[Federal Register Volume 60, Number 129 (Thursday, July 6, 1995)]
[Rules and Regulations]
[Pages 35292-35306]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 95-16502]




[[Page 35291]]

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Part VI





Federal Election Commission





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11 CFR Parts 100, 106, 109, and 114



Express Advocacy; Independent Expenditures; Corporate and Labor 
Organization Expenditures; Final Rule

  Federal Register / Vol. 60, No. 129 / Thursday, July 6, 1995 / Rules 
and Regulations  
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[[Page 35292]]


FEDERAL ELECTION COMMISSION

11 CFR Parts 100, 106, 109, and 114

[Notice 1995-10]


Express Advocacy; Independent Expenditures; Corporate and Labor 
Organization Expenditures

AGENCY: Federal Election Commission.

ACTION: Final rule; Transmittal of regulations to Congress.

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SUMMARY: The Commission is issuing revised regulations that define the 
term ``express advocacy'' and describe certain nonprofit corporations 
that are exempt from the prohibition on independent expenditures. The 
new rules implement portions of several decisions issued by the Federal 
courts in recent years. These rules were originally part of a larger 
rulemaking on the scope of permissible and prohibited corporate and 
labor organization expenditures. The Commission expects to complete the 
remaining portions of the original rulemaking by issuing additional 
revisions to the regulations at a later date.

DATES: Further action, including the announcement of an effective date, 
will be taken after these regulations have been before Congress for 30 
legislative days pursuant to 2 U.S.C. 438(d).

FOR FURTHER INFORMATION CONTACT: Ms. Susan E. Propper, Assistant 
General Counsel, 999 E Street, N.W., Washington, D.C. 20463, (202) 219-
3690 or (800) 424-9530.

SUPPLEMENTARY INFORMATION: The Commission is today publishing the final 
text of revisions to its regulations at 11 CFR 100.17, 106.1(d) and 
109.1(b) and the text of new regulations at 11 CFR 100.22 and 114.10. 
Generally, these regulations implement sections 431(17), 431(18) and 
441b of the Federal Election Campaign Act of 1971, as amended, 2 U.S.C. 
431 et seq. [``FECA'' or ``the Act'']. These regulations have been 
revised in accordance with a number of Federal court decisions 
involving section 441b.
    Section 441b prohibits corporations and labor organizations from 
using general treasury monies to make contributions or expenditures in 
connection with Federal elections. The new regulations provide further 
guidance on what constitutes an expenditure, and describe certain 
corporations that are exempt from the independent expenditure 
prohibition. However, these new rules do not apply to contributions, 
whether monetary or in-kind.
    In Federal Election Commission v. Massachusetts Citizens for Life, 
Inc., 479 U.S. 238 (1986) [``MCFL''], the Supreme Court held that 
expenditures must constitute express advocacy to be subject to the 
prohibition of section 441b. MCFL at 249. In addition, the Court 
concluded that the prohibition on independent expenditures in section 
441b cannot constitutionally be applied to nonprofit corporations 
having certain essential features. The Court said that corporations 
that (1) are formed for the express purpose of promoting political 
ideas and cannot engage in business activities; (2) have no 
shareholders or other persons affiliated so as to have a claim on the 
corporation's assets or earnings; and (3) are not established by a 
business corporation or labor organization and have a policy against 
accepting donations from such entities, cannot be subject to the 
independent expenditure prohibition.
    Based on this decision, the National Right to Work Committee filed 
a Petition for Rulemaking urging the Commission to revise 11 CFR 114.3 
and 114.4 to conform to the statement in the MCFL opinion that 
``express advocacy'' is the appropriate standard for determining when 
independent communications by corporations and labor organizations are 
prohibited under section 441b. See Notice of Availability of Petition 
for Rulemaking, National Right to Work Committee, 52 FR 16275 (May 4, 
1987). Thus, the Petition took the position that the Commission's 
partisan/nonpartisan standards governing corporate and labor 
organization communications to the entity's restricted class and the 
general public are unconstitutional under MCFL.
    The Commission subsequently sought public input on whether to 
initiate a rulemaking to determine the extent to which the MCFL 
decision necessitated changes in the Part 114 rules governing 
independent expenditures by corporations possessing the three essential 
features, changes in the scope of the ``independent expenditure'' 
provisions at 11 CFR Part 109, or the implementation of an ``express 
advocacy'' test for all corporations and labor organizations covered by 
11 CFR Part 114. Advance Notice of Proposed Rulemaking, 53 FR 416 
(January 7, 1988) [``Advance Notice'' or ``ANPRM''].
    The Commission received over 17,000 comments in response to the 
Advance Notice. Nearly all of the commenters submitted virtually 
identical letters urging the Commission to act favorably on NRWC's 
rulemaking petition, and to limit application of its regulations to 
communications expressly advocating the election or defeat of 
candidates so as to avoid impinging upon First Amendment rights. The 
Commission also received detailed comments from seven sources, and held 
a public hearing on November 16, 1988 at which two commenters testified 
as to how the Commission should implement the MCFL opinion. The 
detailed comments and testimony reflect a wide range of views as to how 
the Commission should proceed in response to the MCFL decision.
    In subsequent litigation, two lower courts relied upon an express 
advocacy standard to evaluate corporate communications under section 
441b of the FECA. In Faucher v. Federal Election Commission, 743 F. 
Supp. 64 (D. Me. 1990), the court invalidated the Commission's voter 
guide regulations at 11 CFR 114.4(b)(5)(i). The Court concluded that 
the Commission's voter guide rule is not authorized by the FECA ``as 
interpreted by the Supreme Court in [MCFL], to the extent that the 
regulation makes the permissibility of voter guides * * * hinge upon on 
whether such guides are `nonpartisan' in a broad sense that includes 
issue advocacy rather than the narrower test of `express advocacy.' '' 
Id. at 72. Similarly, in Federal Election Commission v. National 
Organization of Women, 713 F. Supp. 428 (D.D.C. 1989) [``NOW''], 
another district court applied an express advocacy test to determine 
whether section 441b permitted an incorporated membership organization 
to use general treasury funds for membership recruitment letters 
directed to the general public. The court concluded that the letters in 
question did not go beyond issue discussion to express electoral 
advocacy. The Commission appealed both of these lower court decisions.
    Shortly after the MCFL opinion, a court of appeals decision held 
that speech need not include any of the specific words listed in 
Buckley v. Valeo, 424 U.S. 1, 44 n.52 (1976) to constitute express 
advocacy. Federal Election Commission v. Furgatch, 807 F.2d 857, 862-63 
(9th Cir.), cert. denied, 484 U.S. 850 (1987). Instead, the appropriate 
inquiry is whether the communication, when read as a whole and with 
limited reference to external events, is susceptible to no other 
reasonable interpretation but as an exhortation to vote for or against 
a specific candidate. Id. at 864.
    In addition, the Supreme Court provided further guidance on the 
exception from the independent expenditure prohibition for nonprofit 
corporations in Austin v. Michigan Chamber of Commerce, 494 U.S. 652 
(1990). In  Austin, the Court interpreted a Michigan statute very 
similar to 

[[Page 35293]]
section 441b of the FECA. The Austin decision prompted the Commission 
to issue a second notice seeking further comments on what changes to 
its regulations were warranted. Request for Further Comment, 55 FR 
40397 (Oct. 3, 1990), comment period extended 55 FR 45809 (Oct. 31, 
1990). This notice also welcomed comments on the express advocacy 
questions raised by the Faucher and NOW decisions.
    Eight commenters responded to the second notice, including some who 
reiterated their earlier positions. Most, but not all, of the 
commenters urged the Commission to adopt an express advocacy test for 
expenditures under section 441b. One comment favored the development of 
definitions which precisely set out what activity will be deemed within 
the scope of the FECA under such a standard, while another comment 
supported the use of a case by case approach. There was also some 
support for revising the regulations to reflect the approach to express 
advocacy taken into the Furgatch opinion. The Commission also received 
specific suggestions for delineating the class of nonprofit 
corporations falling within MCFL's exception from the independent 
expenditure prohibition. Two comments advocated a broad scope for the 
exemption, while a third comment emphasized the narrowness of the group 
of organizations possessing the three essential features delineated in 
MCFL and Austin.
    Subsequently, the Court of Appeals for the First Circuit upheld the 
district court's decision in Faucher. Faucher v. Federal Election 
Commission, 928 F.2d 468 (1st Cir. 1991). cert. denied sub nom. Federal 
Election Commission v. Keefer et al., 502 U.S. 820 (1991). The 
Commission sought certiorari in Faucher, arguing that the express 
advocacy standard should not be made applicable to the 441b prohibition 
on corporate expenditures. On October 7, 1991, the Supreme Court denied 
the petition for certiorari, and thus declined to consider narrowing or 
otherwise modifying the statements it made in MCFL regarding the scope 
of section 441b. Accordingly, the Commission moved for the dismissal of 
its appeal in NOW and resumed consideration of several substantial 
changes to its regulations necessitated by the MCFL decision.
    The Commission published a Notice of Proposed Rulemaking on July 
29, 1992 seeking public comment on draft rules codifying the reduced 
scope of the prohibition on corporate expenditures. 57 FR 33548 (July 
29, 1992). The proposed language set forth the general rule that 
corporations and labor organizations are prohibited from making 
expenditures for communications to the general public expressly 
advocating the election or defeat of a clearly identified candidate. 
The draft regulations also sought to establish criteria for determining 
whether nonprofit corporations qualify for the exemption from section 
441b's prohibition on independent expenditures.
    The Commission received 35 separate comments on the NPRM from 32 
commenters between July 29, 1992 and November 22, 1993. The Commission 
also received 149 form comments during that period. The Commission held 
a public hearing on October 15 and 16, 1992, at which 15 of these 
commenters testified on the issues presented in the MCFL decision and 
the proposed rules. The comments and testimony are discussed in more 
detail below.
    As indicated above, this rulemaking process has involved a broader 
range of issues regarding the scope of permissible and prohibited 
corporate and labor organization expenditures than is reflected in the 
final rules being promulgated today. The rulemaking with regard to the 
other issues is continuing, and the Commission expects to issue 
additional new rules revising 11 CFR Parts 110 and 114 at a later date. 
These subsequent changes will replace the partisan/nonpartisan 
standards in sections 110.13, 114.1, 114.2, 114.3, 114.4 and 114.12(b) 
with language prohibiting corporations and labor organizations from 
making expenditures for communications to the general public expressly 
advocating the election or defeat of clearly identified candidates. 
Specifically, these provisions govern candidate debates, candidate 
appearances, distributing registration and voting information, voter 
guides, voting records, conducting voter registration and get-out-the-
vote drives and use of meeting rooms. At the same time, the Commission 
intends to address issues which have arisen regarding activities 
undertaken by incorporated colleges and universities, the use of logos, 
trademarks and letterheads, endorsements of candidates, activities 
which facilitate the making of contributions, and coordination between 
candidates and corporations or labor organizations which results in in-
kind contributions. These issues, not previously addressed in the 
rules, involve activities that are also impacted by the express 
advocacy standard and the case law in this area.
    Section 438(d) of Title 2, United States Code requires that any 
rules or regulations prescribed by the Commission to carry out the 
provisions of Title 2 of the United States Code be transmitted to the 
Speaker of the House of Representatives and the President of the Senate 
30 legislative days before they are finally promulgated. These 
regulations were transmitted to Congress on June 30, 1995.

