address this part of MCFL

and other outstanding issues. Any

further definition or refinement of the

major purpose concept and the

associated reporting requirements will

be done in that rulemaking. The

comments submitted on these issues in

response to the NPRM will be

considered as part of this separate

rulemaking.

However, in the meantime, the

Commission cautions, that, ‘‘should [a

qualified nonprofit corporation’s]

independent spending become so

extensive that [its] major purpose may

be regarded as campaign activity,’’ it

will be treated as a political committee

under the FECA and subject to the

applicable regulations.

Certification of No Effect Pursuant to 5

U.S.C. § 605(b) [Regulatory Flexibility

Act]

The attached final rules will not, if

promulgated, have a significant

economic impact on a substantial

number of small entities. The basis for

this certification is that the definition of

express advocacy will not have a

significant economic impact on a

substantial number of small entities. In

addition, as anticipated by the Supreme

Court in MCFL, there may not be a

substantial number of small entities

affected by the final rules. The new

disclosure rules for qualified nonprofit

corporations, which are small entities,

are the least burdensome requirements

possible under the FECA.

List of Subjects

11 CFR Part 100

Elections

11 CFR Part 106

Campaign funds

Political candidates

Political committees and parties

11 CFR Part 109

Campaign funds

Elections

Polticial candidates

Political committees and parties

Reporting requirements

11 CFR Part 114

Business and industry

Elections

Labor

For the reasons set out in the

preamble, Subchapter A, Chapter I of

Title 11 of the Code of Federal

Regulations is amended as follows:

PART 100—SCOPE AND DEFINITIONS

(2 U.S.C. 431)

1. The authority citation for 11 CFR

Part 100 continues to read as follows:

Authority: 2 U.S.C. 431, 438(a)(8).

2. 11 CFR Part 100 is amended by

revising section 100.17 to read as

follows:

§ 100.17 Clearly identified (2 U.S.C.

431(18)).

The term clearly identified means the

candidate’s name, nickname,

photograph, or drawing appears, or the

identity of the candidate is otherwise

apparent through an unambiguous

reference such as ‘‘the President,’’ ‘‘your

Congressman,’’ or ‘‘the incumbent,’’ or

through an unambiguous reference to

his or her status as a candidate such as

‘‘the Democratic presidential nominee’’

or ‘‘the Republican candidate for Senate

in the State of Georgia.’’

3. 11 CFR Part 100 is amended by

adding section 100.22 to read as follows:

§ 100.22 Expressly advocating (2 U.S.C.

431(17)).

Expressly advocating means any

communication that—(a) Uses phrases

such as ‘‘vote for the President,’’ ‘‘reelect your Congressman,’’ ‘‘support the

Democratic nominee,’’ ‘‘cast your ballot

for the Republican challenger for U.S.

Senate in Georgia,’’ ‘‘Smith for

Congress,’’ ‘‘Bill McKay in ‘94,’’ ‘‘vote

Pro-Life’’ or ‘‘vote Pro-Choice’’

accompanied by a listing of clearly

identified candidates described as ProLife or Pro-Choice, ‘‘vote against Old

Hickory,’’ ‘‘defeat’’ accompanied by a

picture of one or more candidate(s),
Federal Register / Vol. 60, No. 129 / Thursday, July 6, 1995 / Rules and Regulations 35305

‘‘reject the incumbent,’’ or

communications of campaign slogan(s)

or individual word(s), which in context

can have no other reasonable meaning

than to urge the election or defeat of one

or more clearly identified candidate(s),

such as posters, bumper stickers,

advertisements, etc. which say ‘‘Nixon’s

the One,’’ ‘‘Carter ’76,’’ ‘‘Reagan/Bush’’

or ‘‘Mondale!’’; or

(b) When taken as a whole and with

limited reference to external events,

such as the proximity to the election,

could only be interpreted by a

reasonable person as containing

advocacy of the election or defeat of one

or more clearly identified candidate(s)

because—

(1) The electoral portion of the

communication is unmistakable,

unambiguous, and suggestive of only

one meaning; and

(2) Reasonable minds could not differ

as to whether it encourages actions to

elect or defeat one or more clearly

identified candidate(s) or encourages

some other kind of action.

