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Hearing of the House Administration Committee - The Federal Election Commission

Location: Washington, DC

Federal News Service









REP. JOHN B. LARSON (D-CT): Thank you very much, Mr. Chairman.

I want to thank you and also thank our distinguished panelists for being here this afternoon and for holding this oversight hearing to review the Federal Election Commission's rulemaking process regarding 527 groups. I know in conversations with the chairman the need for additional hearings related to this issue under the committee's jurisdiction, and especially given the chairman's major role and the outstanding role he played in the passage of HAVA, and also concerns that I think a number of members have about the presidential public financing fund and also the role, and I'm going to be interested in hearing from the commission about this, 501(3)©s may be playing in influencing elections.

To those ends, I'd seek unanimous consent to ask that this article from the "Washington Monthly" be inserted as part of the record, which explores at length the --

REP. NEY: Can I read it first?

REP. LARSON: (Laughs.) Yes.

REP. NEY: Without objection.

REP. LARSON: Both 527s and also the relationship between 527s and 501©s and the potential for one to sort of meld into the other, which I found both interesting reading and also I'm sure made for the complexity involved in the decision making that all of you on the commission have been asked to give.

The news media for the most part has been able to focus on 527s because they have disclosure requirements which makes information readily available. But some groups are using 501© status as a way not to disclose their donors' activities, and these groups may be bigger-may be a bigger influence on elections than 527s are perceived. One group, Americans For Job Security, by all appearances is raising millions of non-federal dollars for the sole purpose of defeating the Democrats. This is done without the same donor disclosure rules that 527s follow. While we are here to talk about the FEC rulemaking process, I am interested in hearing from the witnesses how they can bring these groups, that have been called shadow Republican Party, out into the light as well. And, again, as I've indicated, I'd like to submit this article for the record.

527s are named after a section of the Internal Revenue Code that specifies the tax treatment accorded political organizations and tax exempt organizations which make political expenditures. Congress, as was pointed out by the chair, has addressed 527s twice in the last four years. In 2000 we passed legislation that required all 527s that expect to have gross receipts of over $25,000 during a taxable year to register with the Internal Revenue Service within 24 hours of their formation, if they were not required to report to the FEC. These 527s are then subject to the public disclosure and review requirements of the IRS and if they meet additional requirements, they are subject to public disclosure and review requirements of the FEC as well.

I note that our distinguished colleague Mr. Doolittle has just arrived, and in "Roll Call" on May 17 he said, "I appreciate today's FEC decision which applied a strict constructionalist approach to the law and rendered its decision in a fair and impartial manner." I agree with Mr. Doolittle. He went on to say, "The ruling did not attempt to make law as the petitioners had sought, but instead followed the law as it was written by Congress." He then added, "As abysmal as that law may be."


REP. JOHN T. DOOLITTLE (R-CA): (Off mike.)

REP. LARSON: (Laughs.) Yeah. Well, I just wanted to make sure I gave you full credit, but wanted you to know that in the spirit of what you had to say I was in agreement, not necessarily with your final comment. But in 2002 we passed legislation which was intended, among other things, to reduce unnecessary and duplicative federal reporting by certain state and local political communities where the information was already required to be reported and be publicly disclosed under the state law.

Federal courts have not been silent on the matter of 527 disclosure requirements. On Christmas Eve of last year the U.S. Court of Appeals for the 11th Circuit unanimously reversed the District Court ruling in Mobile Republican Assembly v The U.S. The Court of Appeals held that the disclosure requirements do not impose an unconstitutional penalty on 527s, that disclosure requirements are merely a condition precedent to receiving a federal subsidy by way of a voluntary tax exemption.

Last December in McConnell v The Federal Election Commission the Supreme Court clearly stated that placing limits on raising of unregulated corporate, union and large individual contributions donated by organizations and individuals with general or specific legislative objectives would not have the same application to broader citizen-based interest groups. Any entity that believes, feels, that these disclosure requirements are too severe may choose to organize differently. While they may be subject to higher corporation taxes and additional regulations, it is their choice. Congress is free to impose additional regulations on 527s if it can be clearly demonstrated that these groups have the same corrosive influence on the electoral process."

I would encourage a cautious approach to the imposition of additional restrictions. Political free speech, as has been noted by the chair, is the lifeblood of any vibrant democracy. Congress should not restrict individuals from donating money to groups like the NRA for use in publishing a legislative report card on the voting records of members of Congress, nor restrict the National Association for the Advancement of Colored People from spending contributed funds to conduct voter registration drives. Arguably, these types of activities amount to public service functions and Congress should encourage these citizen-based activities, and not stymie groups from informing the public about their position or from getting more citizens to participate in our democracy.