Explanation and Justification

    Generally, the new and amended rules contain the following changes. 
First, the definitions of ``express advocacy'' and ``clearly 
identified'' at 11 CFR 109.1 (b)(2) and (b)(3) have been moved to new 
11 CFR 100.22 and revised 11 CFR 100.17, respectively. They have been 
reworded to provide further guidance on what types of communications 
constitute express advocacy of clearly identified candidates, in 
accordance with the judicial interpretations found in Buckley, MCFL, 
Furgatch, NOW and Faucher.
    Second, new section 114.10 has been added to implement the MCFL 
Court's conclusion that nonprofit corporations possessing certain 
essential features may not be bound by the restrictions on independent 
expenditures contained in section 441b. This new section expressly 
permits certain corporations to use general treasury funds for 
independent expenditures, and sets out the reporting obligations for 
these corporations.
Part 100--Scope and Definitions (2 U.S.C. 431)

Section 100.17  Clearly Identified (2 U.S.C. 431(18))

    The definitions of ``clearly identified'' in 11 CFR 106.1(d) and 
``clearly identified candidate'' in 11 CFR 109.1(b)(3) have been 
removed and replaced by a revised definition in section 100.17. It is 
not necessary for this definition to appear in multiple locations 
throughout these regulations.
    The NPRM sought comments on two alternative approaches regarding 
the requirement that the candidates be ``clearly identified.'' 
Alternative A-1 indicated that this would include candidates of a 
clearly identified political party and a clearly identified group of 
candidates, such as the ``pro-life'' candidates in the MCFL case. 
Alternative A-2 did not specifically mention clearly identified groups 
of candidates or candidates of clearly identified political parties.
    Several commenters and witnesses argued that under Alternative A-1, 
it could be too difficult to determine the candidates in the group. 
Examples cited were buttons that read ``Elect Women 

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for a Change'' or ``Vote Pro-Choice,'' without more. The language was 
intended to apply to a situation, for example, where one insert in a 
mailing lists voting records or positions on specific issues and 
clearly indicates which of the named candidates shares the speaker's 
views. If another insert urges the reader to vote in favor of 
candidates who share its views, this is considered to be advocating the 
election of those clearly identified candidates. Similarly, the MCFL 
case involved a flyer which urged voters to vote for ``pro-life'' 
candidates, and included a list of ``pro-life candidates.'' Thus, in 
this example, several ``pro-life'' candidates were clearly identified 
to the reader.
    In light of comments, the wording of new section 100.22(a) has been 
reworked to refer to ``one or more clearly identified candidate(s)'' to 
more clearly state what was intended. In addition, section 100.17 has 
been modified to provide some additional examples of when candidates 
are considered to be ``clearly identified.''
Section 100.22  Expressly Advocating

    The definition of express advocacy previously located in 11 CFR 
109.1(b)(2) has been replaced with a revised definition in new section 
100.22. The placement of the definition of express advocacy in Part 
100--Scope and Definitions is intended to ensure that the reader will 
be able to locate it more easily. Also, while express advocacy is an 
important component of any independent expenditure, it is also the 
legal standard used in determining whether other types of activities 
are expenditures by corporations or labor organizations under 11 CFR 
Part 114. Please not that the terms ``communication containing express 
advocacy'' and ``communication expressly advocating the election or 
defeat of one or more clearly identified candidates'' have the same 
meaning.
    The NPRM presented the possibility of creating a separate 
definition of ``express advocacy'' for inclusion in Part 114 that would 
apply only to corporations and labor organizations governed by that 
Part. The NPRM indicated that the purpose of promulgating a separate 
definition would be to focus more specifically on implementing the MCFL 
Court's dictate that ``express advocacy'' is the standard when 
determining what is an expenditure under 2 U.S.C. Sec. 441b. The Notice 
suggested that a separate definition could center on whether a 
communication urged action with respect to a federal election rather 
than on whether the communication also related to a clearly identified 
candidate. Thus, this approach would have taken a different view of 
``express advocacy'' for organizations subject to the prohibitions of 
section 441b.
    There was little support for separate definitions from the comments 
and testimony. The difficulty the commenters and witnesses had in 
trying to determine what the courts meant by ``express advocacy,'' and 
what they thought the Commission had in mind, amply demonstrate that it 
would be extremely confusing to work with separate definitions for 
corporations and labor organizations on one hand, and candidates, 
committees and individuals on the other. Consequently, separate 
definitions of express advocacy have not been included in the final 
rules.

1. Alternative Definitions Presented in the NPRM

    The NPRM sought comments on two alternative sets of revisions to 
the definition of express advocacy. Alternatives A-1 and A-2 were 
similar in several respects. They both continued to list the specific 
phrases set forth in the Buckley opinion as examples of express 
advocacy. Both alternatives recognized that all statements and 
expressions included in a communication must be evaluated in terms of 
pertinent external factors such as the context and timing of the 
communication. In addition, both proposed definitions clearly indicated 
that communications consisting of several pieces of paper will be read 
together.
    The alternative definitions in the NPRM differed in several 
respects. Under Alternative A-1, express advocacy included suggestions 
to take actions to affect the result of an election, such as to 
contribute or to participate in campaign activity. In contrast, 
Alternative A-2 indicated that express advocacy constitutes an 
exhortation to support or oppose a clearly identified candidate, and 
that there must be no other reasonable interpretation of the 
exhortation other than encouraging the candidate's election or defeat, 
rather than another type of action on a specific issue. Nevertheless, 
Alternative A-2 also specifically stated that ``with respect to an 
election'' includes references such as ``Smith '92'' or ``Jones is the 
One.''
    There was no consensus among the commenters and witnesses regarding 
either alternative definition of express advocacy. While there was more 
support for Alternative A-2 than A-1, specific portions of both 
alternatives troubled a number of commenters and witnesses. Some 
objected that Alternative A-1 was too narrow in that it did not cover 
all express, implied, or reasonably understood references to an 
upcoming election. Others argued Alternative A-1 was too broad, and 
preferred Alternative A-2. However, there was also considerable 
sentiment expressed that Alternative A-2 was also too broad, and should 
be further limited to avoid running afoul of the First Amendment 
considerations that are involved.
    To illustrate the difficulty involved in applying an ``express 
advocacy'' standard, the Commission included Agenda Document #92-86-A 
in the rulemaking record. This document contained seven hypothetical 
advertisements, each of which is assumed to be published within two 
weeks of an election. Several written comments and witnesses mentioned 
these examples in analyzing the proposals contained in this Notice, but 
there was no consensus as to which examples, if any, contained express 
advocacy.
    In commenting on the proposed rules, the Internal Revenue Service 
indicated that 26 U.S.C. Sec. 501(c)(3) prohibits certain nonprofit 
organizations from participating or intervening in political campaigns 
on behalf of or in opposition to candidates for elective public office. 
The IRS stated that prohibited political activity under the Internal 
Revenue Code is much broader in scope than the express advocacy 
standard under the FECA. The Commission expresses no opinion as to any 
tax ramifications of activities conducted by nonprofit corporations, 
since these questions are outside its jurisdiction.
    The definition of express advocacy included in new section 100.22 
includes elements from each definition, as well as the language in the 
Buckley, MCFL and Furgatch opinions emphasizing the necessity for 
communications to be susceptible to no other reasonable interpretation 
but as encouraging actions to elect or defeat a specific candidate. 
Please note that exhortations to contribute time or money to a 
candidate would also fall within the revised definition of express 
advocacy. The expressions enumerated in Buckley included ``support,'' a 
term that encompasses a variety of activities beyond voting.
2. Examples of Phrases That Expressly Advocate

    The previous definition of express advocacy in 11 CFR 109.1(b)(2) 
included a list of expressions set forth in Buckley. Both alternatives 
in the NPRM would have largely retained this list of phrases that 
constitute express 

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advocacy. The revised definition in 11 CFR 100.22(a) includes a 
somewhat fuller list of examples. The expressions enumerated in 
Buckley, such as ``vote for,'' ``Smith for Congress,'' and ``defeat'' 
have no other reasonable meaning than to urge the election or defeat of 
clearly identified candidates.

3. Communications Lacking Such Phrases

    The NPRM also addressed communications that contain no specific 
call to take action on any issue or to vote for a candidate, but which 
do discuss a candidate's character, qualifications, or accomplishments, 
and which are made in close proximity to an election. An example is a 
newspaper or television advertisement which simply states that the 
candidate has been caring, fighting and winning for his or her 
constituents. Another example is a case in which a candidate is 
criticized for missing many votes, or for specific acts of misfeasance 
or malfeasance while in office.
    Under Alternative A-2, these types of communications would have 
constituted exhortations if made within a specified number of days 
before an election, and if they did not encourage any type of action on 
any specific issue, such as, for example, supporting pro-life or pro-
choice legislation. Comments were requested as to what an appropriate 
time frame should be--as short as 14 days, or as long as six months, 
prior to an election, or some other time period considered reasonable.
    Some commenters opposed treating these communications as express 
advocacy on the grounds that there is not a clear call to action. 
Others argued that such communications, particularly when made by a 
candidate's campaign committee, were clearly intended to persuade the 
listener or reader to vote for the candidate.
    Communications discussing or commenting on a candidate's character, 
qualifications, or accomplishments are considered express advocacy 
under new section 100.22(b) if, in context, they have no other 
reasonable meaning than to encourage actions to elect or defeat the 
candidate in question. The revised rules do not establish a time frame 
in which these communications are treated as express advocacy. Thus, 
the timing of the communication would be considered on a case-by-case 
basis.

