Tuesday, December 2, 2008, 2:37 PM

Political GPS: FEC Audit Exposes Major Violations By Trade Association PAC

When did your PAC last undergo a legal compliance audit? As a major trade association PAC learned last week, it's far better to audit your own PAC than reach a point where the Federal Election Commission does it for you.

The FEC's audit of the American Resort Owners Coalition PAC exposed a host of compliance lapses: contributions from prohibited sources (corporations and foreign nationals), solicitations that lacked required disclosure statements, and misreporting on publicly filed reports. The PAC’s problems reportedly included soliciting small amounts from numerous timeshare owners, who were not advised that PAC contributions are voluntary.

Where did this PAC go wrong? In the last couple of years, the FEC has suggested internal controls for handling PAC funds and ensuring accurate reporting. It is doubtful that such controls were in place. At a minimum, the PAC's reporting errors would likely have been discovered by reconciling bank statements with filed reports, and through separation of managerial functions. Based on the FEC auditors' findings, the PAC also lacked even rudimentary measures for screening contributions from foreign billing addresses or from contributors with corporate names. And the FEC's audit staff urged that required notices appear on the PAC's website, newsletters, and association bulletins.

Don't let this happen to you. PACs should be audited at least every two years. Experienced FEC counsel can help you examine your compliance systems and written policies, review your PAC solicitations and your solicitations for officeholder appearances, and talk to key personnel to review how the PAC is managed. Even if the PAC later trips over a legal requirement, this kind of attention to compliance will generally mitigate the fine or other sanction.

THE FEC BREAKS ITS DEADLOCK OVER ISSUE ADS, BUT WHAT WAS THE POINT?

In the October 28 edition of Political GPS, we discussed the 3-3 split among FEC Commissioners over whether a non-profit corporation, the National Right to Life Committee, could finance radio ads critical of then-Senator Obama. The advisory opinion request was the first test of FEC rules designed to determine when political ads are the "functional equivalent of express advocacy," which may not be financed with corporate or labor funds in the run-up to an election. In our prior writing, we expressed hope that the FEC would work toward a resolution.

Last week, Democratic Commissioner, Cynthia Bauerly, broke the impasse by joining with the three Republican Commissioners. By a 4-2 vote, the Commission ruled that one of the two proposed radio ads is not the functional equivalent of express advocacy and therefore may be financed by a non-profit corporation. But while the four were able to agree on a result, they could not agree on an explanation – literally not even a word – as to why they ruled as they did. As to the second proposed radio ad, the FEC is irretrievably deadlocked.

So where does that leave things? The NRLC has finally obtained the Commission's blessing for one of its radio ads, though it comes more than three weeks after the Presidential election. Not much help there. For other political advertisers looking for guidance, there is no way to know which facts or assumptions are material to the conclusion presented in this advisory opinion, and therefore no basis for determining when this opinion can be relied upon. In short, advertisers and their counsel must determine how FEC rules should be applied when the Commission itself, when faced with its first test of those rules, could not produce an explanation.

To be fair to the FEC, its rules stem from a Supreme Court test that had only the shaky support of five Justices (a bare majority), all but one of whom expressed doubts about how well the test would hold up in application. With last week's FEC ruling, it appears these doubts were well-founded.

THINKING OF DONATING TO THE INAUGURAL COMMITTEE? OBAMA MAY NOT BE ACCEPTING YOUR MONEY

Inaugurations are expensive propositions, financed by a combination of public and private funds. President-elect Obama’s inaugural committee has announced that it will not accept funds from corporations, PACs, registered federal lobbyists, and foreign nationals. Individual donors are limited to $50,000. This is a change from the practice of previous inaugural committees, which accepted much higher dollar amounts - up to $150,000 in the case of George W. Bush - and even larger sums from corporations.

Obama supporters formed a separate committee - a 501(c)(4) – that is soliciting and accepting donations for the inauguration. The donations do not count against federal contribution limits, but they must be disclosed in public reports filed by the recipient committee. Donations to the inaugural fund, like contributions to candidates, are not tax-deductible.

PARTY LIKE IT'S 1999. . . OR 2009 ANYWAY

The House ethics committee (officially known as the Committee on Standards of Official Conduct) has advised Members that they may use their campaign funds to pay the costs of swearing-in receptions as well as Inauguration Day receptions for constituents. But lobbying firms and other private entities that employ or retain lobbyists may not pay these costs, which would constitute prohibited gifts under the House rules. In addition, any lobbying firm or private entity that offers free attendance to Members at inaugural events must do so in compliance with the House gift rules. As a result, some events hosted by private entities will be permissible under the gift rule exceptions covering "widely attended" events and receptions at which food and beverages of nominal value are served.

On the other hand, departing Members – who are likely to be in less of a partying mood – may not participate in a CODEL or privately-funded fact-finding travel, but they may conduct official travel to and from their districts. They are also permitted to use their campaign funds to cover moving expenses and to cover office wind-down expenses.

NOTE TO NEW APPOINTEES – DON'T THROW OUT THOSE OLD RECORDS

If you're thinking about landing a senior job in the new administration, you better hope you can find your old documents in the attic. The questionnaire that the incoming administration uses to vet prospective appointees has 63 questions, many with multiple sub-parts. Mostly, the questionnaire covers predictable issues – financial information, employment history, business relationships, and tax or other legal entanglements.

But a few of the questions will put you through your paces. One question asks for a description of the most controversial matters you have been involved in during your career. For some candidates, that would be a book in itself. Then there is the question about whether you have ever sent an e-mail that could "suggest a conflict of interest" or be a possible source of "embarrassment" for the new President. No definition of "embarrassment" is offered. You also need to identify the donor and value of any gift you have received over $50 from someone other than a relative or close friend. And, you have to provide information about your guns and your medical treatments, and copies of all of your resumes, speeches and writings.

Got all that? Not done yet. Assuming you make it through this screening process, there are financial disclosure forms that have to be given to federal ethics officials, who will determine if any conflicts of interest exist. If so, you may need to sever ties with existing business and entities, obtain ethics waivers, or set up qualified trusts to manage your investments. Quite a daunting process, but the Obama team has heeded the lessons learned the hard way by prior administrations that it is better to ask the tough questions upfront, than to explain embarrassing situations to the press after an appointment has been made.

If you have any questions or would like more information, please feel free to contact Larry (LNorton@wcsr.com, (202) 857-4429) or Jim (JKahl@wcsr.com, (202) 857-4417).
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