Prohibited and Excessive Contributions; ``Soft Money''

SUMMARY: The Federal Election Commission today seeks comments on

proposed rules relating to funds received by party committees outside

the prohibitions and limitations of the Federal Election Campaign Act,

also known as ``soft money.'' This NPRM addresses issues raised in two

petitions for rulemaking, one submitted by President William J. Clinton

and the other submitted by five Members of the United States House of

Representatives. The two petitions seek limits on the use of soft money

for activities that have an impact on federal elections. The draft

rules which follow do not represent a final decision by the Commission

regarding the changes sought in the petitions. Further information is

provided in the supplementary information that follows.

DATES: Statements in support of or in opposition to the proposed rules

must be filed on or before September 11, 1998. The Commission will hold

a public hearing at 10:00 a.m. on September 23, 1998. Persons wishing

to testify must so indicate in their written comments.

ADDRESSES: All comments should be addressed to Susan E. Propper,

Assistant General Counsel, and must be submitted in either written or

electronic form. Written comments should be sent to the Federal

Election Commission, 999 E Street, N.W., Washington, DC 20463. Faxed

comments should be sent to (202) 219-3923, with printed copy follow up.

Electronic mail comments should be sent to [email protected].

Commenters sending comments by electronic mail should include their

full name and postal service address within the text of their comments.

Electronic mail comments that do not contain the full name, electronic

mail address and postal service address of the commenter will not be

considered. The public hearing will be held in the Commission's public

hearing room, 999 E Street, N.W., 9th Floor.

FOR FURTHER INFORMATION CONTACT: Ms. Susan E. Propper, Assistant

General Counsel, or Paul Sanford, Staff Attorney, 999 E Street, N.W.,

Washington, D.C. 20463, (202) 694-1650 or (800) 424-9530.

SUPPLEMENTARY INFORMATION: With this NPRM, the Commission is publishing

and seeking comments on proposed rules relating to the receipt and use

of prohibited and excessive contributions, also known as ``soft

money,'' by national, state and local party committees. The Commission

is publishing these rules in response to two petitions for rulemaking

that seek limits on the use of soft money in activities that may

influence federal elections.

For reasons that will be explained further below, the Commission

has decided that the issues raised in the petitions warrant further

consideration. The Commission believes that changes in the regulations

relating to soft money may be necessary to give full force and effect

to the prohibitions and limitations in the Federal Election Campaign

Act, 2 U.S.C. 431 et seq. [``FECA'' or ``the Act'], and ensure that

impermissible funds are not used to influence federal elections.

Therefore, the Commission is seeking comments on proposed rules that

would limit the use of soft money by party committees. The proposed

rules are described in detail below.

However, the Commission would like to emphasize that no final

decision has been made on whether or not to promulgate new rules in

this area. At this point, the Commission is merely seeking comments on

possible approaches for limiting the impact of soft money on federal

elections. No final decision will be made until after the comment

period has concluded and a public hearing has been held.

Prior History

The Act limits the amount that individuals can give to candidates,

political committees and political parties for use in federal

elections. 2 U.S.C. 441a. The Act also prohibits corporations and labor

organizations from contributing their general treasury funds for these

purposes. 2 U.S.C. 441b. Federal contractors are also prohibited from

making these contributions. 2 U.S.C. 441c, 11 CFR 115.2(a). Note that,

under 2 U.S.C. 441b and 441e, national banks, Congressionally-chartered

corporations, and foreign nationals are prohibited from making

contributions in connection with any election to any political office.

In contrast, some state campaign finance statutes allow

corporations and labor organizations to make contributions to state and

local candidates, and also allow individuals to make contributions to

state and local candidates in amounts that would exceed the dollar

limits in 2 U.S.C. 441a. In addition, the Act's prohibition on

contributions by federal contractors does not apply to contributions

made in connection with state or local elections. 11 CFR 115.2(a).

Today, most party committees receive some contributions that are

permissible under the FECA and also receive other contributions that

are not permissible under the Act if they are to be used in connection

with federal elections. Contributions that are permissible under the

FECA are often referred to as ``hard money'' contributions.

Contributions that are not permissible, i.e., individual contributions

in excess of the section 441a dollar limits, all corporate and labor

organization general treasury contributions, and contributions from

federal contractors, are often referred to as ``soft money,'' and are

to be used exclusively for state and local campaign activity or other

party committee activities that do not influence federal elections.

Typically, party committees set up separate bank accounts into

which they deposit the hard and soft money contributions they receive.

Hard money contributions are to be deposited into a federal account,

and soft money contributions are to be deposited into a non-federal

account. Some party committees have a federal account and multiple non-

federal accounts. However, since 2 U.S.C. 441b and 441e prohibit

national banks, Congressionally-chartered corporations, and foreign

nationals from making contributions in connection with any election to

any political office, contributions from these entities to a party

committee's non-federal accounts are also prohibited.

It is usually a relatively simple matter for the party committee to

distinguish between hard and soft money contributions and segregate

them in separate bank accounts. However, it can be more difficult to

distinguish between a party committee's federal and non-federal

expenses, because many party committee activities benefit both federal

and non-federal candidates. For example, when a party committee

conducts a get-out-the-vote drive urging people to support the party's

candidates, it presumably increases the turnout of voters who favor

that party's candidates. If there are both federal and non-federal

candidates on the ballot, the drive benefits both the federal and the

non-federal candidates. Consequently, if the party committee pays the

costs of such a drive entirely with soft dollars, the committee is

using prohibited contributions to benefit federal candidates. This

would violate the contribution prohibitions and limitations in the

FECA.

[[Page 37723]]

Since early in its history, the Commission has struggled with the

fact that many party functions have an impact on both federal and non-

federal elections, and has sought to give force and effect to the

FECA's prohibitions and limitations by requiring party committees to

pay at least a portion of the cost of these ``mixed'' activities with

hard dollars. For example, in Advisory Opinion 1975-21, the Commission

required a local party committee to use hard dollars to pay for a

portion of its administrative expenses and voter registration costs.

The Commission said that even though some party functions do not relate

to any particular candidate or election, ``these functions have an

indirect effect on particular elections, and since monies contributed

to fulfill these functions free other money to be used for

contributions and expenditures in connection with Federal elections, it

is appropriate to ascribe a certain portion of the administrative

functions of a party organization to Federal elections during time

periods in which Federal elections are held.'' Id.

The Commission incorporated part of Advisory Opinion 1975-21 into

regulations promulgated in 1977. The regulations required political

committees active in both federal and non-federal elections to allocate

their administrative expenses between separate federal and non-federal

accounts ``in proportion to the amount of funds expended on federal and

non-federal elections, or on another reasonable basis.'' 11 CFR

106.1(e) (1978). Sections 106.1 and 106.5 of the current rules contain

updated versions of these regulations.

In two opinions issued after AO 1975-21, the Commission took an

even more restrictive view of the use of soft money for registration

and get-out-the-vote drive activity. In its response to Advisory

Opinion Request 1976-72, the Commission said that ``even though the

Illinois law apparently permits corporate contributions for State

elections, corporate/union treasury funds may not be used to defray any

portion of a registration or get-out-the-vote drive conducted by a

political party.'' Thus, the Commission concluded that this type of

activity would have to be paid for with hard dollars. In its response

to Advisory Opinion Request 1976-83, the Commission reached a similar

conclusion.

However, in Advisory Opinion 1978-10, the Commission modified its

position. In that opinion, the Commission concluded that the costs of

voter registration and GOTV drives should be allocated in the same

manner as party administrative expenditures. In reaching this

conclusion, the Commission superseded Re: AOR 1976-72 and 1976-83 and

said that corporate and union treasury funds could be used for the

portion of the costs allocated to the party committee's non-federal

account.

In Advisory Opinion 1979-17, the Commission recognized the ability

of a national party committee to establish a separate account to be

used ``for the deposit and disbursement of funds designated

specifically and exclusively to finance national party activity limited

to influencing the nomination or election of candidates for public

office other than elective `federal office.' '' Thus, the Commission

concluded that a national party committee could accept corporate

contributions ``for the exclusive and limited purpose of influencing

the nomination or election of candidates for nonfederal office.''

The 1979 amendments to the Federal Election Campaign Act sought to

encourage the participation of state and local party committees in

federal elections by carving out exceptions to the definitions of

contribution and expenditure for certain volunteer, voter registration

and get-out-the-vote activity conducted by these committees. Under

sections 431(8)(B)(x) and 431(9)(B)(viii), payments for the costs of

campaign materials used in connection with volunteer activities on

behalf of the party's nominee are not contributions or expenditures so

long as the payments do not finance any general public political

advertising, and are made from contributions that are permissible under

the Act but were not designated for a particular candidate. Sections

431(8)(B)(xii) and 431(9)(B)(ix) contain the same rule for voter

registration and get-out-the-vote drive costs conducted by the

committee on behalf of its presidential and vice-presidential nominees.

These provisions supplement a similar provision for slate cards and

sample ballots that existed in the Act prior to the 1979 amendments. 2

U.S.C. 431(8)(B)(v) and 431(9)(B)(iv). Since then, these activities

have collectively been referred to as ``exempt activities.'' The House

Report accompanying the 1979 amendments recognizes the ability of state

and local party committees to allocate the costs of slate card and

volunteer activities in certain circumstances. H.R. Rep. No. 96-422 at

8, 9 (1979).

In 1984, the Commission received a petition for rulemaking from

Common Cause seeking new rules relating to the use of soft money. The

petition requested that the Commission take action to address what the

petitioner alleged was the use of soft money by national party

committees to influence federal elections. The Commission published a

Notice of Availability on January 4, 1985, and subsequently published a

Notice of Inquiry on December 18, 1985. See 50 FR 477 (Jan. 4, 1985),

50 FR 51535 (Dec. 18, 1985). These two notices sought comments from the

public on the issues raised in the petition. The Commission also held a

public hearing on January 29, 1986, at which several witnesses

testified.

After reviewing the petition, the comments and the witness'

testimony, the Commission denied the Common Cause petition, concluding

that neither the petition nor the comments ``constitute concrete

evidence demonstrating that the Commission's regulations have been

abused so that funds purportedly raised for use in nonfederal elections

have in fact been transferred to the state and local level with the

intent that they be used to influence federal elections.'' Notice of

Disposition, 51 FR 15915 (Apr. 29, 1986).