4. Communications Containing Both Issue Advocacy and Electoral Advocacy

    The final rules, like the proposed rules, treat communications that 
include express electoral advocacy as express advocacy, despite the 
fact that the communications happen to include issue advocacy, as well. 
Several comments pointed out that the legislative process continues 
during election periods, and argued that if a legislative issue becomes 
a campaign issue, the imposition of unduly burdensome requirements on 
those groups seeking to continue their legislative efforts and 
communicate with their supporters is unconstitutional. These concerns 
are misplaced, however, because the revised rules in section 100.22(b) 
do not affect pure issue advocacy, such as attempts to create support 
for specific legislation, or purely educational messages. As noted in 
Buckley, the FECA applies only to candidate elections. See, e.g., 424 
U.S. at 42-44, 80. For example, the rules do not preclude a message 
made in close proximity to a Presidential election that only asked the 
audience to call the President and urge him to veto a particular bill 
that has just been passed, if the message did not refer to the upcoming 
election or encourage election-related actions. In contrast, under 
these rules, it is express advocacy if the communication described 
above urged the audience to vote against the President if the President 
does not veto the bill in question.
    Nevertheless, to alleviate the commenters' concerns, the definition 
of express advocacy in new section 100.22(b) has been revised to 
incorporate more of the Furgatch interpretation by emphasizing that the 
electoral portion of the communication must be unmistakable, 
unambiguous and suggestive of only one meaning, and reasonable minds 
could not differ as to whether it encourages election or defeat of 
candidates or some other type of non-election action.
    Both alternative definitions of express advocacy included 
consideration of the context and timing of the communication, and 
indicated that communications consisting of several pieces of paper 
will be read together. Several commenters and witnesses were troubled 
by the perceived vagueness and uncertainty inherent in the use of the 
phrases ``taken as a whole,'' ``in light of the circumstances under 
which they were made,'' and ``with limited reference to external 
events.'' They argued that they would not be able to ascertain in 
advance which facts and circumstances would be considered by the 
Commission. Some of the commenters and witnesses acknowledged the 
difficulty of crafting a clear and precise standard in the First 
Amendment context.
    The final rules in section 100.22 retain the requirement that the 
communication be read ``as a whole and with limited reference to 
external events'' because MCFL makes clear that isolated portions of a 
communication are not to be read separately in determining whether a 
communication constituted express advocacy. See 479 U.S. at 249-50. 
Further, the Furgatch opinion evaluated the contents of the 
communication in question ``as a whole, and with limited reference to 
external events.'' 807 F.2d at 864. The external events of significance 
in Furgatch included the existence of an upcoming presidential election 
and the timing of the advertisement a week before the general election. 
However, please note that the subjective intent of the speaker is not a 
relevant consideration because Furgatch focuses the inquiry on the 
audience's reasonable interpretation of the message. Furgatch, 807 F.2d 
at 864-65.

5. ``Vote Democratic'' or ``Vote Republican''

    In the NPRM, Alternative A-2 treated as express advocacy messages 
such as ``Vote Republican'' or ``Vote Democratic'' if made within a 
specified period prior to a special or general election or an open 
primary. Again, comments were sought on time periods ranging from 14 
days to 6 months prior to an election, or any other time period 
considered reasonable. Alternatively, the period between the primary 
and general elections was suggested as the time when such messages 
refer to clearly identified candidates. In contrast, Alternative A-1 
treated these phrases as express advocacy if made at any time after 
specific individuals have become Republican or Democratic candidates 
within the meaning of the FECA in the geographic area in which the 
communication is made. The NPRM also sought comments on when a message 
such as ``Vote Democratic'' or ``Vote Republican'' refers to one or 
more clearly identified candidates, rather than being just a message of 
support for a party.
    The views of the commenters and witnesses reflected little 
consensus regarding these messages. Several were supportive of 
Alternative A-2, and suggested that a 90 day time frame would be 
appropriate. Others felt that such messages are always express advocacy 
because they aim at influencing the outcome of elections. Conversely, 
some commenters argued that these messages cannot be express advocacy 
if there are no declared candidates yet running for the party's 

[[Page 35296]]
nomination or if the nominee of the party has not yet been selected.
    Section 100.22 of the final rules does not specify a time frame or 
triggering event that will cause these messages to be considered 
express advocacy. Instead, messages such as ``Vote Democratic'' or 
``Vote Republican'' will be evaluated on a case-by-case basis to 
determine whether they constitute express advocacy under the criteria 
set out in 11 CFR 100.22(b).
Part 106--Allocations of Candidate and Committee Activities

Section 106.1  Allocation of expenses between candidates

    A conforming amendment has been made to paragraph (d) of section 
106.1. Previously, this paragraph restated the definition of ``clearly 
identified.'' It has been revised to refer the reader to the definition 
located in 11 CFR 100.17.
Part 109--Independent Expenditures (2 U.S.C. 431(17), 434(c))

Section 109.1  Definitions (2 U.S.C. 431(17))

    The revised rules incorporate a technical amendment to the 
definition of ``person'' in the independent expenditure provisions in 
section 109.1(b)(1). The revision clarifies that ``person'' includes 
qualified nonprofit corporations, which are discussed more fully below. 
This change reflects that in MCFL, the Court upheld the right of 
qualified nonprofit corporations to make independent expenditures, but 
this decision did not extend to other corporations.
    Conforming amendments have also been made to paragraphs (b)(2) and 
(b)(3) of section 109.1. These sections had contained definitions of 
``expressly advocating'' and ``clearly identified candidate.'' As 
explained above, they have been revised to refer the reader to the 
definitions located in sections 100.22 and 100.17, respectively.
Part 114--Corporate and Labor Organization Activity

Section 114.2  Prohibitions on Contributions and Expenditures

    Paragraph (b) of section 114.2 has been revised to reflect the 
exception recognized in the MCFL decision, which allows certain 
nonprofit corporations to use their general treasury funds to make 
independent expenditures. The Commission anticipates making further 
changes to this provision when it completes the remaining portions of 
this rulemaking.

Section 114.10  Qualified Nonprofit Corporations

    In MCFL, the Supreme Court reviewed the application of the 
independent expenditure prohibition in section 441b to MCFL, a small, 
nonprofit corporation organized to promote specific ideological 
beliefs. The Court concluded that, because MCFL did not have the 
potential to exert an undesirable influence on the electoral process, 
it did not implicate the concerns that legitimately prompted regulation 
by Congress. Consequently, the Court found section 441b 
unconstitutional as applied to MCFL.
    The Court cited ``three features essential to [its] holding that 
[MCFL] may not constitutionally be bound by Sec. 441b's restriction on 
independent spending.'' 479 U.S. at 264. First, MCFL was formed for the 
express purpose of promoting political ideas and cannot engage in 
business activities. Second, it has no shareholders or other persons 
affiliated so as to have either a claim on the corporation's assets or 
earnings, or any other economic disincentives to disassociate with the 
corporation. Third, it was not established by a business corporation or 
a labor union, and it has a policy of not accepting contributions from 
such entities. MCFL at 264. The Court said that section 441b's 
prohibition on independent expenditures is unconstitutional as applied 
to nonprofit corporations with these three characteristics.
    Section 114.10 of the final rules is based on this part of the MCFL 
decision, and on the Court's subsequent decision in Austin v. Michigan 
Chamber of Commerce, 494 U.S. 652 (1990). Section 114.10 lists the 
features of those corporations that are exempt from section 441b's 
prohibition on independent expenditures. It also sets out the reporting 
requirements for these corporations. A detailed explanation of section 
114.10 is set out below.

1. General Issues Raised by the NPRM and the Commenters

    a. The name given to exempt corporations. One preliminary question 
is the name to be used for corporations that are exempt from the 
independent expenditure prohibition. The Commission specifically sought 
comments on this issue in the Notice of Proposed Rulemaking. The NPRM 
referred to them as ``exempt corporations.'' However, the Commission 
and some of the commenters expressed concern that this name might cause 
confusion, because the term ``exempt'' is so closely associated with 
the Internal Revenue Code.
    The NPRM contained an alternative version of proposed section 
114.10 that used the phrase ``qualified corporation'' as the name for 
these organizations. The Commission believes this phrase is easy to 
use, and clearly distinct from terms used in other areas of the law. 
However, the Commission has also added the word ``nonprofit'' to make 
this phrase more descriptive. Thus, the name ``qualified nonprofit 
corporation'' or ``QNC'' will be used to refer to organizations that 
are exempt from the independent expenditure prohibition.
    b. General concerns expressed by commenters. Some of the comments 
received contained general observations on the Commission's efforts to 
promulgate rules regarding the exemption recognized in MCFL. One 
commenter objected to any Commission effort to issue rules in this 
area, arguing that Commission action will inevitably narrow the 
standards that were clearly stated in MCFL and Austin, and would make 
the Commission an arbiter of First Amendment rights. The commenter 
alleges that this is a role for which the Commission has no 
constitutional or Congressionally conferred authority.
    However, the Commission disagrees, and has decided to issue 
regulations in this area. Although the MCFL opinion may be quite 
specific by judicial standards, it leaves many administrative questions 
unanswered. Without new rules, the Commission would have to apply the 
MCFL  decision on an ad hoc basis, which could result in inconsistency 
and would provide no guidance to the regulated community. In addition, 
the Commission's regulations are more readily available to the 
regulated community than the text of court decisions, and serve as the 
primary reference for Commission policy. Consequently, the rules should 
reflect court decisions that significantly affect the application of 
the FECA.
    Many of the commenters felt that the proposed rules were too 
restrictive. One commenter said that the essence of the decision is 
that organizations more like voluntary political associations than 
business firms cannot be subjected to section 441b. This commenter 
argued that the three stated features should provide organizations with 
a safe harbor but should not be absolutely required.
    As will be discussed further below, several provisions specifically 
criticized as too restrictive by the commenters have been eliminated 
from the final rules. However, it is important that the three features 
enunciated by the Supreme Court be included in the final rules as a 
threshold requirement for an 