I supported BCRA because it served the link between undisclosed and unregulated political contributions, known as soft money, and the corrosive effect such contributions have on the credibility of government, on federal officeholders, on candidates and their parties. To say that the law is-the chairman pointed out, is difficult to interpret and gray and vague in many areas is an understatement, and to-I think further complicates the task that the FEC has at hand. But, again, that's why I would urge caution in moving forward.

The FEC voted unanimously last week to accept the general counsel's recommendation to act within the next 90 days. I am interested in hearing from the commissioners on what will happen in that timeframe, and if that is enough time to issue any changes. I would like to bring to the commission's attention that when Congress enacted BCRA, we chose to defer the effective date to the following election cycle. This decision allowed all affected groups and parties to have sufficient time to transition from existing rules to the new rules under BCRA without distorting the electoral process in mid cycle, where we find ourselves currently.

The FEC should continue to take whatever time is needed to adequately consider and craft any proposed changes, but with an eye toward avoiding disruptions during the present election cycle, which would affect political committees, organizations and candidates. I look forward to hearing how the commission reach their decisions and what the future may hold for 527s.

REP. NEY: I want to thank the ranking member.


REP. LARSON: Thank you, Mr. Chairman.

And let me start by saying again the profound respect that I have for the difficulty of the task that you have at hand, as witnessed by the testimony and the answers that you all have given. I find it interesting too that the four of you represent Republicans, Democrat, Democrat, Republican as well. And I do believe that the task at hand is a very difficult one and advise caution. I was struck by what Mr. Thomas had to say about wanting to go in and put out a fire. But I wanted to ask you what kind of a fire do you think is raging with respect to 501Cs? And if we're going to put out a fire, shouldn't we put out the entire fire?

MR. THOMAS: Congressman, that's a great point. And I think we should, if we find the same kind of abuse in the 501C area, basically apply the same legal analysis ultimately. If the major purpose of the organization could be shown based on reasonable objective analysis to be influencing elections, then I say you could apply the same test. Now, Commissioner Toner and I in our proposal were attempting to focus initially on the 527 phenomenon because those folks under the tax laws have that special for the purpose of influencing kind of construct that they have to follow in the first place. But we were intending for these other groups, the 501C groups, to allow for appropriate regulation either by the IRS or by the FEC based on the whole body of current applicable law. So I hope you'll appreciate that we are hoping to be vigilant in that area if the case arises.

REP. LARSON: Well, I think the reason I raise that, and strictly in looking at the broader picture-and, again, this is a task that you have as well. But it does occur to me that in this article that I've asked to be introduced for the record they talk about-well, look, let's be honest about this. If you really tear pare these issues, aren't we talking, you know, the term "shadow Democratic Party" and "shadow Republican Party," I suppose you could apply to 527s or 501Cs dependent upon how you look at these organizations and their intent.

I want to read you a comment that the author makes. I thought it was kind of profound. He should, "Should the Republican shadow party give Bush the extra artillery he needs to prevail against Kerry, the newspaper editorialists and good government activists may some day regret the fact that they decried the Democratic shadow party while blithely ignoring the Republican version. Not because it may get Bush elected, but because it will drive the whole soft money political economy deeper underground.

Should Kerry lose, the Democratic operatives running 527s may conclude that there is little value in declaring themselves openly as electioneering outfits. Instead, they'll likely"-it's a good word-"transmogrify their groups into 501Cs. Nobody will be able to see how much money George Soros gave this quarter under that scenario, or figure out who sponsored that $500,000 ad campaign in a St. Louis suburb. Soft money would disappear or, rather, it would just become invisible."

And isn't that the equally troubling problem that we face that will probably require legislation? My broad question is, what kind of remedy? And I'm particularly sensitive to the fact that both the chairman and vice chairman have said from a definitional standpoint what do we have to be working at in terms of definition that will both be broad enough to not want to override or prevent the free speech concepts that we've talked about, but one that will provide more disclosure, more light shedding in on both 527s and 501C(3)s?

Ms. Weintraub?

MS. WEINTRAUB: Congressman, if I knew the answer to that question we could have passed a regulation last week. I think it is in part because it is such a difficult task of line drawing that our counsel asked for another 90 days, in part to take a stab at it. The 501C issue raises, I think, some very troubling issues. They're the ones that you alluded to, that there's a-if we pass this kind of a regulation there's going to be real pressure to push a lot of this activity into 501Cs and there will be no disclosure. Congress acted to obtain disclosure from 527s and we would be defeating that purpose by sort of pushing that whole area underground.