PART 106—ALLOCATION OF

CANDIDATE AND COMMITTEE

ACTIVITIES

4. The authority citation for 11 CFR

Part 106 continues to read as follows:

Authority: 2 U.S.C. 438(a)(8), 441a(b),

441a(g).

5. 11 CFR Part 106 is amended by

revising paragraph (d) of section 106.1

to read as follows:

§ 106.1 Allocation of expenses between

candidates.

* * * * *

(d) For purposes of this section,

clearly identified shall have the same

meaning as set forth at 11 CFR 100.17.

* * * * *

PART 109—INDEPENDENT

EXPENDITURES (2 U.S.C. 431(17),

434(c))

6. The authority citation for 11 CFR

Part 109 continues to read as follows:

Authority: 2 U.S.C. 431(17), 434(c),

438(a)(8), 441d.

7. 11 CFR Part 109 is amended by

revising paragraphs (b)(1), (b)(2) and

(b)(3) of section 109.1 to read as follows:

§ 109.1 Definitions (2 U.S.C. 431(17)).

* * * * *

(b) For purposes of this definition—

(1) Person means an individual,

partnership, committee, association,

qualified nonprofit corporation under

11 CFR 114.10(c), or any organization or

group of persons, including a separate

segregated fund established by a labor

organization, corporation, or national

bank (see part 114) but does not mean

a labor organization, corporation not

qualified under 11 CFR 114.10(c), or

national bank.

(2) Expressly advocating shall have

the same meaning as set forth at 11 CFR

100.22.

(3) Clearly identified shall have the

same meaning as set forth at 11 CFR

100.17.

* * * * *

PART 114—CORPORATE AND LABOR

ORGANIZATION ACTIVITY

8. The authority citation for Part 114

continues to read as follows:

Authority: 2 U.S.C. 431(8)(B), 431(9)(B),

432, 437d(a)(8), 438(a)(8), and 441b.

9. 11 CFR Part 114 is amended by

revising paragraph (b) of section 114.2

to read as follows:

§ 114.2 Prohibitions on contributions and

expenditures.

* * * * * * *

(b) Except as provided at 11 CFR

114.10, any corporation whatever or any

labor organization is prohibited from

making a contribution or expenditure as

defined in 11 CFR 114.1(a) in

connection with any Federal election.

* * * * *

10. 11 CFR Part 114 is amended by

adding section 114.10 to read as follows:

§ 114.10 Nonprofit corporations exempt

from the prohibition on independent

expenditures.

(a) Scope. This section describes those

nonprofit corporations that qualify for

an exemption from the prohibition on

independent expenditures contained in

11 CFR 114.2. It sets out the procedures

for demonstrating qualified nonprofit

corporation status, for reporting

independent expenditures, and for

disclosing the potential use of donations

for political purposes.

(b) Definitions. For the purposes of

this section—

(1) The promotion of political ideas

includes issue advocacy, election

influencing activity, and research,

training or educational activity that is

expressly tied to the organization’s

political goals.

(2) A corporation’s express purpose

includes:

(i) The corporation’s purpose as stated

in its charter, articles of incorporation,

or bylaws, except that a statement such

as ‘‘any lawful purpose,’’ ‘‘any lawful

activity,’’ or other comparable statement

will not preclude a finding under

paragraph (c) of this section that the

corporation’s only express purpose is

the promotion of political ideas;

(ii) The corporation’s purpose as

publicly stated by the corporation or its

agents; and

(iii) Purposes evidenced by activities

in which the corporation actually

engages.

(3) (i) The term business activities

includes but is not limited to:

(A) Any provision of goods or services

that results in income to the

corporation; and

(B) Advertising or promotional

activity which results in income to the

corporation, other than in the form of

membership dues or donations.