[[Page 35297]]
exemption from the independent expenditure prohibition. The MCFL Court 
described these three features as ``essential to [its] holding that 
[MCFL] may not constitutionally be bound by Sec. 441b's restriction on 
independent spending.'' 479 U.S. at 263-64. The clear implication is 
that a corporation that does not have all three of these features can 
be subject to this restriction.
    The U.S. Court of Appeals decision in Day v. Holahan, 34 F.3d 1356 
(8th Cir. 1994), does not affect this conclusion. In that case, the 
Eighth Circuit decided that a Minnesota statute that closely tracked 
the Supreme Court's three essential features was unconstitutional as 
applied to a Minnesota nonprofit corporation. The Commission believes 
the Eighth Circuit's decision, which is controlling law in only one 
circuit, is contrary to the plain language used by the Supreme Court in 
MCFL, and therefore is of limited authority.
    The Notice sought comments on two versions of section 114.10 that 
represent contrasting approaches for defining the MCFL exemption. The 
first version set out the essential features listed in the MCFL opinion 
as threshold requirements for an exemption from the independent 
expenditure prohibition. By following the long-standing presumption 
that all incorporated entities are subject to the independent 
expenditure prohibition in section 441b, and requiring corporations 
that claim to be exempt from that prohibition to demonstrate that they 
are entitled to an exemption, this version sought to fit the MCFL 
decision into the existing statutory framework.
    The second version took the opposite approach. It presumed a broad 
class of corporations would be exempt from section 441b's independent 
expenditure prohibition, unless they have a characteristic that would 
bring them within the Commission's jurisdiction.
    The Commission has decided to follow the first approach and 
incorporate the rules into the existing framework for section 441b. The 
Supreme Court did not conclude that all of section 441b is 
unconstitutional on its face. Rather, it held that one portion of 
section 441b, the prohibition on independent expenditures, is 
unconstitutional as applied to a narrow class of incorporated issue 
advocacy organizations. The Court explicitly reaffirmed the validity of 
section 441b's prohibition on corporate contributions. 479 U.S. at 259-
60. Thus, the broad prohibition on the use of corporate treasury funds 
contained in section 441b still exists, and the Commission's 
responsibility for enforcing that provision remains in place.
    The Commission is aware that most of the comments were in accord 
with the second version. These commenters argued that all organizations 
are entitled to unlimited First Amendment rights regardless of whether 
they are incorporated, and that any Commission action that has the 
effect of limiting those rights is unconstitutional. They felt that the 
first version would define the category of exempt corporations too 
narrowly, and would burden the speech activity of corporations that are 
entitled to an exemption.
    However, there is a long history of regulating the political 
activity of corporations, and the Supreme Court has recognized the 
compelling governmental interest in regulating this activity on 
numerous occasions. ``The overriding concern behind the enactment of 
the [statutory predecessor to section 441b] was the problem of 
corruption of elected representatives through the creation of political 
debts.  * * * The importance of the governmental interest in preventing 
this occurrence has never been doubted.'' First National Bank of Boston 
v. Belotti, 435 U.S. 765, 788, n.26 (1978). ``This careful legislative 
adjustment of the federal electoral laws . . . to account for the 
particular legal and economic attributes of corporations and labor 
organizations warrants considerable deference. . . . [I]t also reflects 
a permissible assessment of the dangers posed by those entities to the 
electoral process.'' FEC v. National Right to Work Committee, 459 U.S. 
197, 209 (1982).
    The MCFL decision reaffirms, rather than casts doubt upon, the 
validity of Congressional regulation of corporate political activity. 
In its opinion, the MCFL Court said ``[w]e acknowledge the legitimacy 
of Congress' concern that organizations that amass great wealth in the 
economic marketplace not gain unfair advantage in the political 
marketplace.'' MCFL, 479 U.S. at 263. The Court found the application 
of section 441b to MCFL unconstitutional not because this governmental 
interest was not compelling in general, but because MCFL was different 
from the majority of entities addressed by section 441b. Consequently, 
this governmental interest was not implicated by MCFL's activity. Id. 
The Court also acknowledged that MCFL-type corporations are the 
exception rather than the rule, saying that ``[i]t may be that the 
class of organizations affected by our holding today will be small.'' 
Id. at 264. Thus, the Commission's task is to incorporate this narrow 
exception to the independent expenditure prohibition into the 
regulations so that they protect the interests of organizations that 
are like MCFL without undermining the FECA's legitimate legislative 
purposes. The Commission has concluded that the first approach is 
better suited to this task.

2. Scope and Definitions

    Paragraph (a) is a scope provision that explains, in general terms, 
the purposes of section 114.10. Paragraph (b) defines four terms for 
the purposes of this section.
    a. The promotion of political ideas. The first term is the phrase 
``the promotion of political ideas.'' The MCFL Court said one of MCFL's 
essential features was that ``it was formed for the express purpose of 
promoting political ideas, and cannot engage in business activities.'' 
479 U.S. at 264. Paragraph (b)(1) clarifies what this phrase means for 
the purposes of section 114.10. Under paragraph (b)(1), the promotion 
of political ideas includes issue advocacy, election influencing 
activity, and research, training or educational activity that is 
expressly tied to the organization's political goals.
    The Commission added the last phrase, which is based on language in 
the Austin decision, in response to several commenters who felt that 
the proposed definition was too narrow. These commenters said that many 
organizations engage in certain activities that are not pure advocacy 
but are directly related to their advocacy activities. They argued that 
organizations should be allowed to conduct these activities without 
losing their exemption from the independent expenditure prohibition. 
The Commission agrees, and has added the last phrase to the final rules 
to serve this purpose.
    b. Express purpose. Paragraph (b)(2) defines the term ``express 
purpose,'' as that term is used in section 114.10. As indicated above, 
the Supreme Court said that MCFL was formed for the express purpose of 
promoting political ideas and cannot engage in business activities. Id. 
Paragraph (b)(2) states that a qualified nonprofit corporation's 
express purpose is evidenced by the purpose stated in the corporation's 
charter, articles of incorporation, or bylaws. It also may be evidenced 
by any purpose publicly stated by the corporation or its agents, and 
any activities in which the corporation actually engages.
    Generally, if an organization's organic documents set out a purpose 
that cannot be characterized as issue advocacy, election influencing 
activity, or research, training or educational activity 

[[Page 35298]]
expressly tied to political goals, the organization will not be a 
qualified nonprofit corporation. However, paragraph (b)(2)(i) contains 
an exception to this rule. If a corporation's organic documents 
indicate that the corporation was formed for the promotion of political 
ideas and ``any lawful purpose'' or ``any lawful activity,'' the latter 
statement will not preclude a finding under paragraph (c)(1) that the 
corporation's only express purpose is the promotion of political ideas. 
The Commission recognizes that it is common for corporations to use 
boilerplate purpose statements elicited from their state's 
incorporation statute when they prepare their articles of 
incorporation. These statements will not prevent such an organization 
from being a qualified nonprofit corporation.
    One commenter objected to including those purposes evidenced by the 
activities in which the corporation actually engages. The commenter 
argued that this rule would allow the Commission to analyze the motives 
behind the corporation's activities.
    The Commission has decided to include this provision in the final 
rules. Generally, corporations engage in activities that further the 
goals of the corporation. Thus, the corporation's activities tend to 
provide a more objective and complete indication of the corporation's 
reasons for existing. In contrast, if the Commission could look only to 
a corporation's organic documents for the corporation's purpose, a 
corporation with an appropriate purpose statement in its organic 
documents would be exempt from the independent expenditure prohibition, 
regardless of whether the activities in which it actually engages were 
consistent with its stated purpose or with the exemption recognized in 
the MCFL opinion.
    The Commission does not intend to engage in extensive speculation 
about the motivations of qualified nonprofit corporations. However, it 
is necessary for the Commission to consider the activities in which a 
corporation actually engages in order to completely assess the 
corporation's purpose.
    c. Business activities. Paragraph (b)(3) defines the term 
``business activities'' for the purposes of these rules. Under 
paragraph (b)(3), ``business activities'' generally includes any 
provision of goods and services that results in income to the 
corporation. It also includes any advertising or promotional activity 
that results in income to the corporation, other than in the form of 
membership dues or donations. Thus, a corporation that publishers a 
newsletter or magazine and sells advertising space in that publication 
will be engaging in business activities, and will not be a qualified 
nonprofit corporation.
    However, the definition specifically excludes fundraising 
activities that are expressly described as requests for donations that 
may be used for political purposes, such as supporting or opposing 
candidates. Fundraising activities conducted under these circumstances 
will not be considered business activities under these rules.
    This definition reflects a critical distinction made by the Supreme 
Court in MCFL. The definition includes those activities that closely 
resemble the commercial activities of a business corporation because 
these activities generate financial resources that, like those of a 
business corporation, ``are not an indication of popular support for 
the corporation's political ideas * * * [but] reflect instead the 
economically motivated decisions of investors and customers.'' 479 U.S. 
at 258. Thus, these ``resources amassed in the economic marketplace'' 
can create ``an unfair advantage in the political marketplace.'' Id. at 
257.
    In contrast, the definition specifically excludes activities that 
generate resources that reflect ``popular support for the corporation's 
political ideas.'' Id. at 257. Fundraising activities that are 
described to potential donors as requests for donations that will be 
used for political purposes will generate donations that reflect 
popular support for the corporation's political ideas. Consequently, 
they do not pose the risk of giving the corporation an unfair advantage 
in the political marketplace.
    In some cases, the fundraising activities of a qualified nonprofit 
corporation closely resemble business activities in that they involve a 
provision of goods that results in income to the corporation. For 
example, a qualified nonprofit corporation may sell T-shirts or 
calendars in order to generate funds to support its political activity. 
MCFL itself held garage sales, bake sales and raffles to raise funds 
for these purposes. However, if the corporation discloses that the 
activities are an effort to raise funds for its political activities, 
such as supporting or opposing candidates, the activities will not be 
considered business activities for the purposes of these rules, 
notwithstanding their close resemblance to ordinary business 
transactions.``This ensures that political resources reflect political 
support.'' NCFL at 264.
    The Commission notes that this exclusion is limited to direct 
fundraising by the corporation. If a corporation sells items through a 
third party, such as a retail store or catalog mail order outlet, this 
will generally be considered a business activity, even if the item is 
accompanied by a notification that a portion of the proceeds will be 
used to support the corporation's political activities. The sale of 
items by a third party that is not a qualified nonprofit corporation 
justifies the application of the independent expenditure prohibition.
    d. Shareholders. Paragraph (b)(4) states the term ``shareholder'' 
has the same meaning as the term ``stockholder,'' as defined in section 
114.1(h) of the Commission's current rules.