And people say, oh, no, no, that's not going to happen for this reason or that reason. We had testimony from some sophisticated players in-political players and they said, you know, we have complicated organizations, we have 501C aspects, we have 527 aspects. We've been using the 527s but, you know, if that doesn't turn out to be a good deal any more, we'll just shift as much of this as we can into the 501Cs and there won't be that kind of disclosure. At the same time we have to be very sensitive to the advocacy needs of the nonprofit community, who are clearly very alarmed at some of the proposals that were put forward, as well as the sort of voter registration activities that the chairman alluded to earlier, which I am equally concerned about.

The Congressional Hispanic Caucus sent us a letter expressing their concern about the need to mobilize voters in their communities, and how that is affected by 501C organizations and they don't want to see limits to that activity. And, frankly, beyond what's in the current law, I don't either. We have barely a majority of people who vote now, who are eligible to vote, and that's not-that's a very troubling phenomenon in and of itself.

I would like to raise one other point on the fire issue, though, on how big the fire is. I think that to some degree a lot of this has been hyped. And you don't have to take my word for it. Read Tom Mann and Tony Corotto (ph) in today's "Roll Call." Hundreds of millions of dollars are being raised in perfectly legal, disclosed hard money contributions to the two major presidential candidates and to their parties, hundreds of millions of dollars.

It's a fundraising operation the likes of which has never been seen before. It's clearly going to be the most expensive election ever known in the history of the world. Some people think that's a good thing, some people think that's a bad thing. But the amount of money that's being raised in the few organizations that people seem to be most concerned about I think is really going to be a drop in the bucket, and that was the perspective of Professor Mann and Corotto as well.

REP. LARSON: I did read the article, and I thank you.

MR. TONER: Mr. Ranking Member, just two brief points. I think it's a critical question you raise.

There's no doubt under the MCFL ruling that a 501C(4) organization under extraordinary circumstances could be a political committee. The Supreme Court there was dealing with a plaintiff group that was a C4 and the upshot of the opinion was if that organization did enough campaign related activities that it became its major purpose, the court indicated it could become a political committee.

So I think you're absolutely right that the law has not precluded a 501C from becoming a political committee. I think that being said, it would be extraordinary because the primary purpose of those types of organizations cannot be politics. If they do cross the line, I think the MCFL decision was clear that jurisdiction could exist, but I think it would be extraordinary.

The other thing I want to note for the record is that Mr. Larry Norton, the FEC's general counsel, did not oppose the proposal that Commissioner Thomas and I advanced. I think he really adopted a stance of neutrality. He didn't oppose the proposal, nor did he advocate its passage but instead indicated that he would like to have some more time, he and his staff, to examine the factual record, read the comments, and then come back to us with recommendations. So I think it really is a stance of neutrality in terms of our general counsel, in terms of this proposal.

REP. LARSON: Is it neutrality or caution?

MR. TONER: I think it's probably both and I think rightfully so. These are major issues that we're dealing with here. My fundamental point is that the test that we've used for determining political committee status has turned on express advocacy, and I think the law has changed after McConnell.

Before McConnell I think a very strong argument existed that the express advocacy test was constitutionally required in this area, and I respected that for many, many years. But I don't believe that's the law any longer. I think we either engage in this issue and develop a new framework that could actually be effective, or we push on based on how we've handled this in the past. And I don't think that's a pathway for effective action.

REP. LARSON: Well, I know the chairman is going to-wants everybody to-and we'll get a chance to ask some more questions. I'd just like to-I'm not an attorney, but I am so impressed by what all of you had to say and the sharpness of your arguments. I'm just reminded of Judge Learned Hand's comment that liberty and freedom is that which leaves you not too sure you're right.


REP. LARSON: Thank you very much, Mr. Chairman.

I feel compelled to say a good word about my colleagues Mr. Shays and-are you guys still including McCain as one of yours? (Laughter.) But I do feel inclined to say that at the heart of their proposal would it be that any piece of legislation that was handed down to us from Mount Sinai might be different than legislation constructed by humans intent in the kind of atmosphere that we exist in, in coming to compromise. Or, as Mr. Bismarck is quoted as saying, two things shouldn't be observed: sausage being made and bill becoming law. That's our job to perfect as we go forward.

Mr. Thomas, I appreciated your comments as well and I do think that there is a corrosive nature of the influence of money in government. And if we go back to the first attempt to regulate this, it was called the Corrupt Policy Act, again trying to eliminate the corrosive nature and the impact that that has, and the potential for that impact it has on legislation. It is certainly a debate that's rich and one that we should-a few quick questions. One is just a practical one in your dealings, and that's what was the practical implication of adopting a new rule mid-cycle for these organizations? Do you care to respond? We'll start with the chairman and work right down.