(ii) The term business activities does

not include fundraising activities that

are expressly described as requests for

donations that may be used for political

purposes, such as supporting or

opposing candidates.

(4) The term shareholder has the same

meaning as the term stockholder, as

defined in 11 CFR 114.1(h).

(c) Qualified nonprofit corporations.

For the purposes of this section, a

qualified nonprofit corporation is a

corporation that has all the

characteristics set forth in paragraphs

(c)(1) through (c)(5) of this section:

(1) Its only express purpose is the

promotion of political ideas, as defined

in paragraph (b)(1) of this section;

(2) It cannot engage in business

activities;

(3) It has:

(i) No shareholders or other persons,

other than employees and creditors with

no ownership interest, affiliated in any

way that could allow them to make a

claim on the organization’s assets or

earnings; and

(ii) No persons who are offered or

who receive any benefit that is a

disincentive for them to disassociate

themselves with the corporation on the

basis of the corporation’s position on a

political issue. Such benefits include

but are not limited to:

(A) Credit cards, insurance policies or

savings plans; and

(B) Training, education, or business

information, other than that which is

necessary to enable recipients to engage

in the promotion of the group’s political

ideas.

(4) It:

(i) Was not established by a business

corporation or labor organization;

(ii) Does not directly or indirectly

accept donations of anything of value

from business corporations, or labor

organizations; and

(iii) If unable, for good cause, to

demonstrate through accounting records

that paragraph (c)(4)(ii) of this section is

satisfied, has a written policy against

accepting donations from business

corporations or labor organizations; and
35306 Federal Register / Vol. 60, No. 129 / Thursday, July 6, 1995 / Rules and Regulations

(5) It is described in 26 U.S.C.

501(c)(4).

(d) Permitted corporate independent

expenditures.

(1) A qualified nonprofit corporation

may make independent expenditures, as

defined in 11 CFR part 109, without

violating the prohibitions against

corporate expenditures contained in 11

CFR part 114.

(2) Except as provided in paragraph

(d)(1) of this section, qualified nonprofit

corporations remain subject to the

requirements and limitations of 11 CFR

part 114, including those provisions

prohibiting corporate contributions,

whether monetary or in-kind.

(e) Qualified nonprofit corporations;

reporting requirements.

(1) Procedures for demonstrating

qualified nonprofit corporation status. If

a corporation makes independent

expenditures under paragraph (d)(1) of

this section that aggregate in excess of

$250 in a calendar year, the corporation

shall certify, in accordance with

paragraph (e)(1)(ii) of this section, that

it is eligible for an exemption from the

prohibitions against corporate

expenditures contained in 11 CFR part

114.

(i) This certification is due no later

than the due date of the first

independent expenditure report

required under paragraph (e)(2).

However, the corporation is not

required to submit this certification

prior to making independent

expenditures.

(ii) This certification may be made

either as part of filing FEC Form 5

(independent expenditure form) or by

submitting a letter in lieu of the form.

The letter shall contain the name and

address of the corporation and the

signature and printed name of the

individual filing the qualifying

statement. The letter shall also certify

that the corporation has the

characteristics set forth in paragraphs

(c)(1) through (c)(5) of this section.

(2) Reporting independent

expenditures. Qualified nonprofit

corporations that make independent

expenditures aggregating in excess of

$250 in a calendar year shall file reports

as required by 11 CFR 109.2.

(f) Solicitation; disclosure of use of

contributions for political purposes.

Whenever a qualified nonprofit

corporation solicits donations, the

solicitation shall inform potential

donors that their donations may be used

for political purposes, such as

supporting or opposing candidates.

(g) Non-authorization notice.

Qualified nonprofit corporations making

independent expenditures under this

section shall comply with the

requirements of 11 CFR 110.11.

Dated: June 30, 1995.

Danny L. McDonald,

Chairman.

[FR Doc. 95–16502 Filed 7–5–95; 8:45 am]

BILLING CODE 6715–01–M