Common Cause challenged the Commission's denial of the petition in

U.S. District Court. In court, Common Cause asserted that no allocation

method is permissible under the FECA. Consequently, Common Cause

argued, the Commission's denial of the petition was arbitrary and

capricious under the Administrative Procedure Act, 5 U.S.C. Sec. 706.

Common Cause also argued that allowing committees to allocate on a

reasonable basis was contrary to law because it failed to ensure proper

allocation between federal and non-federal accounts.

The court rejected Common Cause's first argument, saying that the

Act cannot be read to prohibit allocation. Common Cause v. FEC, 692 F.

Supp. 1391, 1395 (D.D.C. 1987). However, the court then agreed that the

Commission's policy of allowing state party committees to allocate

slate card expenses on any reasonable basis was contrary to law,

``since Congress stated clearly in the FECA that all monies spent by

state committees on these activities vis-a-vis federal elections must

be paid for `from contributions subject to the limitations and

prohibitions of this Act.''' Id. (quoting 2 U.S.C. 431(8)(B)(x)(2) and

(xii)(2), 431(9)(B)(viii)(2) and (ix)(2)). The court said that

[t]he plain meaning of the FECA is that any improper allocation

of nonfederal funds by a state committee would be a violation of the

FECA. Yet, the Commission provides no guidance whatsoever on what

allocation methods a state or local committee may use; . . . Thus, a

revision of the Commission's

[[Page 37724]]

regulations to ensure that any method of allocation used by state or

local party committees is in compliance with the FECA is warranted.

Id. at 1396.

The court directed the Commission to replace the ``any reasonable

basis'' allocation method with more specific allocation formulas that

would ensure that only contributions subject to the limitations and

prohibitions of the Act are used to influence federal elections.

However, the court also acknowledged that the Commission could

``conclude that no method of allocation will effectuate the

Congressional goal that all moneys spent by state political committees

on those activities permitted in the 1979 amendments be `hard money'

under the FECA. That is an issue for the Commission to resolve on

remand.'' Id. (emphasis in original).

In a subsequent order, the same court stated that ```[s]oft money'

denotes contributions to federally regulated campaign committees in

excess of the aggregate amounts permitted for federal elections by the

FECA; these contributions, even if directed to national campaign

entities, are permissible if the money is not to be used in connection

with federal elections.'' Common Cause v. FEC, 692 F.Supp. 1397, 1398

(D.D.C. 1988).

The Commission initiated a rulemaking in response to the court's

decision in which it made several efforts to obtain input from the

regulated community. In addition to the two comment periods and public

hearing held before the court's decision, the Commission sought

comments on proposed rules through a new Notice of Proposed Rulemaking

published on September 29, 1988. 53 FR 38012. The Commission also held

another public hearing on the proposed rules on December 15, 1988, at

which a cross section of the regulated community had an opportunity to

testify. The Commission took the additional step of sending

questionnaires to the chairs of all the Democratic and Republican state

party committees, and also sought input from the chief fundraisers for

each of the major political parties during the 1988 election year.

The Commission issued final rules in 1990 and put them into effect

on January 1, 1991. Methods of Allocation Between Federal and Non-

Federal Accounts; Payments; Reporting, 55 FR 26058 (June 26, 1990).

These rules currently govern the allocation of expenses between federal

and non-federal accounts. They seek to address the issue of soft money

in two ways.

First, the current rules replace the ``any reasonable basis''

allocation method with specific allocation methods to be used to pay

the costs of activities that impact both federal and nonfederal

elections. The method to be used depends on the type of committee

incurring the expense and the type of activity for which expenses are

to be allocated.

National party committees, other than the Senate and House campaign

committees, are required to allocate a minimum of 60% of their

administrative expenses and costs of generic voter drives to their

federal accounts each year (65% in presidential election years). 11 CFR

106.5(b). In addition, national party committees must allocate the

costs of each combined federal and non-federal fundraising program or

event using the funds received method described in 11 CFR 106.5(f).

Senate and House campaign committees are required to allocate their

administrative and generic voter drive expenses using a funds expended

formula, subject to a 65% minimum federal percentage, 11 CFR 106.5(c),

and, like the national party committees, they must allocate the costs

of each combined federal and non-federal fundraising program or event

using the funds received method described in 11 CFR 106.5(f), with no

minimum federal percentage required.

State and local party committees must allocate (1) their

administrative expenses and generic voter drive costs using the ballot

composition method, described in 11 CFR 106.5(d); (2) the costs of

communications exempt from the contribution and expenditure definitions

under 11 CFR 100.7(b) (9), (15) or (17), and 100.8(b) (10), (16) or

(18), according to the proportion of time or space devoted to federal

and nonfederal candidates in the communication, 11 CFR 106.5(e); (3)

expenses incurred in joint fundraising activities using the funds

received method, 11 CFR 106.5(f); and (4) direct candidate support

activity according to the time or space devoted to each candidate in

the communication. 11 CFR 106.1. The new rules also set up procedures

to be used by all three types of committees to pay for their mixed

activities.

Second, the rules impose additional reporting requirements in order

to enhance the Commission's ability to monitor the allocation process.

All three types of party committees are required to report their

allocations of administrative expenses, voter drive costs, fundraising

costs and costs of exempt activities, and also to itemize any transfer

of funds from their non-federal to their federal or allocation

accounts. In addition, all six national party committees are now

required to disclose the financial activities of their nonfederal

accounts. Specifically, the committees are required to report all

nonfederal receipts and disbursements. The Commission believed this

additional reporting would help to ensure that impermissible funds were

not used for federal election activities.

On May 20, 1997, the Commission received a petition for rulemaking

from five Members of the United States House of Representatives urging

the Commission ``to modify its rules to help end or at least

significantly lessen the influence of soft money.'' On June 5, 1997,

the Commission received a second petition for rulemaking relating to

soft money, this one submitted by President Clinton. President

Clinton's petition asks the Commission to ``ban soft money'' and

``adopt new rules requiring that candidates for federal office and

national parties be permitted to raise and spend only `hard dollars.'''

In accordance with its usual procedures, the Commission published a

Notice of Availability in the June 18, 1997 edition of the Federal

Register announcing that it had received the petitions and inviting the

public to submit comments on them. 62 FR 33040 (June 18, 1997). The

comment period closed on July 18, 1997. The Commission received 188

comments in response to the Notice of Availability.

Summary of Comments on the Petitions for Rulemaking

Most of the comments on the Notice of Availability were directed at

the question of whether the Commission should promulgate new rules on

soft money, and if so, what those rules should be. However, a few

commenters raised threshold issues regarding the petitions that should

be addressed before examining the substantive issues raised. These

threshold issues will be discussed in subsection 1, below. The

remaining comments will be summarized in subsection 2.

1. Comments Raising Threshold Issues Regarding the Petitions

a. Sufficiency of the Petitions

One comment raised a threshold question about the sufficiency of

the petitions. This comment asserted that the petitions should be

denied because they do not set forth the factual and legal grounds

supporting the proposed change in the rules. See 11 CFR 200.2(b)(4).

The comment said that the Commission should require petitioners to put

on record ``specific, detailed and credible instances of abuse that in

terms of seriousness and scope will justify'' the rules sought in the

petition, and

[[Page 37725]]

should hold certain petitioners to a higher standard of evidence.

This comment misconstrues the purpose of the petition for

rulemaking procedures. These procedures provide the public with

guidance on how to seek changes in the Commission's rules, and should

be read in light of the Commission's long-standing practice of making

its policymaking processes as open and accessible as possible. The

rules do not place a heavy evidentiary burden on a petitioner to prove,

on the face of a petition, that policy changes are necessary.

Petitioners need only raise policy issues that are within the

Commission's jurisdiction, and request that the Commission consider

whether policy changes are warranted. If a petitioner does so, the

Commission will publish a Notice of Availability and begin its

consideration process. The Commission will use the comments received on

the petition and its own experience in interpreting and enforcing the

Act to determine whether to proceed with a rulemaking.

Furthermore, implicit in the Commission's commitment to making its

rulemaking process easily accessible to the public is a commitment to

making that process available to all members of the public on an equal

basis. Consequently, the Commission does not believe it would be

appropriate to hold certain petitioners to higher evidentiary

standards.

The Commission concludes that the letters submitted by President

Clinton and the five Members of Congress adequately explain the factual

and legal grounds upon which they rely, and demonstrate that there are

issues related to the use of soft money that are worthy of Commission

consideration. Therefore, they qualify as petitions under 11 CFR

200.2(b). The Commission also notes that even if it were to conclude

that the letters do not qualify as petitions, it has the discretionary

authority to treat them as the basis for a sua sponte rulemaking. 11

CFR 200.2(d).

b. Statutory Authority

Another threshold issue raised by the comments is whether the

Commission has the authority to regulate soft money. Several of the

comments that opposed the petitions take the position that soft money

is outside the Commission's jurisdiction, and that imposing limits on

soft money would exceed the Commission's statutory authority. They

assert that, since the Act does not restrict the use of non-federal

funds by the national party committees unless those funds are used for

federal election activity, the Commission cannot impose restrictions on

its own.

In contrast, several of the comments that support the petitions

argued that the Commission has the power to ban the use of soft money

by party committees to the extent necessary to avoid having soft money

influence federal elections. Another comment argued that, in the Common

Cause case, discussed above, the court said that when the Commission

fails to issue regulations, and the policy resulting from that failure

flatly contradicts Congress's purpose, the Commission can be held to

have acted contrary to law. Since the Act prohibits the use of soft

money in federal elections, this comment asserts that a Commission-

imposed limitation serving the same purpose would be upheld.

The Commission has reviewed this threshold question and reached the

preliminary conclusion that it has the authority to issue new rules

relating to soft money, at least insofar as it is used in connection

with Federal elections. The FECA limits the amounts that individuals

and political committees can contribute for the purpose of influencing

federal elections, and also prohibits corporations, labor organizations

and federal contractors from using their general treasury funds to make

contributions in connection with federal elections. 2 U.S.C. 441a,

441b, 441c. Section 438(a)(8) of the Act authorizes the Commission to

``prescribe rules, regulations and forms to carry out the provisions of

this Act. * * *'' The Commission believes this broad grant of

rulemaking authority includes the authority to promulgate rules to

limit the use of soft money in connection with federal elections.