MR. SMITH: Well, let me-I'll let those who supported that notion I guess respond to how that practically would have worked out. I think it would have, for some groups at least, cause some chaos because it would have been allocating expenses, for example, over a lengthy period of time and some would have to shift some of those allocation rules. But I want to use that concern to address something I think hasn't really been made clear, and Congressman Ehlers mentioned a little bit about clarity, and Congressman Mica was talking about could we come back in August and do something? I voiced my opinion that nothing that would be done would be effective this cycle. And I think it might be worthwhile for the point of clarity that everybody seems to want to get at to see if my colleagues agree with me that nothing is going to change in this cycle, just as nothing changed on May 13, that the rules that everybody understood were going to be in effect right up until --

REP. LARSON: That's an excellent point. Is that the agreement of the --

MR. THOMAS: I think as a practical matter we're now basically stuck, for lack of a better word, with the mishmash of the law as it exists, without the Toner-Thomas proposal.

MR. SMITH (?): I think that's a very important point because I believed it was critical the agency make an affirmative decision on what the law will be 2004, and we've done that. I didn't agree with the decision, but I accept it and respect it. And so now I think in the 90 day period that's alluded to, we're going to have to take up, well, what is the law going to be for the 2005/2006 cycle? I think that's what we're working on now.

REP. LARSON: And would you say that that holds true for both 527s and 501Cs?

MR. TONER: Yes. I believe the legal status quo will be in place for this cycle, yes.

REP. LARSON: Madam Vice Chair?

MS. WEINTRAUB: I agree with that, and I appreciate the opportunity to clarify that because I said in response to an earlier question that we could pass a regulation in 90 days when our counsel comes back with a recommendation. But I don't believe from a practical standpoint that we could put it into effect for this election cycle. If you count the days, we would have to let it sit for 30 or 60 legislative days after we approved it and after it was published in the Federal Register. And I think, given the congressional calendar, you just can't get there from here. For myself, I'm not terribly troubled by that because I think the regulatory community needs notice. They need to be able to make plans, they need to know what the rules are in advance of when they're acting. That's why BCRA didn't go into effect until the beginning of the next cycle, and it wasn't because the people who voted for it were happy with the status quo then. But you do need to provide notice to the --

REP. LARSON: I'm struck by how long you were struggling with definitions.

And if minds of your capability are struggling with these definitions, and I mean no disrespect to the minds assembled up here, then in terms of making-and I understand in 90 days you're going to take another shot at it. But I take it from the chair's comment that even in taking a shot like that, given the cycle that we're in and given the practical application of that, that any recommendation would probably be put off for legislative consideration in the next session. Is that what the intent of --

MR. SMITH: I think that's right. And, Congressman, if I may use the opportunity to go on a bit? Nobody prior to December or January past was saying that any changes here were required. Everybody understood that 527s were going to run wild in this campaign. That was known. And when this issue first came up, we have moved very, very quickly to handle it. The aggressive time-you know, we've had-in three months we had to get comments. People need time to send their comments, as you well know. We had over 150,000 comments. We had a two day hearing with over 30 witnesses, the vast majority of whom argued these rules were improper and should not be enacted.

I mean, we have moved very rapidly on this as it is. And I want to point out that this has not come up all of a sudden because the commission was just sitting around for two years. It has come up all of a sudden because until January nobody-you know, Shays wasn't saying anything, Senator McCain wasn't saying anything, Congressman Meehan wasn't saying anything. None of these people were sitting there saying, why, you're not addressing the 527 issue. And they weren't saying that because Congress did not address it in BCRA and everybody understood that.

(Cross talk.)

REP. LARSON: But they're saying it now?

MR. SMITH: They're saying it now, but it took-yeah, it's a January 2004 invention.

MR. THOMAS: And if I might, I think Chairman Smith makes a very good point about the fact that this agency considered these major issues on an expedited basis. And any suggestion that the agency didn't use due diligence, didn't aggressively look at these issues so it could make a decision on a timely basis I just don't share. I didn't agree with the decision of May 13, but I really appreciate all the effort that was made within the agency to make a decision in an expedited manner as these issues required.

REP. LARSON: And I share that. I share your opinion. I want you to know that. I do. I think that you have given it due deliberation and I'm impressed.

