Friday, April 24, 2009, 11:48 AM

Political GPS: FEC DROPS CASE AGAINST 527 GROUP – WHAT ARE THE LESSONS?

The FEC this week quietly dismissed an October 2006 complaint charging that the Lantern Project, a 527 organization, had failed to register as a political committee and raised funds outside of the limits and prohibitions of federal law.

An organization must register with the FEC and comply with federal source restrictions and contribution limits if it raises or spends over $1,000 to influence a federal election. That may seem like a low bar, especially given that to qualify as a 527 under IRS rules, an organization's primary purpose must be to influence elections. So how did the Lantern Project avoid an expensive investigation and hefty fines, a fate suffered by a number of high-profile groups from the 2004 campaign?

FEC records indicate that the Lantern Project spent over $1.6 million in the months immediately prior to the 2006 election, with every ad apparently critical of Rick Santorum. The ads attacked Santorum's positions on minimum wage, Social Security, tax breaks for oil companies, and other issues. If this was an "issue" group, the issue was Rick Santorum. But the FEC chose not to interview donors or look at written fundraising appeals to see if the activities of the organization qualified the group as a political committee under Commission rules.

Here's why. Before the FEC will look beyond the public record or any information the party charged with the violations elects to share with them, the agency must find "reason to believe" that a violation has occurred. In this case, neither the available fundraising appeals nor the ads satisfied FEC tests for political committee status. While in some cases allegations of wrongdoing can be enough to go forward, the FEC typically declines to credit allegations if they are specifically disputed by the respondent organization, as occurred here. On a vote of 4-1, with one Commissioner recused, the FEC found insufficient grounds to look into the matter and decided to shut it down.

This outcome is best explained by the Lantern Group's method of operating and awareness of FEC tripwires. For one thing, the group was more circumspect about its objectives than some of the 527s in the 2004 campaign. In 2004, organizational leaders touted their electoral ambitions in news stories - statements that helped support an argument that the Commission should delve further into the groups’ fundraising and spending. In contrast, the Lantern project described itself this way: "our mission here is simple: [t]o shine a light on the facts about Rick Santorum’s extreme positions, failed policies and hypocritical statements – and let the facts speak for themselves."

The Lantern Project's ads were also crafted to avoid "expressly advocating" for Santorum's defeat, which would be "expenditures" triggering political committee status if they cost over $1,000. One example: "From privatizing Social Security to cutting student loans for the middle class, when Rick Santorum has to choose between siding with George Bush or middle class Pennsylvanians, Santorum supports Bush. What is he thinking?" There was no language such as "vote against" or "defeat," which would satisfy one FEC test for express advocacy, and no words referring to Santorum’s candidacy or election, which may have helped satisfy another.

There were also no statements on the group's website indicating that the funds would be used to target Santorum's defeat, which under FEC rules would mean that the funds received were "contributions." More than $1000 raised that way and you have a political committee. The Lantern Group told FEC staff that in communications with donors, fundraisers expressly disclaimed intentions to elect or defeat Santorum, and that the organization had placed a statement on its website saying the same thing. The FEC says the website disclaimer alone would not insulate a group from liability if there was evidence to the contrary. Of course, it's difficult to find contrary evidence if you don’t look for it.

What are the lessons for 527 organizations and other non-profits engaged in political activity? One lesson is that there is less risk of an FEC investigation if most fundraising is done through personal appeals, rather than through websites or other public communications. If a group does use a website, it will help fend off legal action if there is a statement on the site that funds raised will not be used to elect or defeat a candidate.

As for the ads, a group should be careful to avoid crossing into territory that the FEC considers to be express advocacy - although the records released in the Lantern Project case hint that the Commission may in future cases apply an even stricter test, first articulated by the Supreme Court in the Wisconsin Right to Life case, that forbids consideration of context, such as the fact that an ad was run in proximity to an election. And finally, it may help if public statements and organizational filings stress the positions of the officeholders, rather than their suitability as candidates.

While 527 groups appeared to play a reduced role in the 2008 elections, this recent FEC decision reminds us that there is still plenty of opportunity for them - as well as other non-profit organizations - to influence federal elections.

CHARITABLE-MATCH IS NO MATCH FOR FEC

FEC deadlocks along party lines are fast becoming a common occurrence. Somewhat surprising is the matter that split Commissioners earlier this week. Intercontinental Exchange, Inc. (ICE), which operates global futures exchanges and over-the-counter markets, asked the FEC for permission to increase the charitable match on employee PAC contributions from $1-to-$1 to as much as $2 for each $1 contributed to the PAC.

The Commission has issued many advisory opinions (AOs) approving charitable matching programs, provided that the contributor does not receive any financial, tax, or other tangible benefit from the corporation, the PAC or the charity. Since the proposed incentive program met that condition, FEC lawyers recommended granting ICE’s request. The three Republican Commissioners concurred with the draft opinion, but none of the Democratic Commissioners were willing to sign on. As a result, no AO was issued.

The FEC's non-decision is surprising in a number of respects. Advisory opinion requests regarding PAC promotional programs do not traditionally engender partisan splits. In fact, the FEC has approved a wide variety of charitable-match, raffles, and other promotional programs that encourage PAC participation.

The legal underpinnings for opposing the request are also unclear. One explanation reportedly offered by Democratic Commissioners was that the generous match would provide such a substantial incentive that it would cast doubt on the voluntariness of PAC contributions. That's puzzling because the amount of the match in comparison to the PAC contribution has never been a focus of past FEC opinions. And in the context of promotional raffles, the value of the prize can be much greater than the winner’s PAC contribution.

It may well be that after some turnover on the Commission, a requestor, either ICE or some other organization, may decide it's worth asking this question again.

COURT DEALS BLOW TO OHIO PAY-TO-PLAY LAW

An Ohio appeals court on April 14 struck down certain provisions of the state's pay-to-play law that were adopted in 2006. This is the second time a court has invalidated these provisions on technical grounds involving the manner in which the law was passed. The Ohio Attorney General obtained a stay of the first ruling pending appeal. There is no word yet on whether further appeals or requests for a stay are in the offing.

We will have more to say on the Ohio pay-to-play situation in coming weeks. Until the legal uncertainty clears, however, we urge that state bidders and contractors, their owners (20% or more) and family members, and contractors' affiliated PACs – all of which may be subject to contribution restrictions - exercise great caution in making contributions in Ohio. Also, Ohio’s Legislative Inspector General recently issued a statement, reminding prospective contractors that once the state receives federal funds under the American Recovery and Reinvestment Act of 2009, the distribution of those funds through state channels means that Ohio's lobbying laws apply. Under Ohio law, lobbying includes efforts to influence executive agency decisions regarding the expenditure of funds, award of contracts, and regulatory decisions.

NEW CAMPAIGN CONTRIBUTION LIMITS PROPOSED FOR EARMARK BENEFICIARIES

Rep. Paul Hodes (D-NH) and Gabrielle Giffords (D-AZ) have introduced legislation that would ban federal lawmakers from taking campaign contributions from companies for whom they have secured earmarks. The ban would also extend to contributions from the president, CEO, COO, and CFO, as well as the lobbyists for such companies.

H.R. 2038, The Clean Law for Earmark Accountability Reform (CLEAR) Act, would amend the Federal Election Campaign Act. Until the text of the bill is available, we do not know whether the prohibited contributions would result in violations by the contributors and the recipient campaigns or what the penalties would be for violators. It is also not clear if the bill would apply to both in-house and retained lobbyists. Political GPS will follow this bill and report on it in future posts.

Posting will resume the week of May 4th.

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