There is ample judicial authority supporting this conclusion. As

the United States Court of Appeals for the District of Columbia Circuit

has recognized, courts have shown a ``lack of hesitation in construing

broad grants of rule-making power to permit promulgation of rules with

the force of law as a means of agency regulation of otherwise private

conduct.'' National Petroleum Refiners Association v. Federal Trade

Commission, 482 F.2d 672, 680 (D.C. Cir. 1973) (``NPRA''). ``An agency

with a general grant of rulemaking authority has jurisdiction to

promulgate regulations reasonably related to the purposes of its

enabling legislation.'' Pinney v. National Transportation Safety Board,

993 F.2d 201, 202 (10th Cir. 1993). The Supreme Court has said that

``[w]here the empowering provision of a statute states simply that the

agency may `make * * * such rules and regulations as may be necessary

to carry out the provisions of this Act,' we have held that the

validity of a regulation promulgated thereunder will be sustained so

long as it is `reasonably related to the purposes of the enabling

legislation.' '' Mourning v. Family Publications Service, Inc., 411

U.S. 356, 369 (1973) (quoting Thorpe v. Housing Authority of City of

Durham, 393 U.S. 268, 280-81 (1969). The ``authority of the [Federal

Power Commission] need not be found in explicit language. [A general

rulemaking provision] demonstrates a realization by Congress that the

Commission would be confronted with unforeseen problems of

administration in regulating this huge industry and should have a basis

for coping with such confrontation. While the action of the Commission

must conform with the terms, policies and purposes of the Act, it may

use means which are not in all respects spelled out in detail.'' Public

Service Comm'n of State of New York v. Federal Power Commission, 327

F.2d 893, 897 (D.C. Cir. 1964). Thus, the Commission believes that it

has the authority to promulgate rules to ensure that contributions that

would violate sections 441a, 441b or 441c are not used to influence

federal elections.

The Commission also believes that, given the complexity of the

issues raised, this is an area in which providing additional guidance

to the regulated community is particularly important. ``More than

merely expediting the agency's job, use of substantive rule-making is

increasingly felt to yield significant benefits to those the agency

regulates. Increasingly, courts are recognizing that use of rule-making

to make innovations in agency policy may actually be fairer to

regulated parties than total reliance on case-by-case adjudication.''

NPRA, 482 F.2d at 682.

However, the Commission does not regard this as a closed issue.

Therefore, as part of its effort to explore the question of whether new

rules are needed, commenters are invited to further address the issue

of whether the Commission has the authority to promulgate rules in this

area. Commenters are also encouraged to express their views on whether

the proposed rules set out in this notice are within the scope of that

authority.

2. General Comments on the Petitions for Rulemaking

a. Comments Supporting the Petitions

Approximately \3/4\ of the 188 comments received in response to the

Notice of Availability expressed support for the petitions for

rulemaking. Among

[[Page 37726]]

those supporting the petition were twelve United States Senators, three

United States Congressmen, the Secretaries of State of five states, and

eleven state Attorneys General.

These supporting comments suggested a number of different

strategies for addressing the issues raised in the petition. For

example, more than a hundred comments urged the Commission to ban soft

money completely, while other comments urged the Commission to limit

certain uses of soft money. A dozen comments urged the Commission to

ban soft money contributions to the national party committees, or to

prohibit the party committees from receiving soft money contributions.

Three other commenters urged the Commission to prohibit the

solicitation of soft money contributions by national party committees,

federal officeholders, and federal candidates. Another comment

suggested that the Commission prohibit the party committees from

spending soft money or transferring it to other committees. Other

comments were directed at the use of soft money by state and local

party committees. These comments suggested that the Commission prohibit

state and local party committees from spending soft money on any

activity or event that might influence a federal election, and limit

their use of soft money to general overhead expenses.

Several comments suggested that the Commission impose partial

limits on soft money. One comment suggested that the use of soft money

be reduced or limited so that the amount will not influence a party or

candidate. Two comments suggested that specific dollar limits be

imposed, one on the amount that a party committee could receive, and

the other on the amount that a contributor could give.

The comments contained a number of arguments as to why additional

limits on the use of soft money are needed. Four comments asserted that

soft money destroys the integrity of the political process, and said

that a ban on soft money would help to restore public confidence in the

integrity of the process. Eight comments said that the widespread use

of soft money alienates voters, and creates the perception of

impropriety, thereby discouraging involvement in the process. Five

commenters argued that soft money increases the demand for campaign

contributions, and distracts government officials from the

responsibilities of governance.

Many of the comments also argued that soft money is a loophole

being used to circumvent the prohibitions and limitations of the Act.

One comment asserted that the current system essentially allows money

laundering to occur by allowing impermissible soft dollars to be

exchanged for hard dollars that can be used without limitation. Other

comments said that soft money results in actual quid pro quo

corruption, thereby frustrating the purposes of 2 U.S.C. 441a and 441b.

Another comment expressed concern that soft money is having a negative

impact on the public financing system for presidential campaigns.

Several comments were directed at the system of allocating federal

and non-federal expenses, as set out in the current rules. Most of

these comments urged the Commission to abandon the system and prohibit

any combined use of federal and nonfederal funds. Several comments

asserted that the soft money problem has grown significantly worse

since the rules were promulgated, indicating that the rules have failed

to ensure that only hard dollars are used to influence federal

elections. One of these comments said that reporting under the

allocation rules is inadequate, and that the Commission does not have

the resources necessary to enforce the rules.

b. Comments Opposing the Petitions

As indicated above, about one quarter of the comments spoke out

against limits on soft money, for a variety of reasons. Several

comments argued that the proposals set out in the petitions would

violate the First Amendment. Others expressed concern that the

proposals would effectively federalize all national party activities,

and could weaken parties, which play an important role in our political

system. Two other comments urged the Commission to take action on soft

money only when it has addressed the issue of compulsory union dues.

Three comments urged the Commission to reject the petitions and devote

its resources to enforcing existing laws.

Analysis

Prior to 1991, it was difficult to determine how much soft money

the party committees were raising and spending, because there was no

systematic disclosure of soft money activity, and no uniform guideline

for allocating expenses. Although some states required party committees

to disclose their non-federal account activity, others did not, and

even in those states where disclosure was required, not all activity

appeared on the public record. Consequently, most of the available

information was anecdotal.

The Commission is generally reluctant to make significant changes

in existing policy in the absence of clear evidence that such changes

are needed to effectuate the Act's mandate. Consequently, the

Commission concluded that it would be inappropriate to impose the

significant restraints on the use of soft money sought in the 1984

petition for rulemaking. Instead, the Commission established specific

allocation methods and required additional disclosure by the party

committees. Based upon the information available at the time, the

Commission believed this approach struck the appropriate balance

between the need to effectuate the prohibitions and limitations of the

Act, and also recognize the interests of the states in regulating non-

federal activity.

However, recent developments--brought to light in many instances

because of the additional disclosure requirements imposed in 1991--have

reopened the question of whether allowing party committees to pay a

portion of their mixed activities costs with soft dollars is consistent

with the mandate of the FECA. Concerns have been raised that the

allocation rules have allowed party committees to use large

contributions from prohibited sources and in excess of the hard dollar

limits in ways that, in fact, influence federal elections, even though

they are ostensibly being used for nonfederal election activity.

One such development is the dramatic increase in the amount of soft

money raised and spent by the national party committees since

promulgation of the allocation rules. According to summaries of the

reports filed with the Commission, which do not include transfers among

the national party committees, the national committees raised $262.1

million during the 1995-96 election cycle, or an average of

approximately $131.05 million per year, up from $86 million in the 1992

election cycle or an average of $43 million per year. Similarly, soft

money disbursements by the committees totaled $271.5 million in the

1996 election cycle, a significant increase from the $79.1 million

spent in the 1992 election cycle. The reports also show that soft money

receipts by the national party committees continued to increase in

1997. Soft money fundraising by the Democratic committees increased 25%

during the first six months of the year, when compared to the same

period during the previous election cycle. Soft money fundraising by

the Republican national party committees increased 17% during this

period.

[[Page 37727]]

In addition to the increase in the total dollar amount of soft

money contributions, there has also been an increase in the number of

contributions made to the party committees' nonfederal accounts that

would have been prohibited under FECA if they had been made to a

federal account. As explained above, the Act limits individual

contributions to the national party committees' federal accounts to

$20,000 per calendar year, and also limits total contributions by an

individual to $25,000 per year. 2 U.S.C. 441a(a)(1)(B) and 441a(a)(3).

In addition, the Act prohibits contributions by corporations, labor

organizations and federal contractors. 2 U.S.C. 441b, 441c. Entities

that are prohibited from making contributions to a federal account and

individuals wishing to make contributions in excess of the dollar

limits have generally been permitted to direct those contributions to a

nonfederal account, even though contributions to nonfederal accounts

are often used for activities that have an impact on federal elections.

The reports indicate that contributors are doing so with increasing

frequency. The national party committees' nonfederal accounts received

at least 381 individual contributions of more than $20,000 during the

1992 presidential election cycle, and also received about 11,000

contributions from sources that are prohibited from contributing to

federal accounts. In the 1996 election cycle, both numbers more than

doubled. The committees' nonfederal accounts received nearly 1000

individual contributions in excess of $20,000, and also received

approximately 27,000 contributions from FECA-prohibited sources. Thus,

it appears that an increasing number of contributors see the party

committees' nonfederal accounts as an avenue through which they can

make contributions that would be prohibited under sections 441b or 441c

or would exceed the $20,000 individual contribution limit. Some

individual contributors may also be using these accounts to make

contributions that would otherwise exceed their $25,000 overall limit.

Ironically, there are also indications that the allocation rules

themselves may have increased the amount of soft money raised by the

national party committees, although it may not be possible to establish

cause and effect. Although the national party committees were not

required to report soft money receipts in 1984, one national party

committee official submitted testimony stating that his party raised

$3.7 million in soft money during the 1984 Presidential election year.

Federal Election Commission Hearing on the Use of Undisclosed Funds or

``Soft Money'' to Influence Federal Elections, January 29, 1986

(written testimony of Frank J. Fahrenkopf, Chairman, Republican

National Committee, at 4). That same party committee raised $23.5

million in 1992, the first Presidential election year in which the

allocation rules applied. This party committee subsequently raised

$66.2 million in the 1996 Presidential election year, approximately 18

times the amount reportedly raised in 1984. In addition, two national

party committees that did not have a non-federal money account before

promulgation of the allocation rules established such an account and

began raising soft money after the rules went into effect.