4. The Essential Features

    The Supreme Court said ``MCFL has three features essential to our 
holding that it may not constitutionally be bound by Sec. 441b's 
restriction on independent spending.'' MCFL at 263-64. These features 
have been incorporated into paragraph 114.10(c) of the final rules. A 
qualified nonprofit corporation is a corporation that has all the 
characteristics set out in this paragraph. Corporations that do not 
have all of these characteristics are not qualified nonprofit 
corporations, and therefore are bound by the independent expenditure 
prohibition.
    a. Purpose. Paragraph (c)(1) states that a qualified nonprofit 
corporation is one whose only express purpose is the promotion of 
political ideas. In other words, if a corporation's organic documents, 
authorized agents, and actual activities indicate that its purpose is 
issue advocacy, election influencing activity, or research, training or 
other activity expressly tied to the organization's political goals, 
the corporation may be a qualified nonprofit corporation. However, if 
the documents, agents or activities indicate any other purpose, the 
corporation will be subject to the independent expenditure prohibition.
    As indicated above, the rules contain an exception for boilerplate 
purpose statements in a corporation's organic documents. If a 
corporation's organic documents indicate that the corporation was 
formed for the promotion of political ideas and ``any lawful purpose'' 
or ``any lawful activity,'' the latter statement will not preclude a 
finding under paragraph (c)(1) that the corporation's only express 
purpose is the promotion of political ideas.
    One commenter argued that requiring the promotion of political 
ideas to be an organization's only express purpose would exclude 
organizations that do educational and research work on political topics 
with which they are concerned. It would also exclude 

[[Page 35299]]
organizations that train people in advocacy techniques, an important 
part of the activities of many nonprofit corporations. The Commission 
has addressed these concerns by broadening the definition of the phrase 
``the promotion of political ideas'' in paragraph (b)(1) to include 
these activities. This definition is discussed in detail above.
    b. Business activities. Under paragraph (c)(2), a corporation must 
be unable to engage in business activities in order to be a qualified 
nonprofit corporation. Paragraph (c)(2) tracks the language of the MCFL 
decision in that it limits the exemption to corporations that cannot 
engage in business activities. Thus, in order to be exempt, business 
activities must be proscribed by the corporation's organic documents or 
other internal rules.
    However, as indicated above, fundraising activities that are 
expressly described as requests for donations to be used for political 
purposes are not business activities. Consequently, a qualified 
nonprofit corporation can engage in fundraising activities without 
losing its exemption, so long as it makes the appropriate disclosure.
    Most of the commenters objected to a complete prohibition on 
business activities. One commenter argued that the presence of minimal 
business activities would not have changed the result in MCFL. This 
commenter said that, despite the Supreme Court's reliance on the 
absence of business activities, a prohibition should not be read into 
the opinion, since it would unreasonably limit the activities of these 
organizations.
    However, the plain language of the MCFL opinion endorses a complete 
prohibition on business activities. The Court said ``MCFL has three 
features essential to our holding that it cannot constitutionally be 
bound by Sec. 441b's restriction on independent spending. First, it was 
formed for the express purpose of promoting political ideas, and cannot 
engage in business activities.'' MCFL, 479 U.S. at 264 (emphasis 
added). This statement clearly supports a total ban on business 
activities.
    In addition, other parts of the opinion make it clear that the 
Court based its conclusion on the complete absence of any business 
activities, and strongly suggest that the presence of business 
activities would have changed the result. Earlier, the Court said that 
``the concerns underlying the regulation of corporate political 
activity are simply absent with regard to MCFL. It is not the case * * 
* that MCFL merely poses less of a threat of the danger that has 
prompted regulation. Rather, it does not pose such a threat at all.'' 
479 U.S. at 263. In order to pose no such threat, a corporation must be 
free from resources obtained in the economic marketplace. Only those 
corporations that cannot engage in business activities are free from 
these kinds of resources.
    This approach will not unreasonably limit the activities of a 
qualified nonprofit corporation. The corporation has at least two 
options for generating revenue under the final rules. First, the 
corporation can engage in unlimited fundraising activities, so long as 
it informs potential donors that it is seeking donations that will be 
used for political purposes, such as supporting or opposing candidates. 
Second, the corporation can establish a separate segregated fund and 
make its independent expenditures exclusively from that fund.
    Several other commenters also felt that a limited amount of 
business activity should be allowed, and argued that the Commission 
should incorporate the tax law concepts of related and unrelated 
business activity into the final rules. Under this approach, income 
from activity that is related to the corporation's mission would not be 
considered business activity, and as such, would not affect its 
qualified nonprofit corporation status. In addition, qualified 
nonprofit corporations would be permitted to engage in some unrelated 
business activity, so long as it does not become the organization's 
primary purpose.
    However, reliance on these tax law concepts would be inappropriate 
here because the tax code was drafted to serve different purposes. 
Section 501(c)(4) of the tax code grants tax exempt status to 
organizations that promote the social welfare. In exercising its 
administrative discretion, the Internal Revenue Service has concluded 
that it is appropriate to allow social welfare organizations to engage 
in some unrelated business activity so long as it does not become their 
primary purpose, apparently believing that a limited amount of business 
activity is not incompatible with the promotion of social welfare.
    In contrast, section 441b seeks to prevent the use of resources 
amassed in the economic marketplace to gain an unfair advantage in the 
political marketplace. The MCFL Court concluded that a complete 
prohibition on the use of resources amassed in the economic marketplace 
is necessary to serve this purpose. Thus, the Commission has 
incorporated this prohibition into the final rules.
    c. Shareholders/disincentives to disassociate. The second feature 
that distinguished MCFL from other corporations was that ``it ha[d] no 
shareholders or other persons affiliated so as to have a claim on its 
assets or earnings.'' 479 U.S. at 264. The Supreme Court said this 
``ensures that persons connected with the organization will have no 
economic disincentive for disassociating with it if they disagree with 
its political activity.'' Id. Later, in Austin, the Court said that 
persons other than shareholders may also face disincentives to 
disassociate with the corporation. ``Although the Chamber also lacks 
shareholders, many of its members may be similarly reluctant to 
withdraw as members even if they disagree with the Chamber's political 
expression, because they wish to benefit from the Chamber's 
nonpolitical programs.  * * * The Chamber's political agenda is 
sufficiently distinct from its educational and outreach programs that 
members who disagree with the former may continue to pay dues to 
participate in the latter.'' 494 U.S. at 663.
    These characteristics have been incorporated into paragraph (c)(3) 
of the final rules. In the interests of clarity, the rules separate 
these two characteristics into separate subparagraphs. Only those 
corporations that have the characteristics set out in both 
subparagraphs are exempt from the independent expenditure prohibition.
    i. Shareholders. Under paragraph (c)(3)(i), a qualified nonprofit 
corporation is one that has no shareholders or other persons affiliated 
in a way that could allow them to make a claim on the organization's 
assets or earnings. Thus, if any of the persons affiliated with a 
corporation have an equitable or ownership interest in the corporation, 
the corporation will not be a qualified nonprofit corporation.
    One commenter said the limitation on persons with claims against 
the corporation is unnecessary, and also said it should be coupled with 
an explanation that this restriction will not deprive a corporation of 
the right to have dues-paying members.
    The Commission believes this limitation is necessary to ensure that 
associational decisions are based entirely on political considerations. 
However, this limitation will not adversely affect corporations with 
dues-paying members. In most cases, dues payments are not investments 
made with an expectation of return or repayment. They do not give 
members any right to the corporation's assets or earnings. 
Consequently, the existence of 