MR. THOMAS: Well, Congressman, I was just going to add that I think there would have been some folks who would perhaps have had some difficulty feeling comfortable with the imposition of what I refer to as the promote, support, attack or oppose test. That was really the heart of the proposal. But I would-there's no-the commission already adopted that approach in the advisory opinion and four of us at least comfortable back then saying, look, the Supreme Court has indicated this is pretty clear, and we're talking about groups the major purpose of which is to influence elections. So although there might have been some folks who would have kicked and screamed, I think most of the players out there that we are aware of, that are in the news all the time, could have quickly adhered to a promote, support, attack or oppose standard. So I would have been willing to give it a go.

REP. LARSON: Madam Vice Chair?

MS. WEINTRAUB: Thank you. I'd like to address that point because I introduced the draft that we-with some amendments from Commissioner Toner, that we ultimately ended up adopting in that advisory opinion. It wasn't my first choice, but it was the best choice that I felt we could get more votes for. And in response to that there was an outcry not just from, you know, whiney people that didn't want to have to comply with it, but from people who are dispassionate observers of the process. George Will on the right, Rick Hasan (ph), who's a fairly-a liberal law professor in Los Angeles.

MR. SMITH: I think I know Rick better than you do. He's very liberal.


MS. WEINTRAUB: You probably do. I won't contest that. And I don't think he'd be insulted by the appellation either. But people on both sides of the political spectrum or dispassionate observers of the process said that that advisory opinion did not give clear guidance. So now that we know that and we have heard this from a wide, wide range of people, I think it would be irresponsible for us to just glom on to that and say, okay, we already voted for one thing that we've been told is confusing to people. Now let's put it into a regulation without giving it further clarification. I'm not opposed to codifying it, but I think we have to define it and clarify it.

REP. LARSON: Thank you.


REP. LARSON: Just for a quick comment. Only that it seems in listening to you that only Democratic operatives have this expertise and strategy, that somehow Republicans are babes in the woods; that they have not applied any of these strategies whatsoever? Or is it outrage that Democrats discovered 527s because 501(3)©s have been in effect for so long and so successful? I mean, that's what-you know?

MR. TONER: I think you make a very good point. And I think Republicans are hardly babes in the woods, and I think they have been and will get into this arena aggressively given how we've come out on this. I think you're going to see a dramatic escalation of Republican oriented organizations. You've mentioned and read into the record an organization that's out there. And that's why I think it's critical to make clear that under current law and under the Supreme Court precedent, 501C(4)s can be political committees.

But to argue that they should be exempt as a matter of law from ever being a political committee I don't think adds up under Supreme Court precedent. Now, admittedly that might be an extreme case, but you make a very good point. Republicans, I believe, will aggressively be in this arena. Who could blame them? If there's going to be wide running in here, that's I think only to be expected.

REP. LARSON: This isn't a place to make wagers, but if I were a wagering man, which I'm not, but I think if we totaled up what the 501Cs have been able to raise-but of course we wouldn't know that because of disclosure-I think you would find the Democrats dramatically dwarfed. But that's a discussion for another day.

REP. NEY: Well, just a comment before we move to Mr. Ehlers. You know, I think after no decision, which is in a sense a decision, fortunately the babes are going to mature into adults very quickly.

Mr. Ehlers.

REP. EHLERS: Thank you, Mr. Chairman. I was going to remark something to the same effect.

And the issue, Mr. Larson-I just want to get this in quickly before I make my comment. The issue is not that so much as the perceived duplicity of the party that fought very hard to get this passed and a majority of whose members voted for it, immediately began forming the 527s. Whereas the party that I think was more responsible on this thought it was improper and waited for a ruling. So I guess I resent the aspersion that somehow your hands are perfectly clean.

Let me just comment --

REP. LARSON: If I made that, I didn't mean to.


REP. LARSON: Thank you, Mr. Chairman.

And, again, thank you for your insight and leadership in this area, and my other colleagues' as well. I enjoyed immensely the discussion this afternoon. Especially thanks to the panelists. There is much work to be done always in a democracy that needs constant pruning and attention. Mr. Chairman, I would ask that the-because two of my colleagues who had conflicts with legislative business of their own, if the record could be kept open to enable them to send questions to the commissioners so that you might be able to respond to their questions and other questions that any member may not have had a chance to get to. I know that's always your practice and procedure, and I just again wanted to thank you and the commissioners for your thoughtful deliberation.

REP. NEY: With that, I'd ask unanimous consent that members and witnesses have seven legislative days to submit material into the record and for those statements and materials to be entered in an appropriate place in the record. Without objection, the material will be entered. I wanted to thank Congressman Larson and his staff, our staff, members who have participated in this today and, most importantly, the commissioners. And also I'd like to ask unanimous consent that staff be authorized to make technical and conforming changes on all matters considered by the committee at today's hearing. Without objection, so ordered.

Having completed our business, the committee is adjourned. Thank you.

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