In some situations, the national party committees have interpreted

the allocation rules to allow transfers of funds to state and local

party committees in order to take advantage of more favorable

allocation ratios. Although the allocation rules prohibit state party

committees from using transferred funds for certain volunteer and GOTV

activities, see 11 CFR 100.7(b)(15)(vii), and (b)(17)(vii),

100.8(b)(16)(vii) and (b)(18)(vii), they do not prohibit the use of

transferred funds for voter drive or other activities, nor do they

explicitly require state parties to apply the national party

committee's allocation ratio when they use transferred funds for those

purposes.

Generally speaking, it is easier to raise soft money than hard

money. As a result, the national party committees look for ways to make

their hard dollars go farther. Transferring funds helps them achieve

this goal in a number of ways. For example, a national party may try to

stretch its hard dollars by transferring them to a state or local party

committee and instructing the committee to use the funds for a

particular mixed activity. Generally, the rules permit a state or local

party committee to pay a higher percentage of its mixed activity costs

with soft dollars than a national party is able to when conducting the

same activity. In many cases, the difference is significant. To

illustrate, a national party committee conducting a $100,000 voter

drive under the current rules would be required to pay for the drive

with at least $60,000 in hard money. In contrast, a state party

committee conducting the same drive might only be required to use

$35,000 in hard money, and could pay the remaining costs with soft

money. This creates an incentive for the national committee to transfer

hard dollars to the state committee and have the recipient committee

conduct the activity.

There have also been allegations that both national and state party

committees have transferred soft dollars to nonprofit organizations for

them to use in conducting activities that influence federal elections,

such as voter registration drives or get-out-the-vote campaigns.

Ordinarily, a party committee would be required to allocate the costs

of such an activity, i.e., pay part of the cost of the activity with

hard dollars. However, many nonprofit organizations are not political

committees under the FECA, and thus are generally not subject to the

allocation rules. Currently, in many situations, nonprofit

organizations that are not political committees under the FECA can pay

the costs of voter registration or get-out-the-vote activities entirely

with soft dollars. Thus, as with the hard dollar transfers described

above, the party committees may believe that transferring soft money to

these types of nonprofit organizations will enable them to conserve

hard dollars. However, in applying the allocation rules, one court has

said that when an organization conducts an allocable activity with

funds received from a party committee, the recipient organization can

be required to use the allocation rules applicable to the party

committee from which the funds were obtained. FEC v. California

Democratic Party, No. S-97-891, (E.D.Cal. Jun. 11, 1998).

The disclosure reports show that, in election years, the national

party committees transfer more soft money to state and local party

committees in states that appear to have closely contested races for

federal office. For example, reports indicate that the national party

committees transferred a combined $14.3 million in soft money to state

and local party committees in California during the 1995-96 election

cycle. California was an important battleground state in the

Presidential election. Polls indicated that both major party candidates

had a chance to win the state's 54 electoral votes.

In contrast, polls indicated that President Clinton had a

substantial lead in New York State. One national party committee did

not transfer any soft money to state and local party committees in New

York during the 1995-96 election cycle, and the other national party

committee transferred only $325,332, even though New York represents 33

electoral votes. While this is only one example and there are other

possible explanations for this disparity, one likely explanation for it

is that the national party committees were

[[Page 37728]]

directing their soft money to those states in which it would have the

most impact on federal elections.

In addition, there have been allegations in the press and other

fora that suggest that federal candidates and officeholders may be more

involved in the process of raising soft money for the parties than they

have been in the past. Federal officeholders, in particular, appear to

be directly involved in soliciting contributions for the party

committees' soft money accounts. In 1990, the Commission recognized

that some solicitations for soft money contributions may lead

contributors to believe that funds contributed will be used to benefit

federal candidates, when, in fact, soft money can only be used for non-

federal election activity. In order to address this concern, the

Commission created a presumption that party committee solicitations

that refer to a federal candidate or election are for the purpose of

influencing a federal election, and thus any contributions received in

response to those solicitations are subject to the prohibitions and

limitations of the Act. 11 CFR 102.5(a)(3). 55 FR at 26059 (June 26,

1990). The Commission now believes it may be appropriate to seek

comments as to whether solicitations by a federal candidate or federal

officeholder should be covered by Sec. 102.5(a)(3), and thus whether

the resulting contributions should be subject to the Act's prohibitions

and limitations.

Of course, the discussion of the above allegations should not be

read as a determination by the Commission that these allegations

involve violations of the FECA. Determinations by the Commission of

violations of FECA by specific persons in specific factual contexts can

only be made in an enforcement proceeding.

However, the record described above suggests that the use of soft

money has expanded far beyond what the Commission anticipated when it

promulgated the allocation rules. This appears to be particularly true

for the national party committees. They are directly tied to federal

officeholders in Congress and the White House. They also play a major

role in raising funds to elect candidates for federal office, and in

directing those funds to states in which key elections are being held.

Thus, it is reasonable to conclude that at least one dominant focus of

the national party committees is in electing federal candidates. This

is in contrast to state and local party committees, who focus more of

their activities on raising funds for and assisting in the election of

state and local candidates.

On the other hand, the Commission is also aware that only a small

percentage of the 500,000 elected positions in this country are

federal, and that national party committees may have an interest in the

outcome of both federal and nonfederal elections. In some cases, the

national party committees promote ideas, issues and agendas of

importance to their respective parties, activities which, they assert,

do not fall within the FECA. Thus, it is reasonable to conclude that

another dominant focus of the national party committees is advocating

issues and electing state and local candidates, although the level of

direct involvement in non-federal elections varies among the national

party committees. In recognition of this interest, national party

committees have, to date, been permitted to set up separate nonfederal

accounts to raise and spend money as allowed under applicable state and

local law.

Putting aside the question of how much national party committee

activity is not federal-election related, it appears that by allowing

national party committees to pay a portion of their mixed activities

costs with soft dollars, the allocation rules appear to be allowing the

national party committees to use large soft money contributions in ways

that unavoidably influence federal elections, even though they are

ostensibly raised for nonfederal election activity. This is

inconsistent with the policy goals of the FECA, which seeks to limit

corruption and the appearance of corruption that is created when large

individual contributions and corporate, labor organization and federal

contractor funds are used to influence federal elections. The number

and percentage of comments expressing the view that soft money has a

corrupting influence on the federal election process is a strong

indication that soft money is ``eroding * * * public confidence in the

electoral process through the appearance of corruption.'' FEC v.

National Right to Work Committee, 459 U.S. 197, 209 (1982) (citing

Buckley v. Valeo, 424 U.S. 1, 26-27 (1976)).

Consequently, the Commission believes that it may be necessary to

promulgate new rules to ensure that soft money is not used to influence

federal elections, and give full force and effect to the prohibitions

and limitations of the Act. The Commission has drafted proposed rules

that seek to achieve this goal. These rules are set out below, along

with several alternative proposals.

The Commission is also interested in receiving comments on any

other issues relating to soft money. In particular, as discussed above,

comments are invited on the scope of the Commission's authority to

promulgate rules in this area. Comments are also invited on whether the

allegations discussed above are accurate, relevant to this inquiry, and

adequate to justify changes in Commission policy.

The Commission would like to re-emphasize that the rules and

alternatives set out below are preliminary proposals only. They do not

represent a final decision, and may be modified by the Commission or

rejected and not adopted at all. Also note that these proposals focus

on soft money activity conducted by party committees, and would not

directly impact issue advocacy conducted by other entities, which,

unless it expressly advocates the election or defeat of a clearly

identified candidate, or in certain cases is coordinated with a

candidate or party, is outside the Commission's jurisdiction.

Coordination is currently being addressed in another rulemaking. See 62

FR 24367 (May 5, 1997).

Rulemaking Proposals

In an effort to generate a full range of views, the Commission is

seeking comment on two options for addressing the issues raised above,

and is also seeking comment on three variations on the second of these

two options.

The first option would be to make no changes to the current rules.

Under the first option, the national parties would continue to be

prohibited from receiving and using soft money in connection with

federal elections. Soft money raised for non-federal election related

purposes would be permitted. Non-federal accounts would be permitted

for these non-federal election purposes along with the building fund

accounts specifically authorized by the FECA.

The second option would be to make revisions to the current rules.

The Commission has drafted proposed revisions to the current rules that

would address these issues. The proposed revisions are described in

detail in the next two sections. Draft rules implementing these

proposals are set out in the proposed rule section of this notice.

The proposed revisions consist of a core proposal, and three

variations on the core proposal. The core proposal would prohibit the

receipt and use of soft money by the national party committees, and

would eliminate all national party committee nonfederal accounts other

than the building fund accounts specifically authorized by the FECA.

This proposal also clarifies portions of section 102.5 relating to

solicitations by federal candidates and officeholders. However, the

core proposal would not change the

[[Page 37729]]

allocation rules for state and local party committees.

The first variation to the core proposal would modify it to make a

narrow exception to the prohibition on the receipt of soft money by

national party committees. This exception would allow national party

committees to raise soft money for the limited purpose of making direct

or earmarked contributions to state and local candidates. The section

of the proposed rules titled ``variation one'' sets out those rule

provisions that would be different from the core proposal if this

variation were adopted. All the other provisions of the core proposal

would remain the same.

The second variation on the core proposal would modify the core

proposal to ensure that hard money transferred from a national to a

state or local party committee is spent using the rules applicable to

the national party committees, rather than the state or local party

committee's more favorable allocation ratios. Variation two would

require the national party committee to earmark transfers of funds for

use in a particular activity, and would require the state or local

party committee to finance the identified activity entirely with hard

dollars. Variation two could be implemented if either one of the two

options were adopted as is, or if the core proposal of the second

option were adopted with variation one. As with variation one,

variation two of the proposed rules sets out those rule provisions that

would be different from the core proposal if variation two were

adopted.

Finally, the third variation on the second option's core proposal

would extend portions of the core proposal's treatment of national

party committees to state and local party committees. Under variation

three, state and local party committees would be required to finance

their mixed activities entirely with hard dollars. Like variation two,

variation three could be implemented in conjunction with the core

proposal, or in conjunction with both the core proposal and variation

one. Those provisions that would differ from the core proposal of the

second option are set out in variation three of the proposed rules,

below.

The Commission invites commenters to submit their views on the

first and second options, including the core proposal and all three

variations of the second option.

1. National Party Committees, Including the Senate and House Campaign

Committees of the National Parties

The objective of the proposed rules is to ensure that soft money is

not used to influence federal elections. In order to achieve this

result, the core proposal virtually eliminates the soft money available

to the national party committees to subsidize activities that influence

federal elections.