[[Page 35300]]
dues-paying members will not affect the corporation's exempt status.
    Two commenters expressed concern that paragraph 114.10(c)(3)(i) 
could be read to deny exempt status to corporations with employees or 
creditors, because an employee of a qualified nonprofit corporation 
could have a claim against the corporation for wages, and a creditor 
could have a claim against the corporation on a debt.
    The Commission has revised this provision in accordance with these 
comments. Claims held by employees and creditors with no ownership 
interest in the corporation arise out of arms-length employment or 
credit relationships, rather than an equitable interest in the 
corporation. Consequently, they will not be treated as claims on the 
corporation's assets or earnings that affect the corporation's 
exemption from the independent expenditure prohibition.
    ii. Disincentives to disassociate. Paragraph (c)(3)(ii) limits the 
exemption to corporations that do not offer benefits that are a 
disincentive for recipients to disassociate themselves with the 
corporation on the basis of its position on a political issue. Thus, if 
the corporation offers a benefit that recipients lose if they end their 
affiliation with the corporation, or cannot obtain unless they become 
affiliated, the corporation will not be a qualified nonprofit 
corporation. This provision ensures that the associational decisions of 
persons who affiliate themselves with the corporation are based 
exclusively on political, rather than economic, considerations.
    The rule contains examples of benefits that will be considered 
disincentives to disassociate with the corporation. First, credit 
cards, insurance policies and savings plans will be considered 
disincentives to disassociate. Consequently, corporations that offer 
such things as affinity credit cards or life insurance will not be 
qualified nonprofit corporations.
    Second, training, education and business information will be 
considered disincentives to disassociate from the corporation, unless 
the corporation provides these benefits to enable the persons who 
receive them to help promote the group's political ideas. This 
provision allows a qualified nonprofit corporation to provide its 
volunteers with the training and information they need to advocate its 
issues. However, if the corporation provides other kinds of training or 
information that is not needed for its issue advocacy work, the 
corporation will not be a qualified nonprofit corporation.
    One commenter objected to paragraph (c)(3)(ii), saying that it 
would prevent most organizations from qualifying for the exemption. 
Other commenters urged the Commission to distinguish between benefits 
that are related to the corporation's issue advocacy work, or grow out 
of it, and those that are unrelated to that work, saying that only the 
latter should be regarded as disincentives to disassociate. These 
commenters also recommended that a substantiality test be used, so that 
benefits that are insubstantial or create an insignificant disincentive 
to disassociate would not disqualify the corporation.
    The Commission has revised this section to address some of the 
concerns raised by the commenters. As indicated above, paragraph 
114.10(c)(3)(ii) has been revised to say that, if a corporation 
provides training or education that is necessary to promote the 
organization's political ideas, the training will not be considered an 
incentive to associate or disincentive to disassociate.
    However, the Commission has decided against including a 
substantiality test for benefits that ostensibly create a less 
significant disincentive to disassociate with the corporation. Any 
disincentive, no matter how small, can influence an individual's 
associational decisions, particularly where the ``cost'' to the 
individual of obtaining the benefit is only a small yearly donation to 
the corporation. For example, a corporation might offer donors access 
to affinity credit cards with no annual fee. Although the actual dollar 
value of such a benefit may be insignificant, it could easily offset 
the donor's annual donation to the corporation. Thus, membership levels 
would partially reflect the popularity of the benefit being offered, 
rather than exclusively reflecting the popularity of the group's 
political ideas.
    Including a substantiality test would also force the Commission to 
determine which benefits are substantial enough to influence a 
particular individual's decision whether or not to continue associating 
with an organization. The Commission is reluctant to make these 
difficult subjective determinations if they can be avoided. 
Consequently, the final rule does not contain a substantiality 
threshold for disincentives to disassociate with the corporation.
    e. Relationship with business corporations and labor organizations. 
The Supreme Court said that one of the reasons MCFL was exempt from the 
independent expenditure prohibition was that it ``was not established 
by a business corporation or labor union, and it is its policy not to 
accept contributions from such entities.'' MCFL, 479 U.S. at 264. This 
characteristic has been incorporated into paragraph (c)(4) of the final 
rules. The final rule has been broken down into three subparagraphs for 
purposes of clarity.
    Paragraph (c)(4)(i) implements the first part of the Court's 
statement. Only corporations that were not established by a business 
corporation or labor organization can be eligible for an exemption 
from, the independent expenditure prohibition. Thus, corporations that 
are set up by business corporations or labor organizations cannot be 
qualified nonpropfit corporations.
    Paragraph (c)(4)(ii) limits the exemption to corporations that do 
not directly or indirectly accept donations of anything of value from 
business corporations or labor organizations. This includes donations 
received directly from these entities, and donations that pass through 
a third organization. Thus, if a corporation accepts donations from an 
organization that accepts donations from these entities, the 
corporation will not be a qualified nonprofit corporation.
    The rule also limits the exemption to corporations that can provide 
some assurance that they do not accept donations from business 
corporations or labor organizations. Under paragraph (c)(4)(iii), if 
the corporation can demonstrate, through accounting records, that it 
has not accepted any donations from business corporations and labor 
organizations in the past from business corporations and labor 
organizations in the past, it will be eligible for the exemption. If it 
is unable, for good cause, to make this showing, it can provide 
adequate assurance by showing that it has a documented policy against 
accepting donations from these entities. In order to be documented, 
this policy must be embodied in the organic documents of the 
corporation, the minutes of a meeting of the governing board, or a 
directive from the person that controls the day-to-day operation of the 
corporation.
    Most of the commenters objected to an absolute ban on the 
acceptance of business corporation and labor organization donations, 
arguing that a ban is not necessary and is not supported by the court 
decisions. Several commenters argued that MCFL's third requirement is 
met when an organization is free from the influence of business 
corporations. Others urged the Commission to focus not on the level of 
donations but on whether the 

[[Page 35301]]
corporation is acting as a ``conduit'' for business corporation and 
labor organization funds. One commenter suggested that the Commission 
engage in factual analyses to determine whether an organization is 
under the influence of a business corporation or labor organization or 
is acting as a conduit for the funds of such an organization.
    However, the language of the MCFL opinion supports a prohibition on 
business corporation and labor organization donations. The MCFL Court 
said that one of the features ``essential to [its] holding that [MCFL] 
may not constitutionally be bound by Sec. 441b's restriction on 
independent spending'' was that ``MCFL was not established by a 
business corporation or a labor union, and it is its policy not to 
accept contributions from such entities.'' 479 U.S. at 263-64 (emphasis 
added). The Court concluded that the existence of this policy 
``prevents [qualified nonprofit] corporations from serving as conduits 
for the type of direct spending that creates a threat to the political 
marketplace.'' Id. Thus, although the MCFL Court was concerned that 
business corporations and labor organizations could improperly 
influence qualified nonprofit corporations and use them as conduits to 
engage in political spending, the Court saw MCFL's policy of not 
accepting business corporation or labor organization donations as the 
way to address these concerns.
    The Austin decision explains why a complete prohibition on these 
donations is necessary to serve the purposes of section 411b. In 
concluding that the Michigan Chamber of Commerce was not an MCFL-type 
corporation, the Court recognized that the danger of ``unfair 
deployment of wealth for political purposes'' exists whenever a 
business corporation or labor organization is able to funnel donations 
through a qualified nonprofit corporation. ``Because the Chamber 
accepts money from for-profit corporations, it could, absent 
application of [Michigan's version of section 441b], serve as a conduit 
for corporate political spending.'' Austin, 494 U.S. at 664. ``Business 
corporations * * * could circumvent the [independent expenditure] 
restriction by funneling money through the Chamber's general 
treasury.'' Id.
    Therefore, the Commission has limited the exemption to corporations 
that do not accept donations from business corporation or labor 
organizations. The Commission believes it would be impractical to 
engage in factual analyses to determine whether an organization is 
actually influenced by a business corporation or labor organization or 
is acting as a conduit for the funds of these entities. Furthermore, 
nothing in the Court's decisions suggests that the Commission must 
engage in such an inquiry. In fact, the Court has specifically said 
that, with regard to the application of section 441b, it will not 
``second-guess a legislative determination as to the need for 
prophylactic measures where corruption is the evil feared.'' FEC v. 
National Right to Work Committee, 459 U.S. 197, 210 (1982) (``NRWC'').
    Two commenters said it is impossible to screen out all such 
donations, and asserted that incidental or inadvertent business 
corporation or labor organization receipts should be permitted. One 
commenter suggested a de minimis test for a qualified nonprofit 
corporation's overall level of corporate or labor support, and limits 
on the percentage that could be accepted from a single contributor. 
Another commenter said the Commission should allow qualified nonprofit 
corporations to accept a de minimis amount of corporate or labor 
organization donations, so long as the corporation segregates these 
donations in a separate account and allocates expenses so that the 
corporate funds are not used to make independent expenditures.
    In applying this rule, the Commission will distinguish inadvertent 
acceptance of prohibited donations from knowing acceptance of a de 
minimis amount of prohibited donations. Inadvertently accepted 
prohibited donations will not affect a corporation's qualification for 
an exemption from the independent expenditure prohibition. However, 
knowingly accepted prohibited donations will void a corporation's 
exemption, even if the corporation accepts only a de minimis amount. 
The Commission notes that political committees are required to screen 
their receipts for prohibited contributions. Most committees do so 
successfully, even though many of them are small and have limited 
resources. Qualified nonprofit corporations will also be expected to 
adopt a mechanism for screening their receipts for prohibited 
contributions in order to remain exempt from the independent 
expenditure prohibition.
    Finally, the Commission notes that, in most cases, the prohibition 
on indirect business corporation and labor organization donations in 
paragraph (c)(4)(ii), discussed above, will not affect qualified 
nonprofit corporations that receive grants from organizations that are 
tax exempt under section 501(c)(3). Some qualified nonprofit 
corporations, all of which are section 501(c)(4) tax exempt 
organizations under the final rules, may receive grants from section 
501(c)(3) organizations. Because section 501(c)(3) organizations can 
accept donations from business corporations and labor organizations, 
paragraph (c)(4)(ii) could be read to disqualify an otherwise qualified 
nonprofit corporation if it receives a grant from a section 501(c)(3) 
organization.
    However, under IRS rules, section 501(c)(4) organizations that 
receive funds from a section 501(c)(3) organization are required to use 
those funds in a way that is consistent with the section 501(c)(3) 
organization's exempt purpose. Since political campaign intervention is 
never consistent with a section 501(c)(3) organization's exempt 
purpose, the recipient section 501(c)(4) organization is not supposed 
to use the grant for campaign activity. ``[O]therwise, public funds 
might be spent on an activity that Congress chose not to subsidize.'' 
Regan v. Taxation With Representation, 461 U.S. 540, 544 (1982). So 
long as these safeguards exist, the Commission will not regard a grant 
from a section 501(c)(3) organization to a qualified nonprofit 
corporation as an indirect donation from a business corporation or 
labor organization. Consequently, the grant will not affect the 
organization's exemption from the independent expenditure prohibition.
    f. Section 501(c)(4) status. Paragraph (c)(5) of the final rules 
limits the exemption from the independent expenditure prohibition to 
corporations that are described in 26 U.S.C. 501(c)(4). Section 
501(c)(4) describes a class of organizations known as social welfare 
organizations that are exempt from certain tax obligations. Under 
section 501(c)(4), a social welfare organization is not organized for 
profit but is operated exclusively for the promotion of social welfare. 
A corporation must be a social welfare organization in order to be 
exempt from the prohibition on independent expenditures.
    IRS regulations state that the promotion of social welfare does not 
include ``direct or indirect participation or intervention in political 
campaigns on behalf of or in opposition to any candidate.'' 26 CFR 
1.501(c)(4)-1(a)(2)(ii). However, the rules also state that an 
organization is operated exclusively for the promotion of social 
welfare if it is ``primarily'' engaged in promoting the common good and 
general welfare of the people of the community. 26 CFR 1.501(c)(4)-
1(a)(2)(i). Thus, the rules allow social welfare organizations to 
engage in a limited amount of political activity.

