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Donor Disclosure: Will FEC's Dismissal of Complaint Usher in More Secrecy in 2014?
By Lawrence H. Norton & Margaret Rohlfing on August 15, 2013
Posted in 501(c)(4), Campaign Finance, FEC, Super PACs
With donors now allowed to give unlimited sums to Super PACs and other political advocacy groups, the biggest issue in campaign finance regulation is what such groups must disclose about their fundraising and spending, and when. Some states have moved aggressively to bolster their disclosure rules, with a couple of states filing suit to force groups engaged in election spending to unmask their donors.
The federal response has been a different story, with no consensus on a path forward, let alone agreement that new disclosure rules are necessary in a post-Citizens United world. A little-noticed statement released by the three Republican Commissioners of the Federal Election Commission ("FEC") suggests that groups active in 2014 may actually find it easier to avoid registering as Super PACs and disclosing their donors.
The 26-page statement explains the Commission's dismissal of a complaint charging that American Issues Project ("AIP"), a 501(c)(4), failed to register with the FEC and file reports as a federal political committee. AIP spent over $2.8 million in the 2008 election on ads attacking then-candidate Barack Obama. The two Democrats on the Commission found reason to believe a violation had occurred – the sixth seat on the Commission is vacant right now – but that left the matter short of the votes necessary to move forward.
How does a group that spends almost $3 million on negative campaign ads avoid registering and filing reports as a federal political committee – or as it would be characterized if it registered today, a Super PAC? Because, according to the three Republican Commissioners, AIP's "major purpose" – the Constitutional test for determining when a group is acting as a political committee – was not influencing federal elections.
First, the Commissioners noted AIP's self-described mission, as reflected in IRS and corporate filings, which was to advocate for conservative principles, including limited government, lower taxes, and a strong national defense. Thus, the Commissioners reasoned, AIP's "central organizational purpose" related to issues, not federal candidates.
Second, according to the three Commissioners, AIP's spending showed that its major purpose was not to nominate or elect federal candidates. In each of its fiscal years (which ran from May 1 to April 30), AIP reported combined spending on "management and general expenses," "fundraising expenses," "program services, and other activities in excess of the amount it spent on express electoral advocacy. Even looking only at "non-overhead" expenses, the Commissioners concluded that the $2.8 million ad buy represented slightly less than 45% of AIP's total spending from the organization's inception in 2007 until it ceased operating in 2010. To determine a group's major purpose, the Commissioners wrote, spending must be viewed over time, not within a single calendar year.
Where does this leave things for advocacy groups in 2014? The AIP case may prompt more organizations to forgo registering and reporting as Super PACs, opting instead for the 501(c)(4) form that generally does not require disclosing donors. Such groups will have to be careful in publicly describing their activities and ensure that over the long term their expenses for express electoral advocacy are exceeded by their combined expenses for everything else. While a future complaint will likely be considered by a new group of FEC Commissioners, the Commission has traditionally been reluctant to impose penalties for conduct that it found in a prior case did not violate the law.
But even if an organization manages to skirt registration and reporting as a federal political committee, it cannot escape FEC rules entirely. The organization must file 24- and 48-hour independent expenditure reports that itemize its spending on express electoral advocacy and must include disclaimers on such advertising. Also, regardless of whether it operates as a Super PAC or 501(c)(4), a group must be careful to observe coordination rules that can treat certain spending as a prohibited in-kind contribution to a campaign or political party. Finally, a 501(c)(4) group must navigate IRS rules that prohibit such organizations from making intervention in political campaigns its primary activity. The IRS "primary activity" test is not the same as the FEC's "major purpose" test and can be just as difficult to apply.
In speaking for the Supreme Court's majority in Citizens United, Justice Kennedy lauded the benefits of prompt disclosure, noting that it enables shareholders to make informed decisions and "citizens can see whether elected officials are 'in the pocket' of so-called moneyed interests." While these general principles are widely accepted, the stakes as to how disclosure should work, and when anonymity is permissible, are much higher now that groups may raise unlimited sums from individuals and corporations. The AIP case suggests that it may be some time before disclosure meets Justice Kennedy's ideal.
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