Both the first and second options recognize the limited scope of

the FECA, and acknowledge that national party committees have other

purposes besides the election of federal candidates. The major

difference between the two options is whether most national party

committees' federal and nonfederal activities are inextricably

intertwined, or, as the current rules suggest, can be separated in a

way that will ensure that soft money is not used to influence federal

elections.

One way to attempt to reduce the amount of soft money used to

influence federal elections would be to adjust the allocation ratios so

that national party committees are required to use a larger percentage

of hard dollars to pay the costs of their mixed activities. However,

adjusting the allocation ratios would have limited impact for several

reasons.

First, unless the ratios were increased to 100%, the national party

committees could continue to pay for a portion of their mixed

activities with soft dollars. Thus, increasing the ratios would merely

reduce, rather than eliminate, the amount of soft money spent by the

national party committees on mixed activities that influence federal

elections.

In addition, this approach would have no impact on soft money spent

by the national party committees that is not spent directly on mixed

activities. Of the $271.5 million in soft money disbursed by the

national party committees during the 1996 election cycle, only $90.5

million, or one third, was spent directly on mixed activities that were

subject to the allocation ratios. An even greater amount, $114.8

million, or 42% of the total spent during the cycle, was transferred to

state and local party committees. An additional amount, which cannot be

as readily determined from the committees' reports, was transferred to

outside groups that are not subject to the allocation rules. Adjusting

the allocation ratios would only affect those amounts spent on mixed

activities. Amounts transferred between party committees would be

unaffected.

The preliminary evidence described above indicates that soft money

transferred by the national party committees, except for money not used

in connection with federal elections, is having a significant impact on

federal elections. If the proposed rules do not take these transfers

into account, they will not adequately effectuate the Congressional

intent that only hard money be used to influence the outcome of federal

elections. See Common Cause v. FEC, 692 F. Supp. 1391 (D.D.C. 1987),

enforced, 692 F. Supp. 1397 (D.D.C. 1987).

The first option, described in the introduction above, assumes that

money raised by national party committees to elect candidates to state

and local offices and to promote party positions on issues of local,

regional, and national importance can be spent in a way that will not

influence federal elections, and thus is beyond the Commission's

jurisdiction. The Commission invites comments on this option. In

particular, the Commission encourages commenters to help clarify the

various purposes of national party committees by discussing those

national party committee activities that promote party positions,

agendas and ideas on issues of local, regional, and national

importance.

In addition to seeking comments on this approach, the Commission is

also seeking comments on whether Schedule I should be revised so that

transfers between party committees can be more accurately tracked as

well as money used to elect candidates to state and local offices and

to promote party positions on issues of local, regional, and national

importance. This information would greatly enhance the available

information on how soft money is spent by national party committees.

The second option is based on the conclusion that the only way to

limit the amount of soft money spent by the party committees to

influence federal elections would be to reduce the amount of soft money

raised by the party committees, and in particular, by the national

party committees. This option concludes that the dominant focus of the

national party committees is on electing federal candidates, and

virtually all national party committee activities influence federal

elections. Thus, it would be more consistent with the purposes of the

FECA and the statute's jurisdictional reach to require national party

committees to finance their mixed activities entirely with hard

dollars. The most effective way of carrying out the Act's requirements

is to prohibit the national party committees

[[Page 37730]]

from raising soft money for most purposes.

The core proposal of the second option would achieve this goal by

revising the allocation rules for national party committees.

Specifically, the core proposal would revise section 102.5 to prohibit

all three types of national party committees from operating non-federal

accounts and accepting soft money. The only exception would be that

committees could continue to operate the building fund accounts, since

these accounts are specifically permitted by the FECA. See 2 U.S.C.

431(8)(B)(viii), 11 CFR 100.7(b)(12) and 11 CFR 100.8(b)(13).

The core proposal of the second option would also make related

changes to Part 106. Proposed sections 106.1(a) and 106.5(b) would

require the national party committees to defray expenses, other than

building fund expenses, entirely with hard dollars. This would include

the costs of expenditures that are on behalf of both federal and

nonfederal candidates, section 106.1(a), and the costs of combined

federal and non-federal fundraising programs currently allocated using

the funds received method in section 106.5(f). It would also include

costs incurred in fundraising for the committees' building funds, in

order to ensure that fundraising for building funds does not become an

avenue for spending soft money to influence federal elections, such as

by soliciting building fund contributions with communications that

expressly advocate the election or defeat of federal candidates.

Sections 106.1(a) and 106.5(b) of the core proposal would apply to

all of the national party committees, including the Senate and House

campaign committees. The core proposal would also make minor structural

modifications to section 106.1. Paragraph (a) would be broken into two

parts, and several reporting requirements in separate paragraphs of the

current rule would be relocated to paragraph (b). In addition, current

section 106.5(c), would be removed and replaced with an entirely new

provision, to be discussed below. The Commission invites comments on

these proposals.

Variation one on the second option's core proposal is largely the

same as the core proposal. However, variation one would create a narrow

exception to the prohibition on the receipt of soft money by national

party committees. Under section 102.5(c) of variation one, national

party committees other than the Senate and House campaign committees

would be allowed to maintain a second non-federal account for the

limited purpose of receiving donations that are either earmarked for

and subsequently donated to clearly identified non-federal candidates

or are raised and spent solely in the form of donations to non-federal

candidates, either directly or through an earmarked transfer to a state

or local party committee. This would allow national party committees to

continue raising soft dollars for the very limited purpose of making or

passing on contributions directly to nonfederal candidates. However,

the national party committees would still be required to finance their

mixed activities entirely with hard dollars. Comments are invited on

this proposal.

If the second option were to be adopted, either with or without

variation one of the core proposal, a modest reorganization of section

106.5 of the regulations would be necessary. This reorganization is

shown in the core proposal section of the proposed rules. First, the

section heading would be revised to reflect the substantive changes in

the section. Second, since the national party committees would no

longer be allocating expenses, the list of costs to be allocated in

current section 106.5(a)(2) would be relocated to section 106.5(c)(2).

Revised section 106.5(b) would apply to all national party committees,

including the Senate and House campaign committees, and new section

106.5(c) would state the general rule that state and local party

committees are required to allocate the expenses in paragraph (c)(2) in

accordance with paragraphs (d) through (f). Comments are invited on the

reorganization of section 106.5.

The version of section 106.5 in variation three of the second

option also reflects this reorganization, although variation three

would also make other changes to section 106.5 that will be discussed

further below.

2. State and Local Party Committees

The Commission is seeking comment on whether the rules governing

state and local party committees should be changed to address some of

the issues raised above.

As with the national party committees, the current allocation rules

appear to be allowing state and local party committees to use soft

money to subsidize activities that, at least in part, influence federal

elections. In addition, as discussed above, the differences between the

allocation methods applicable to national party committees and those

applicable to state and local party committees create an incentive for

a national party committee that wants to engage in a mixed activity to

transfer hard dollars to a state or local party committee and have the

recipient committee conduct the activity using its more favorable

allocation ratios. This problem exists under the current rules.

However, it would be made more acute if the second option were adopted,

because the core proposal for national party committees would eliminate

the national party committees' non-federal accounts and require

national party committees to use 100% hard money for all activities.

Implementing the core proposal of the second option could also

encourage soft money donors to redirect their contributions to the

state and local party committees, which would then use the funds for

mixed activities that influence federal elections. The national party

committees might assist their state and local affiliates by employing a

type of directed donor strategy, in which the national committee

solicits soft money contributions and instructs contributors to send

their contributions directly to the state or local committee. Thus,

instead of reducing the amount of soft money activity, the core

proposal for national party committees may merely redirect that

activity to the state and local level, where reporting may be less

complete than at the federal level.

Variations two and three on the core proposal would address these

issues. If the core proposal of the second option were implemented with

variation two, the rules would eliminate the national party committees'

nonfederal accounts and would also seek to limit the incentive for

national party committees to transfer funds to state and local party

committees in order to take advantage of the recipient committee's more

favorable allocation ratios. Specifically, variation two would require

a national party committee that transfers hard dollars to a state or

local party committee to include a written communication identifying

the state or local party committee activity for which the transferred

funds are to be used. The national party committee would also be

required to include a copy of the written communication in its next

regularly scheduled disclosure report to the Commission. See section

106.5(b) of variation two.

The recipient state or local party committee would then be required

to use the transferred funds for the identified activity, and pay any

additional costs incurred in the identified activity entirely with hard

dollars. This would ensure that funds that originate with a national

party committee are used in accordance with the rules that apply to

national party committees. Finally, like the national

[[Page 37731]]

party committee, the state or local party committee would be required

to submit a copy of the written communication with its next regularly

scheduled disclosure report. Section 106.5(c)(1)(ii)(A) of variation

two. Comments are encouraged on these proposals.

Paragraph (c)(1)(ii)(B) of variation two contains an exception for

transfers to state and local party committees in states that hold

federal and non-federal elections in different years. The transfer

requirements described above would not apply to transfers made to these

entities if the funds transferred were used exclusively for generic

voter drive activity conducted in a calendar year in which no

candidates for federal office appear on any primary, general, or

special election ballot.

Variation two also contains a conforming amendment to section

106.1. Revised section 106.1(a)(1) would require state and local

committees to follow the transfer rules in section 106.5 if they use

transferred funds to pay for expenditures on behalf of both federal and

nonfederal candidates. The Commission also notes that it may be

necessary to make other conforming amendments to the reporting

requirements in Part 104 of the regulations, should variation two be

implemented.

Variation three of the core proposal would extend portions of the

core proposal's treatment of national party committees to state and

local party committees in order to ensure that state and local

committees do not use soft money donations to influence federal

elections. The core proposal would require national party committees to

pay their expenses entirely with hard dollars. Similarly, variation

three would require state and local party committees to pay the costs

of their mixed activities entirely with hard dollars, regardless of

whether the funds used were transferred from a national party

committee. Under this approach, state and local party committees would

be required to pay all of the costs they incur in the activities

described in current section 106.5(a)(2) with funds that are

permissible under the FECA. This is in contrast to the current rules,

under which they allocate the costs of all of these activities, and is

also in contrast to variation two, under which they would allocate the

costs of any mixed activities not partially financed with funds

transferred from a national party committee. Variation three would also

amend section 106.1 to require state and local committees to use hard

dollars for expenditures made on behalf of both federal and nonfederal

candidates.