[[Page 35302]]

    The commenters expressed varying views on this provision and its 
relationship to the rest of the proposed rules. Two commenters argued 
that section 501(c)(4) organizations should be presumptively exempt, 
regardless of whether they have any of the other characteristics of a 
qualified nonprofit corporation. In contrast, two other commenters said 
that the additional characteristics should be included in the final 
rules. These two commenters noted that the Internal Revenue Code allows 
business corporations and labor organizations to make direct donations 
to section 501(c)(4) organizations. Thus, the additional 
characteristics must be included in order to limit the exemption from 
the independent expenditure prohibition to the kind of organizations 
described in the MCFL opinion.
    The Commission has decided not to recognize a presumption that 
social welfare organizations are qualified nonprofit corporations 
solely because of their section 501(c)(4) status. Although the 
characteristics of a social welfare organization overlap to some extent 
with MCFL's three essential features, they are not identical. This 
difference results from the fact that the tax code was written to serve 
different purposes than the FECA. Thus, it would be inappropriate to 
presume that all social welfare organizations are entitled to an 
exemption from the independent expenditure prohibition.
    Furthermore, the Internal Revenue Service often uses general legal 
principles to enforce the provisions of the tax code. Thus, there will 
often be no clearly stated IRS rule or policy that the Commission can 
refer to in making its determinations. In addition, filing for formal 
recognition of tax exempt status under section 501(c)(4) is permissive, 
not required. As a result, the Commission will not be able to rely on 
the IRS for verification of an organization's tax exempt status.
    Therefore, the Commission has decided to include the additional 
characteristics in the final rules, and limit the exemption from the 
independent expenditure prohibition to corporations with these 
characteristics.

5. Other Requirements Not Included in the Final Rules

    The Notice of Proposed Rulemaking contained a number of proposed 
requirements that are not included in the final rules. These proposals 
are summarized below.
    a. Affiliation with a separate segregated fund. One proposal would 
have denied the exemption to corporations that have a separate 
segregated fund. This proposal would have the effect of requiring 
corporations that have separate segregated funds to make independent 
expenditures solely from that fund, regardless of whether they have the 
characteristics of a qualified nonprofit corporation.
    The commenters were universally opposed to this proposal. One 
commenter said such a rule would be impossible to apply, and would lead 
to a nonsensical result whereby small, unsuccessful groups would be 
able to make independent expenditures with general treasury funds, 
while larger, more successful groups would be required to use their 
separate segregated funds. Another commenter said that there is no 
governmental interest in denying the exemption to organizations with 
separate segregated funds, because the existence of such a fund does 
not create a danger that the organization will flood the electoral 
process with business profits. A third commenter objected to this 
criterion, arguing that the constitutional theory underlying the MCFL 
decision did not rely upon MCFL's allegations of the difficulty faced 
by small nonprofits attempting to comply with FEC regulations.
    Although a bright line rule such as this one would be very useful 
in implementing the Court decisions, the Commission has not included 
this proposal in the final rules. Consequently, corporations with these 
characteristics will be exempt from the independent expenditure 
prohibition regardless of whether they have a separate segregated fund.
    b. Eligibility to file IRS Form 990EZ. The NPRM proposed to limit 
the exemption from the independent expenditure prohibition to 
corporations with limited financial resources by requiring them to be 
eligible to file their tax returns on Internal Revenue Service Form 
990EZ. Form 990EZ is available to organizations that have gross 
receipts during the year of less than $100,000 and total assets at the 
end of the year of less than $250,000.
    Most commenters objected to this proposal. Several commenters 
observed that an organization's size was not included in the list of 
essential features, and also said that it has no relationship to the 
justification given for the regulation of corporate political speech. 
One commenter argued that the filing eligibility levels are so low that 
most ``substantial'' organizations would not qualify for an exemption.
    In contrast, one commenter supported the use of the Form 990EZ 
eligibility thresholds as a criterion for an exemption from the 
independent expenditure prohibition. This commenter thought it should 
be used to prevent groups with extensive financial resources from 
exacting political debts from candidates by giving them significant 
support. He argued that there is a compelling state interest in 
preventing organizations from seeking a quid pro quo.
    The Commission is concerned that this proposal may be difficult to 
administer, and so has decided not to include it in the final rules. 
The Internal Revenue Service submitted comments in which it noted that 
only those section 501(c)(4) organizations that are formally recognized 
as tax exempt can file Form 990 or 990EZ. Organizations that are not 
formally recognized must file as taxable organizations, usually on Form 
1120. Consequently, there may not be an easy way to confirm an 
organization's eligibility to file Form 990EZ. In addition, 
organizations with less than $25,000 in annual gross receipts have no 
real need to seek formal recognition, since they are not required to 
file tax returns at all. Thus, there will be no way to confirm the 
filing eligibility of these organizations.
    The IRS also noted that the eligibility requirements for filing 
Form 990EZ may change from time to time. This would have the effect of 
changing the eligibility requirements for an exemption from the 
independent expenditure prohibition.
    Consequently, the Commission has excluded this proposal from the 
final rules. Corporations with the characteristics in paragraph (c) 
will be exempt regardless of whether they are eligible to file Form 
990EZ.
    c. Less sophisticated fundraising techniques. The narrative portion 
of the NPRM indicated that the Commission was considering limiting the 
exemption to groups that use the less sophisticated fundraising 
techniques typically employed by grass roots organizations. One 
criterion considered would deny the exemption to organizations that 
utilize more formalized fundraising methods such as direct mail 
solicitation.
    However, the Commission has decided not to include this in the 
final rules. Corporations with the characteristics set out in paragraph 
(c) will be exempt from the independent expenditure prohibition 
regardless of how they raise funds, so long as their fundraising 
activity is not business activity under paragraph (b)(3) of the final 
rules.

6. Reconstituting as a Qualified Nonprofit Corporation

    The Commission recognizes that some corporations that are not 
qualified nonprofit corporations may wish to reconstitute themselves so 
that they 

[[Page 35303]]
qualify for an exemption from the independent expenditure prohibition. 
In order to become a qualified nonprofit corporation, a corporation 
must adopt the essential characteristics set out in paragraph (c) of 
the final rules. In addition, the corporation must purge its accounts 
of corporate and labor organization donations and implement a policy to 
ensure that it does not accept these donations in the future. Once it 
adopts the essential characteristics, purges its accounts, and 
implements such a policy, the corporation will become a qualified 
nonprofit corporation.

7. Permitted Corporate Independent Expenditures

    Paragraph (d) states that qualified nonprofit corporations can make 
independent expenditures, as defined in 11 CFR Part 109, without 
violating the prohibitions on corporate expenditures in 11 CFR Part 
114. However, this paragraph also emphasizes that qualified nonprofit 
corporations remain subject to the other requirements and limitations 
in Part 114, in particular, the prohibition on corporate contributions, 
whether monetary or in-kind.
    The Commission received no comments on this provision, and has 
retained it in the final rules.
8. Reporting Requirements

    Paragraph (e) requires a corporation that makes independent 
expenditures to certify that it is a qualified nonprofit corporation 
under this section and report its independent expenditures. The 
procedures for certifying exempt status are set out in paragraph 
(e)(1). The requirements for reporting independent expenditures are set 
out in paragraph (e)(2).
    Under paragraph (e)(1), the corporation must certify that it is 
eligible for an exemption from the independent expenditure prohibition. 
This certification must be submitted no later than the date upon which 
the corporation's first independent expenditure report is due under 
paragraph (e)(2), which will be described in detail below. However, the 
corporation is not required to submit this certification prior to 
making independent expenditures. The certification can be made as part 
of FEC Form 5, which the Commission will be modifying for use in this 
situation. Or, the corporation can submit a letter that contains the 
name, address, signature and printed name of the individual filing the 
report, and certifies that the corporation has the characteristics set 
out in paragraph (c).
    One of the alternatives set out in the NPRM would have required 
qualified nonprofit corporations to submit much more detailed 
information in order to qualify for exempt status. The Commission 
decided not to include these requirements in the final rules in order 
to minimize the reporting burdens on qualified nonprofit corporations. 
Instead, the Commission has decided to require only that corporations 
certify that they have the characteristics of a qualified nonprofit 
corporation when they make independent expenditures. This will ensure 
that corporations claiming to be exempt are aware of the 
characteristics required to qualify for an exemption.
    Paragraph (e)(2) states that qualified nonprofit corporations must 
comply with the independent expenditure reporting persons who make 
independent expenditures in excess of $250 in a calendar year to report 
those expenditures using FEC Form 5. This report must include the name 
and mailing address of the person to whom the expenditures was made, 
the amount of the expenditure, an indication as to whether the 
expenditure was in support of or in opposition to a candidate, and a 
certification as to whether the corporation made the expenditure in 
cooperation or consultation with the candidate. The names of persons 
who contributed more than $200 towards the expenditure must also be 
reported.
    Thus, the final rules treat qualified nonprofit corporations as 
individuals for the purposes of the reporting requirements. This is one 
of the least burdensome reporting schemes contained in the FECA. The 
MCFL Court specifically endorsed this approach when it said that the 
disclosure provisions of 2 U.S.C. 434(c) will ``provide precisely the 
information necessary to monitor [the corporation's] independent 
spending activity and its receipt of contributions.'' MCFL, 479 U.S. at 
262. None of the commenters discussed the proposed independent 
expenditure reporting requirements.
    In another part of its opinion, the MCFL Court also said that 
``should MCFL's independent spending become so extensive that the 
organization's major purpose may be regarded as campaign activity, the 
corporation would be classified as a political committee.'' MCFL, 479 
U.S. at 262. The proposed rules set out a test for determining a 
corporation's major purpose, and also contained proposed reporting 
requirements related to that test. These reporting requirements were 
set out in paragraph (e) of the proposed rules.
    As will be discussed further below, the Commission has decided not 
to address this part of the Court's opinion in the final rules being 
promulgated today, preferring to do so at a later date as part of a 
separate rulemaking. Consequently, the reporting requirements related 
to the major purpose test have been deleted from paragraph (e) of the 
final rules. However, these rules may eventually be amended to require 
reporting of information related to the major purpose concept. Any such 
changes will be made as part of the separate rulemaking.