Variation three would contain two exceptions to the general

requirement that state and local party committees pay the costs of

their mixed activities entirely with hard dollars. First, national and

state party committees could continue to defray their building fund

expenses with funds in a building fund account established in

accordance with section 102.5(c)(2). In addition, state and local party

committees in states that do not hold federal and non-federal elections

in the same year could continue to use funds that are not subject to

the prohibitions and limitations of the Act to defray the costs of

generic voter drive activity conducted in a calendar year in which no

candidates for federal office appear on any primary, general, or

special election ballot.

Comments are invited on variation three of the core proposal. The

Commission recognizes that this would be a significant change for

committees that operate on the state and local level, and would raise

issues regarding the scope of the FECA. The concept underlying this

approach is that all mixed activity, by its very nature, affects

federal elections, and must be paid for with hard dollars. Commenters

are encouraged to address the question of whether the Commission has

the statutory authority to implement such a rule.

The Commission would like to emphasize that, under variations two

and three, state and local party committees would be able to continue

raising soft money to pay for activities that exclusively influence

nonfederal elections.

Finally, the core proposal and all three variations of the core

proposal would amend current section 106.5(a)(2)(iv) to address the

allegation that party committees have transferred funds to nonprofit

organizations in order to avoid the allocation requirements. The

revised provisions are set out in section 106.5(c)(2)(iv) of the core

proposal, variation one and variation two, and in section 106.5(b) of

variation three. Section 106.5(c)(2)(iv) would indicate that the costs

of generic voter drives must be allocated if the drive is conducted

directly by a state or local party committee or is financed by the

party committee and conducted by another entity. Section 106.5(b) of

variation three would indicate that the costs of generic voter drives

must be defrayed entirely with hard dollars, whether the drive is

conducted directly by a state or local party committee or is financed

by the party committee and conducted by another entity. The Commission

invites comments on these proposals.

3. Other Proposed Rules

a. Party committee solicitations by federal candidates and

officeholders

The Commission is considering changes to section 102.5(a)(3) to

make it clear that contributions solicited by a federal candidate or

officeholder are subject to the prohibitions and limitations of the

Act. As discussed above, when a federal candidate or officeholder

solicits a contribution, the contributor is likely to assume that his

or her contribution will be used to benefit a federal candidate.

Proposed revisions to section 102.5(a)(3) set out in the core proposal

would make it clear that contributions resulting from a solicitation

made by a federal candidate or officeholder are subject to the

prohibitions and limitations of the Act. However, in the case of a

solicitation for a national party committee, this presumption could be

rebutted if the donor, in writing, expressly designates the

contribution for the committee's building fund account, as described in

section 102.5(c)(2). In the case of a solicitation for a state party

committee, this presumption could be rebutted if the donor, in writing,

expressly designates the contribution for the committee's building fund

account, or for its non-federal account, as described in section

102.5(a)(1)(i). Donors to a local party committee could also designate

their contributions for a nonfederal account. The core proposal also

contains a conforming amendment to current section 102.5(a)(2), which

would add to the list of contributions that may be deposited in a

federal account those contributions that, due to the operation of

proposed paragraph (a)(3), would be presumed to be for the purpose of

influencing an election. The Commission invites comments on these

proposals.

b. Allocating Joint Fundraising Expenses

Section 102.17 sets out rules for committees, other than separate

segregated funds, that engage in joint fundraising. Generally, this

provision only applies to joint fundraising activities conducted on

behalf of more than one federal candidate or on behalf of multiple non-

connected committees. Fundraising activities conducted by party

committees for both their federal and nonfederal accounts are currently

governed by 11 CFR 106.5(f), although under the core proposal of the

second option, national party committee

[[Page 37732]]

fundraising would be governed by paragraph (b).

The core proposal of the second option would insert a cross

reference into section 102.17(c)(7) directing party committees that

collect both federal and nonfederal funds through a joint fundraiser to

allocate their expenses for the fundraiser in accordance with section

106.5. Even though no comparable language appears in the current rule,

this new language would merely make explicit the Commission's long-

standing interpretation of these two provisions. Thus, this proposal

would not be a change in Commission policy. Comments are invited on

this proposed revision.

c. Curing prohibited and excessive contributions

Under section 103.3(b) of the Commission's rules, committee

treasurers are responsible for examining all contributions received to

ensure that they do not violate the prohibitions or limitations of the

Act. Contributions that present genuine questions as to whether they

are from a prohibited source may be deposited in the committee's

account or returned to the contributor within ten days of receipt.

However, if such a contribution is deposited, the treasurer has thirty

days to determine the legality of the contribution. If unable to

confirm that the contribution is legal, the treasurer must refund the

contribution. 11 CFR 103.3(b)(1).

Similarly, if a treasurer receives a contribution that does not

initially appear to be from a prohibited source, and subsequently

determines that the contribution is from a prohibited source, the

treasurer is required to refund the contribution within 30 days. 11 CFR

103.3(b)(2).

Paragraph (b)(3) contains similar rules for contributions that

exceed the limitations in 2 U.S.C. Sec. 441a, either on their face or

when aggregated with other contributions from the same contributor. See

also 11 CFR 110.1 or 110.2. The treasurer has the option of depositing

the excessive contribution or returning it to the contributor. However,

if the contribution is deposited, the treasurer has sixty days to seek

redesignation of the contribution to another election, or reattribution

to another contributor. If unable to obtain redesignation or

reattribution, the treasurer is required to refund the contribution. 11

CFR 103.3(b)(3).

The Commission is considering the situation where a committee has

received an excessive or prohibited contribution and wants to cure this

problem by transferring the contribution to a nonfederal account.

Proposed revisions to sections 103.3(b)(1), (2) and (3), as shown in

the core proposal of the second option, would allow a treasurer to make

such a transfer to a non-federal account established in accordance with

11 CFR 102.5(a)(1)(i) or 102.5(c), but only after obtaining an express

written redesignation of the contribution to the non-federal account.

If a written redesignation cannot be obtained within thirty days of

receiving the contribution, the treasurer would be required to return

the contribution to the contributor. The Commission invites comments on

these proposals.

The treasurer's ability to transfer the prohibited or excessive

contribution would also be subject to other applicable federal laws.

For example, if a treasurer receives a contribution from a foreign

national, he or she would not be able to cure the illegality of that

contribution by transferring it to a non-federal account, because

foreign nationals are prohibited from making contributions in

connection with any election to any political office. Similarly, the

transfer would be subject to applicable state laws. The proposed rule

would not preempt, under 2 U.S.C. 453, any state-imposed contribution

prohibitions or limitations. Comments on these limitations are welcome.

Conclusion

The Commission welcomes comments on the issues raised by the

proposed rules, and on the general question of whether changes to the

regulations relating to soft money are warranted at this time. As

mentioned above, the Commission is also interested in comments on the

issue of whether it has the authority to promulgate rules in this area.

Those interested are also welcome to raise other issues that should be

addressed if the Commission decides to issue final rules.

Certification of No Effect Pursuant to 5 U.S.C. 605(b) (Regulatory

Flexibility Act)

I certify that the attached proposed rules, if promulgated, would

not have a significant economic impact on a substantial number of small

entities. The basis of this certification is that the national, state

and local party committees of the two major political parties are not

small entities under 5 U.S.C. Sec. 601, and the number of other party

committees to which the rule would apply is not substantial.

List of Subjects

11 CFR Part 102

Political committees and parties.

11 CFR Part 103

Campaign funds, Political committees and parties.

11 CFR Part 106

Campaign funds, Political committees and parties.

First Option

The Commission would make no changes to the existing regulations.

Second Option

The Commission is proposing to make the following changes to the

regulations:

For the reasons set out in the preamble, it is proposed to amend

subchapter A, chapter I of title 11 of the Code of Federal Regulations

as follows:

Core Proposal

PART 102--REGISTRATION, ORGANIZATION, AND RECORDKEEPING BY

POLITICAL COMMITTEES (2 U.S.C. 433)

1. The authority citation for part 102 would continue to read as

follows:

Authority: 2 U.S.C. 432, 433, 438(a)(8), 441d.

2. Section 102.5 would be amended by revising paragraph (a) and

adding paragraph (c), to read as follows:

Sec. 102.5 Organizations financing political activity in connection

with Federal and non-Federal elections, other than through transfers

and joint fundraisers.

(a) Organizations, other than national party committees, that are

political committees under the Act. (1) Except as provided in paragraph

(c) of this section, any organization that finances political activity

in connection with both federal and non-federal elections and that

qualifies as a political committee under 11 CFR 100.5 shall either:

(i) Establish a separate federal account in a depository in

accordance with 11 CFR part 103. Such account shall be treated as a

separate federal political committee which shall comply with the

requirements of the Act including the registration and reporting

requirements of this part and 11 CFR part 104. Only funds subject to

the prohibitions and limitations of the Act shall be deposited in such

separate federal account. All disbursements, contributions,

expenditures and transfers by the committee in connection with any

federal election shall be made from its federal account. No transfers

may be made to such federal account from any other account(s)

maintained by such organization for the purpose of financing activity

in connection with non-federal elections, except as

[[Page 37733]]

provided in 11 CFR 106.5(g) and 106.6(e). Administrative expenses shall

be allocated pursuant to 11 CFR part 106 between such federal account

and any other account maintained by such committee for the purpose of

financing activity in connection with non-federal elections; or

(ii) Establish one account, which shall receive only contributions

subject to the prohibitions and limitations of the Act, regardless of

whether such contributions are for use in connection with federal or

non-federal elections. Such organization shall register as a political

committee and comply with the requirements of the Act.

(2) Only contributions described in paragraphs (a)(2)(i), (ii),

(iii) or (iv) of this section may be deposited in a federal account

established under paragraph (a)(1)(i) of this section or may be

received by a political committee established under paragraph

(a)(1)(ii) of this section:

(i) Contributions designated for the federal account;

(ii) Contributions that result from a solicitation which expressly

states that the contribution will be used in connection with a federal

election;

(iii) Contributions from contributors who are informed that all

contributions are subject to the prohibitions and limitations of the

Act; or

(iv) Contributions that, due to the operation of paragraph (a)(3)

of this section, are presumed to be for the purpose of influencing an

election.

(3) Any party committee solicitation that is made by a federal

candidate or federal officeholder or that makes reference to a federal

candidate or a federal election shall be presumed to be for the purpose

of influencing a federal election. The full amount of any funds

received as a result of that solicitation shall be presumed to be a

contribution under 11 CFR 100.7(a) that is subject to the prohibitions

and limitations in 11 CFR parts 110 and 114. However, this paragraph

does not apply to a donation that is made payable to or is accompanied

by a writing, signed by the donor, which clearly indicates that the

donation is for a non-federal account or building fund account

described in paragraphs (a)(1)(i) or (c) of this section.

* * * * *

(c) National party committees. (1) National party committees,

including the Senate and House campaign committees of a national party,

shall establish one or more federal account(s) in accordance with 11

CFR part 103. The federal account(s) shall receive only contributions

subject to the prohibitions and limitations of the Act. Except as

provided in paragraph (c)(2) of this section, national party committees

shall not establish any nonfederal account or receive any contribution

or donation of anything of value that is not subject to the

prohibitions and limitations of the Act.

(2) National party committees, including the Senate and House

campaign committees of a national party, may establish a building fund

account to be used solely for the purpose of receiving gifts,

subscriptions, loans, advances or deposits of money or anything of

value described in 11 CFR 100.7(b)(12) or 11 CFR 100.8(b)(13).

3. Section 102.17 would be amended by revising paragraph

(c)(7)(ii), redesignating current paragraph (c)(7)(iii) as paragraph

(c)(7)(iv), and adding new paragraph (c)(7)(iii), to read as follows:

Sec. 102.17 Joint fundraising by committees other than separate

segregated funds.

* * * * *

(c) * * *

(7) * * *

(ii) If participating committees are affiliated as defined in 11

CFR 110.3 prior to the joint fundraising activity, expenses need not be

allocated among those participants. Payment of such expenses by an

unregistered committee or organization on behalf of an affiliated

political committee may cause the unregistered organization to become a

political committee.

(iii) If the participants are party committees of the same

political party, expenses need not be allocated among those

participants, unless the committees collect both federal and non-

federal funds, in which case, expenses must be allocated in accordance

with 11 CFR 106.5. Payment of such expenses by an unregistered

committee or organization on behalf of an affiliated political

committee may cause the unregistered organization to become a political

committee.

* * * * *

PART 103--CAMPAIGN DEPOSITORIES (2 U.S.C. 432(h))

4. The authority citation for part 103 would continue to read as

follows:

Authority: 2 U.S.C. 432(h), 438(a)(8)

5. Section 103.3 would be amended by adding a new sentence at the

end of paragraphs (b)(1), (b)(2) and (b)(3), to read as follows:

Sec. 103.3 Deposit of receipts and disbursements (2 U.S.C. 432(h)(1)).

* * * * *

(b) * * *

(1) * * * Treasurers of committees that are not authorized by any

candidate may also transfer the contribution to a non-federal account

established in accordance with 11 CFR 102.5(a)(1) (i) or (c) and treat

the funds as a contribution to the non-federal account, so long as the

donor provides an express written redesignation of the contribution to

the non-federal account within thirty days of the treasurer's receipt

of the contribution.

(2) * * * Treasurers of committees that are not authorized by any

candidate may also transfer the contribution to a non-federal account

established in accordance with 11 CFR 102.5(a)(1) (i) or (c) and treat

the funds as a contribution to the non-federal account, so long as the

donor provides an express written redesignation of the contribution to

the non-federal account within thirty days of the treasurer's receipt

of the contribution.

(3) * * * Treasurers of committees that are not authorized by any

candidate may also transfer the contribution to a non-federal account

established in accordance with 11 CFR 102.5(a)(1)(i) or (c) and treat

the funds as a contribution to the non-federal account, so long as the

donor provides an express written redesignation of the contribution to

the non-federal account within thirty days of the treasurer's receipt

of the contribution.

* * * * *

PART 106--ALLOCATIONS OF CANDIDATE AND COMMITTEE ACTIVITIES

6. The authority citation for part 106 would continue to read as

follows:

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

7. Section 106.1 would be amended by revising paragraphs (a) and

(b) to read as follows:

Sec. 106.1 Allocation of expenses between candidates.

(a) General rule. (1) Expenditures, including in-kind

contributions, independent expenditures, and coordinated expenditures

made on behalf of more than one clearly identified federal candidate

shall be attributed to each such candidate according to the benefit

reasonably expected to be derived. For example, in the case of a

publication or broadcast communication, the attribution shall be

determined by the proportion of space or time devoted to each candidate

as compared to the total space or time devoted to all candidates. In

the case of a fundraising program or event where funds are collected by

one committee

[[Page 37734]]

for more than one clearly identified candidate, the attribution shall

be determined by the proportion of funds received by each candidate as

compared to the total receipts by all candidates.

(2) (i) Except as provided in paragraph (a)(2)(ii) of this section,

the methods described in paragraph (a)(1) of this section shall also be

used to allocate payments involving both expenditures on behalf of one

or more clearly identified federal candidates and disbursements on

behalf of one or more clearly identified non-federal candidates. When

such a payment is made by a political committee with separate federal

and non-federal accounts, the payment shall be made according to the

procedures set forth in 11 CFR 106.5(g) or 106.6(e), as appropriate.

(ii) When a national party committee, including a Senate or House

campaign committee of a national party, makes a payment involving both

expenditures on behalf of one or more clearly identified federal

candidates and disbursements on behalf of one or more clearly

identified non-federal candidates, the payment shall be made entirely

from the committee's federal account(s), i.e., with funds subject to

the prohibitions and limitations of the Act.

(b) Reporting. An expenditure made on behalf of more than one

clearly identified federal candidate shall be reported pursuant to 11

CFR 104.10(a). A payment that includes amounts attributable to one or

more non-federal candidates, and that is made by a political committee

with separate federal and non-federal accounts, shall also be reported

pursuant to 11 CFR 104.10(a). An authorized expenditure made by a

candidate or political committee on behalf of another candidate shall

be reported as a contribution in-kind to the candidate on whose behalf

the expenditure was made, except that expenditures made by party

committees pursuant to 11 CFR 110.7 need only be reported as an

expenditure.

* * * * *

8. In Sec. 106.5, the section heading and paragraphs (a), (b), (c),

(d)(1) introductory text, (d)(2) heading, the first sentence of

paragraph (e), and paragraph (f) heading, would be revised to read as

follows:

Sec. 106.5 Party committee federal and non-federal activities;

payments by national party committees; allocation by state and local

party committees.

(a) Scope and general rule. This section covers payment of expenses

by national party committees, general rules regarding federal and non-

federal expenses incurred by state and local party committees, methods

for allocation of administrative expenses, costs of generic voter

drives, exempt activities, and fundraising costs by state and local

party committees, and procedures for payment of allocable expenses.

Requirements for reporting of allocated disbursements are set forth in

11 CFR 104.10. Party committees that make disbursements in connection

with federal and non-federal elections shall make those disbursements

entirely from funds subject to the prohibitions and limitations of the

Act, or from accounts established pursuant to 11 CFR 102.5. Political

committees that have established separate federal and non-federal

accounts under 11 CFR 102.5(a)(1)(i) shall allocate expenses between

those accounts according to this section. Organizations that are not

political committees but have established separate federal and non-

federal accounts under 11 CFR 102.5(b)(1)(i), or that make federal and

non-federal disbursements from a single account under 11 CFR

102.5(b)(1)(ii) shall also allocate their federal and non-federal

expenses according to this section.

(b) National party committees. (1) Except as provided in paragraph

(b)(2) of this section, national party committees, including the Senate

and House campaign committees of a national party, shall defray their

expenses entirely from funds subject to the prohibitions and

limitations of the Act.

(2) National party committees may defray the expenses described in

11 CFR 100.7(b)(12) and 11 CFR 100.8(b)(13) with funds from an account

established in accordance with 11 CFR 102.5(c)(2).

(c) State and local party committees. (1) General rule. State and

local party committees shall allocate the costs described in paragraph

(c)(2) of this section in accordance with paragraphs (d) through (f) of

this section.

(2) Costs to be allocated. Committees that make disbursements in

connection with federal and non-federal elections shall allocate

expenses according to this section for the following categories of

activity:

(i) Administrative expenses including rent, utilities, office

supplies, and salaries, except for such expenses directly attributable

to a clearly identified candidate;

(ii) The direct costs of a fundraising program or event, including

disbursements for solicitation of funds and for planning and

administration of actual fundraising events, through which a committee

collects both federal and non-federal funds, whether the committee

conducts the program or event individually or in conjunction with

another committee;

(iii) State and local party activities exempt from the definitions

of contribution and expenditure under 11 CFR 100.7(b) (9), (15) or

(17), and 100.8(b) (10), (16) or (18) (exempt activities) including the

production and distribution of slate cards and sample ballots, campaign

materials distributed by volunteers, and voter registration and get-

out-the-vote drives on behalf of the party's presidential and vice-

presidential nominees, where such activities are conducted in

conjunction with non-federal election activities; and

(iv) Generic voter drives either conducted by the committee itself

or paid for by the committee and conducted by another entity, including

voter identification, voter registration, and get-out-the-vote drives,

or any other activities that urge the general public to register, vote

or support candidates of a particular party or associated with a

particular issue, without mentioning a specific candidate.

(d) State and local party committees; method for allocating

administrative expenses and costs of generic voter drives--(1) General

rule. Except as provided in paragraph (d)(2) of this section, all state

and local party committees shall allocate their administrative expenses

and costs of generic voter drives, as described in paragraph (c)(2) of

this section, according to the ballot composition method, described in

paragraphs (d)(1)(i) and (ii) of this section as follows:

* * * * *

(2) State and local party committees in states that do not hold

federal and non-federal elections in the same year. * * *

(e) State and local party committees; method for allocating costs

of exempt activities. Each state or local party committee shall

allocate its expenses for activities exempt from the definitions of

contribution and expenditure under 11 CFR 100.7(b) (9), (15) or (17),

and 100.8(b) (10), (16) or (18), when conducted in conjunction with

non-federal election activities, as described in paragraph (c)(2) of

this section, according to the proportion of time or space devoted in a

communication. * * *

(f) State and local party committees; method for allocating direct

costs of fundraising. * * *

* * * * *

[[Page 37735]]

Variation One

PART 102--REGISTRATION, ORGANIZATION AND RECORDKEEPING BY POLITICAL

COMMITTEES (2 U.S.C. 433)

1. The authority citation for part 102 would continue to read as

follows:

Authority: 2 U.S.C. 432, 433, 438(a)(8), 441d.

2. Section 102.5 would be amended by revising paragraph (a) and

adding paragraph (c), to read as follows:

Sec. 102.5 Organizations financing political activity in connection

with Federal and non-Federal elections, other than through transfers

and joint fundraisers.

(a) [Same as core proposal of second option.]

* * * * *

(c) National party committees. (1) National party committees,

including the Senate and House campaign committees of a national party,

shall establish one or more federal account(s) in accordance with 11

CFR part 103. The federal account(s) shall receive only contributions

subject to the prohibitions and limitations of the Act. Except as

provided in paragraphs (c)(2) and (3) of this section, national party

committees shall not establish any nonfederal account or receive any

contribution or donation of anything of value that is not subject to

the prohibitions and limitations of the Act.

(2) National party committees, including the Senate and House

campaign committees of a national party, may establish a building fund

account to be used solely for the purpose of receiving gifts,

subscriptions, loans, advances or deposits of money or anything of

value described in 11 CFR 100.7(b)(12) or 11 CFR 100.8(b)(13).

(3) National party committees, other than the Senate and House

campaign committees of a national party, may establish one or more

accounts for receiving donations that are:

(i) Earmarked for and subsequently donated to a clearly identified

non-federal candidate; or

(ii) Raised and spent solely in the form of donations to non-

federal candidates, either directly or through an earmarked transfer to

a state or local party committee.

3. Proposed Sec. 102.17 would be the same as the core proposal of

the second option.

PART 103--[AMENDED]

4. Proposed Sec. 103.3 would be the same as the core proposal of

the second option.

PART 106--[AMENDED]

5. Proposed Secs. 106.1 and 106.5 would be the same as the core

proposal of the second option.

Variation Two

PART 102--[AMENDED]

1. Proposed Secs. 102.5 and 102.17 would be the same as the core

proposal of the second option.

PART 103--[AMENDED]

2. Proposed Sec. 103.3 would be the same as the core proposal of

the second option.

PART 106--ALLOCATIONS OF CANDIDATE AND COMMITTEE ACTIVITIES

3. The authority citation for part 106 would continue to read as

follows:

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

4. Section 106.1 would be amended by revising paragraphs (a) and

(b) to read as follows:

Sec. 106.1 Allocation of expenses between candidates.

(a) General rule. (1) [same as core proposal of second option.]

(2) (i) Except as provided in paragraph (a)(2)(ii) of this section

and in 11 CFR 106.5(c)(1)(ii)(A), the methods described in paragraph

(a)(1) of this section shall also be used to allocate payments

involving both expenditures on behalf of one or more clearly identified

federal candidates and disbursements on behalf of one or more clearly

identified non-federal candidates. When such a payment is made by a

political committee with separate federal and non-federal accounts, the

payment shall be made according to the procedures set forth in 11 CFR

106.5(g) or 106.6(e), as appropriate.

(ii) [Same as core proposal of second option.]

(b) [Same as core proposal of second option.]

* * * * *

5. In Sec. 106.5, the section heading and paragraphs (a), (b), (c),

(d)(1) introductory text, (d)(2) heading, the first sentence of

paragraph (e), and paragraph (f) heading, would be revised to read as

follows:

Sec. 106.5 Party committee federal and non-federal activities;

payments and transfers by national party committees; allocation by

state and local party committees.

(a) Scope and general rule. This section covers general rules

regarding federal and non-federal expenses incurred by party

committees, payment of expenses by national party committees and

transfers of funds from national party committees to state and local

party committees, methods for allocation of administrative expenses,

costs of generic voter drives, exempt activities, and fundraising costs

by state and local party committees, and procedures for payment of

allocable expenses. Requirements for reporting of allocated

disbursements are set forth in 11 CFR 104.10. Party committees that

make disbursements in connection with federal and non-federal elections

shall make those disbursements entirely from funds subject to the

prohibitions and limitations of the Act, or from accounts established

pursuant to 11 CFR 102.5. Political committees that have established

separate federal and non-federal accounts under 11 CFR 102.5(a)(1)(i)

shall allocate expenses between those accounts according to this

section. Organizations that are not political committees but have

established separate federal and non-federal accounts under 11 CFR

102.5(b)(1)(i), or that make federal and non-federal disbursements from

a single account under 11 CFR 102.5(b)(1)(ii) shall also allocate their

federal and non-federal expenses according to this section.

(b) National party committees--(1) Disbursements for mixed

activities. (i) Except as provided in paragraph (b)(1)(ii) of this

section, national party committees, including the Senate and House

campaign committees of a national party, shall defray their expenses

entirely from funds subject to the prohibitions and limitations of the

Act.

(ii) National party committees may defray the expenses described in

11 CFR 100.7(b)(12) and 11 CFR 100.8(b)(13) with funds from an account

established in accordance with 11 CFR 102.5(c)(2).

(2) Transfers to state or local party committees. Whenever a

national party committee, including the Senate and House campaign

committees of a national party, transfers funds from any account of the

national party committee to any account of a state or local party

committee, the transfer shall be accompanied by a written communication

specifically identifying the state or local party committee activity or

expense for which the transferred funds are to be used. The national

party committee shall attach a copy of the written communication to the

schedule of itemized disbursements submitted with its next regularly

scheduled report.

(c) State and local party committees. (1)(i) General rule. Except

as provided

[[Page 37736]]

in paragraph (c)(1)(ii) of this section, state and local party

committees shall allocate the costs described in paragraph (c)(2) of

this section in accordance with paragraphs (d) through (f) of this

section.

(ii) State and local party committees defraying expenses with funds

transferred from a national party committee--(A) General rule. A state

or local party committee that receives a transfer from a national party

committee shall:

(1) Use the funds transferred exclusively for the activity

specifically identified by the national party committee in the written

communication accompanying the transfer, except that no funds

transferred from a non-federal account shall be used for any portion of

the costs of any activity described in paragraph (c)(2) of this

section;

(2) Defray 100% of the remaining costs of the specifically

identified activity with funds drawn from the state or local party

committee's federal account, i.e., with funds that are subject to the

prohibitions and limitations of the Act; and

(3) Attach a copy of the written communication to the schedule of

itemized receipts submitted with its next regularly scheduled report.

(B) Exception for transfers to state and local party committees in

states that do not hold federal and non-federal elections in the same

year. The requirements of paragraph (c)(1)(ii)(A) of this section shall

apply to transfers made to state and local party committees in states

that do not hold federal and non-federal elections in the same year,

unless the funds transferred are used exclusively for generic voter

drive activity conducted in a calendar year in which no candidates for

federal office appear on any primary, general, or special election

ballot.

(2) [Same as core proposal of second option.]

(d) [Same as core proposal of second option.]

(e) [Same as core proposal of second option.]

(f) [Same as core proposal of second option.]

* * * * *

Variation Three

PART 102--[AMENDED]

1. Proposed Secs. 102.5 and 102.17 would be the same as the core

proposal of the second option.

PART 103--[AMENDED]

2. Proposed Sec. 103.3 would be the same as the core proposal of

the second option.

PART 106--ALLOCATIONS OF CANDIDATE AND COMMITTEE ACTIVITIES

3. The authority citation for part 106 would continue to read as

follows:

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

4. Section 106.1 would be amended by revising paragraphs (a) and

(b) to read as follows:

Sec. 106.1 Allocation of expenses between candidates.

(a) General rule. (1) [same as core proposal of second option.]

(2) Payments that involve both expenditures, in-kind contributions,

independent expenditures, or coordinated expenditures on behalf of one

or more clearly identified federal candidates and disbursements on

behalf of one or more clearly identified non-federal candidates shall

be made entirely from the committee's federal account(s), i.e., with

funds subject to the prohibitions and limitations of the Act.

[[Page 37737]]

(b) [Same as core proposal of second option.]

* * * * *

5. Section 106.5 would be revised to read as follows:

Sec. 106.5 Federal and non-federal activities by party committees and

use of party committee funds by other organizations.

(a) National party committees. (1) Except as provided in paragraph

(a)(2) of this section, national party committees, including the Senate

and House campaign committees of a national party, shall defray their

expenses entirely from funds subject to the prohibitions and

limitations of the Act.

(2) National party committees may defray the expenses described in

11 CFR 100.7(b)(12) and 11 CFR 100.8(b)(13) with funds from an account

established in accordance with 11 CFR 102.5(c)(2).

(b) State and local party committees--(1) General rule. Except as

provided in paragraph (b)(3) of this section, state and local party

committees, and other party committees that are not national party

committees but that have established separate federal and non-federal

accounts under 11 CFR 102.5(a)(1)(i), shall defray the following

expenses entirely from funds subject to the prohibitions and

limitations of the Act:

(i) Administrative expenses including rent, utilities, office

supplies, and salaries, except for such expenses directly attributable

to a clearly identified candidate;

(ii) The direct costs of a fundraising program or event, including

disbursements for solicitation of funds and for planning and

administration of actual fundraising events, through which a committee

collects federal funds or a combination of federal and non-federal

funds, whether the committee conducts the program or event individually

or in conjunction with another committee;

(iii) State and local party activities exempt from the definitions

of contribution and expenditure under 11 CFR 100.7(b) (9), (15) or

(17), and 100.8(b) (10), (16) or (18) (exempt activities) including the

production and distribution of slate cards and sample ballots, campaign

materials distributed by volunteers, and voter registration and get-

out-the-vote drives on behalf of the party's presidential and vice-

presidential nominees, whether or not such activities are conducted in

conjunction with non-federal election activities; and

(iv) Generic voter drives either conducted by the committee itself

or paid for by the committee and conducted by another entity, including

voter identification, voter registration, and get-out-the-vote drives,

or any other activities that urge the general public to register, vote

or support candidates of a particular party or associated with a

particular issue, without mentioning a specific candidate.

(2) Use of party committee funds by other organizations. When a

state or local party committee pays for a generic voter drive conducted

by another entity, such as a voter identification, voter registration,

get-out-the-vote drive, or any other activity that urges the general

public to register, vote or support candidates of a particular party or

associated with a particular issue without mentioning a specific

candidate, the costs of the voter drive shall be defrayed entirely from

funds subject to the prohibitions and limitations of the Act.

(3) Generic voter drives in exclusively non-federal elections.

State and local party committees in states that do not hold federal and

non-federal elections in the same year may use funds that are not

subject to the prohibitions and limitations of the Act to defray the

costs of generic voter drive activity conducted in a calendar year in

which no candidates for federal office appear on any primary, general,

or special election ballot.

Dated: July 8, 1998.

Lee Ann Elliott,

Commissioner, Federal Election Commission.

[FR Doc. 98-18543 Filed 7-10-98; 8:45 am]

BILLING CODE 6715-01-P