9. Solicitation Disclosure

    Section 114.10(f) of the final rules states that when a qualified 
nonprofit corporation solicits donations, the solicitation must inform 
potential donors that their donations may be used for political 
purposes, such as supporting or opposing candidates. This rule, which 
has been modified slightly from the proposed rule, requires qualified 
nonprofit corporations to include a disclosure statement in their 
solicitations for donations.
    One commenter called this an ``unjustifiable roadblock'' to the 
exercise of constitutional rights by small nonprofit corporations, and 
speculated that the people who run these organizations won't know about 
this requirement until after a complaint is filed against them.
    However, this disclosure requirement directly serves the purposes 
of the MCFL exemption. In carving out this exemption, the Supreme Court 
said ``[t]he rationale for regulation is not compelling with respect to 
independent expenditures by [MCFL]'' because ``[i]ndividuals who 
contribute to appellee are fully aware of its political purposes, and 
in fact contribute precisely because they support those purposes.'' 
MCFL at 260-61. ``Given a contributor's awareness of the political 
activity of [MCFL], as well as the readily available remedy of refusing 
further donations, the interest [of] protecting contributors is simply 
insufficient to support Sec. 441b's restriction on the independent 
spending of MCFL.'' Id. at 262 (emphasis added).
    The MCFL Court went on to endorse the disclosure requirement as a 
way to ensure that persons who make donations are aware of how those 
donations may be used. The Court said the need to make donors aware 
that their donations may be used to ``urge support for or opposition to 
political candidates'' can be met by ``simply requiring that 
contributors be informed that their money may be used for such a 
purpose.'' MCFL, 479 U.S. at 261.

[[Page 35304]]

    Furthermore, the Commission does not regard anticipated ignorance 
of a regulation as a legitimate argument against the promulgation of 
that regulation, particularly when the regulation will implement the 
Commission's statutory mandate and the holding of a Supreme Court 
decision.
    Therefore, the Commission has included this requirement in the 
final rules. The Commission does not expect this requirement to impose 
a significant burden on qualified nonprofit corporations. For example, 
corporations need not say anything more than ``donations to xyz 
organization may be used for political purposes, such as supporting or 
opposing candidates,'' or similar language, in order to satisfy this 
requirement. This will ensure that donors are aware of the 
corporation's campaign activity.

10. Non-authorization Notification

    Paragraph (g) of the final rules requires qualified nonprofit 
corporations that make independent expenditures to comply with the 
disclaimer requirements in 11 CFR 110.11. Section 110.11 requires any 
person financing an express advocacy communication to include a 
statement in the communication identifying who paid for it. 11 CFR 
110.11(a)(1). This statement must also identify the candidate or 
committee who authorized the communications, unless the communications 
was not authorized by any candidate or committee, in which case, it 
must so indicate. 11 CFR 110.11(a)(1)(iii). Thus, a qualified nonprofit 
corporation that finances an independent expenditure must include a 
disclaimer that states the name of the corporation and indicates that 
the communication was not authorized by any candidate or candidate's 
committee. The Commission received no comments on this provision.

11. Major Purpose

    In MCFL, the Court said that ``should MCFL's independent spending 
become so extensive that the organization's major purpose may be 
regarded as campaign activity, the corporation would be classified as a 
political committee. * * * As such, it would automatically be subject 
to the obligations and restrictions applicable to those groups whose 
primary objective is to influence political campaigns.'' 479 U.S. at 
262 (citation omitted).
    The NPRM sought comments on a number of issues related to this part 
of the Court's opinion. For example, the notice set out two alternative 
versions of a test for determining whether a qualified nonprofit 
corporation's major purpose is making independent expenditures. The 
notice also specifically sought comments on whether these tests should 
turn on whether independent expenditures are ``a'' major purpose or 
``the'' major purpose of the corporation. As discussed above, the 
notice also contained proposed requirements for reporting the 
information that the Commission would need for these tests. Several 
commeters submitted views on these issues.
    The Commission has decided not to address this part of MCFL in the 
final rules. In its administration of the Act, the Commission is 
applying a major purpose concept in other contexts that do not involve 
qualified nonprofit corporations. The Commission would prefer to 
promulgate a major purpose test that will govern in all of these 
situations. Such a rule is beyond the scope of this rulemaking.
    Therefore, the Commission has decided to initiate a separate 
rulemaking to address this part of MCFL and other outstanding issues. 
Any further definition or refinement of the major purpose concept and 
the associated reporting requirements will be done in that rulemaking. 
The comments submitted on these issues in response to the NPRM will be 
considered as part of this separate rulemaking.
    However, in the meantime, the Commission cautions, that, ``should 
[a qualified nonprofit corporation's] independent spending become so 
extensive that [its] major purpose may be regarded as campaign 
activity,'' it will be treated as a political committee under the FECA 
and subject to the applicable regulations.

Certification of No Effect Pursuant to 5 U.S.C. Sec. 605(b) [Regulatory 
Flexibility Act]

    The attached final rules will not, if promulgated, have a 
significant economic impact on a substantial number of small entities. 
The basis for this certification is that the definition of express 
advocacy will not have a significant economic impact on a substantial 
number of small entities. In addition, as anticipated by the Supreme 
Court in MCFL, there may not be a substantial number of small entities 
affected by the final rules. The new disclosure rules for qualified 
nonprofit corporations, which are small entities, are the least 
burdensome requirements possible under the FECA.
List of Subjects

11 CFR Part 100

    Elections

11 CFR Part 106

    Campaign funds
    Political candidates
    Political committees and parties

11 CFR Part 109

    Campaign funds
    Elections
    Polticial candidates
    Political committees and parties
    Reporting requirements

11 CFR Part 114

    Business and industry
    Elections
    Labor

    For the reasons set out in the preamble, Subchapter A, Chapter I of 
Title 11 of the Code of Federal Regulations is amended as follows:

PART 100--SCOPE AND DEFINITIONS (2 U.S.C. 431)

    1. The authority citation for 11 CFR Part 100 continues to read as 
follows:

    Authority: 2 U.S.C. 431, 438(a)(8).

    2. 11 CFR Part 100 is amended by revising section 100.17 to read as 
follows:


Sec. 100.17  Clearly identified (2 U.S.C. 431(18)).

    The term clearly identified means the candidate's name, nickname, 
photograph, or drawing appears, or the identity of the candidate is 
otherwise apparent through an unambiguous reference such as ``the 
President,'' ``your Congressman,'' or ``the incumbent,'' or through an 
unambiguous reference to his or her status as a candidate such as ``the 
Democratic presidential nominee'' or ``the Republican candidate for 
Senate in the State of Georgia.''
    3. 11 CFR Part 100 is amended by adding section 100.22 to read as 
follows:


Sec. 100.22  Expressly advocating (2 U.S.C. 431(17)).

    Expressly advocating means any communication that--(a) Uses phrases 
such as ``vote for the President,'' ``re-elect your Congressman,'' 
``support the Democratic nominee,'' ``cast your ballot for the 
Republican challenger for U.S. Senate in Georgia,'' ``Smith for 
Congress,'' ``Bill McKay in `94,'' ``vote Pro-Life'' or ``vote Pro-
Choice'' accompanied by a listing of clearly identified candidates 
described as Pro-Life or Pro-Choice, ``vote against Old Hickory,'' 
``defeat'' accompanied by a picture of one or more candidate(s), 

[[Page 35305]]
``reject the incumbent,'' or communications of campaign slogan(s) or 
individual word(s), which in context can have no other reasonable 
meaning than to urge the election or defeat of one or more clearly 
identified candidate(s), such as posters, bumper stickers, 
advertisements, etc. which say ``Nixon's the One,'' ``Carter '76,'' 
``Reagan/Bush'' or ``Mondale!''; or
    (b) When taken as a whole and with limited reference to external 
events, such as the proximity to the election, could only be 
interpreted by a reasonable person as containing advocacy of the 
election or defeat of one or more clearly identified candidate(s) 
because--
    (1) The electoral portion of the communication is unmistakable, 
unambiguous, and suggestive of only one meaning; and
    (2) Reasonable minds could not differ as to whether it encourages 
actions to elect or defeat one or more clearly identified candidate(s) 
or encourages some other kind of action.

PART 106--ALLOCATION OF CANDIDATE AND COMMITTEE ACTIVITIES

    4. The authority citation for 11 CFR Part 106 continues to read as 
follows:

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

    5. 11 CFR Part 106 is amended by revising paragraph (d) of section 
106.1 to read as follows:
Sec. 106.1  Allocation of expenses between candidates.

* * * * *
    (d) For purposes of this section, clearly identified shall have the 
same meaning as set forth at 11 CFR 100.17.
* * * * *

PART 109--INDEPENDENT EXPENDITURES (2 U.S.C. 431(17), 434(c))

    6. The authority citation for 11 CFR Part 109 continues to read as 
follows:

    Authority: 2 U.S.C. 431(17), 434(c), 438(a)(8), 441d.

    7. 11 CFR Part 109 is amended by revising paragraphs (b)(1), (b)(2) 
and (b)(3) of section 109.1 to read as follows:


Sec. 109.1  Definitions (2 U.S.C. 431(17)).

* * * * *
    (b) For purposes of this definition--
    (1) Person means an individual, partnership, committee, 
association, qualified nonprofit corporation under 11 CFR 114.10(c), or 
any organization or group of persons, including a separate segregated 
fund established by a labor organization, corporation, or national bank 
(see part 114) but does not mean a labor organization, corporation not 
qualified under 11 CFR 114.10(c), or national bank.
    (2) Expressly advocating shall have the same meaning as set forth 
at 11 CFR 100.22.
    (3) Clearly identified shall have the same meaning as set forth at 
11 CFR 100.17.
* * * * *

PART 114--CORPORATE AND LABOR ORGANIZATION ACTIVITY

    8. The authority citation for Part 114 continues to read as 
follows:

    Authority: 2 U.S.C. 431(8)(B), 431(9)(B), 432, 437d(a)(8), 
438(a)(8), and 441b.

    9. 11 CFR Part 114 is amended by revising paragraph (b) of section 
114.2 to read as follows:


Sec. 114.2  Prohibitions on contributions and expenditures.

* * * * * * *
    (b) Except as provided at 11 CFR 114.10, any corporation whatever 
or any labor organization is prohibited from making a contribution or 
expenditure as defined in 11 CFR 114.1(a) in connection with any 
Federal election.
* * * * *
    10. 11 CFR Part 114 is amended by adding section 114.10 to read as 
follows:


Sec. 114.10  Nonprofit corporations exempt from the prohibition on 
independent expenditures.

    (a) Scope. This section describes those nonprofit corporations that 
qualify for an exemption from the prohibition on independent 
expenditures contained in 11 CFR 114.2. It sets out the procedures for 
demonstrating qualified nonprofit corporation status, for reporting 
independent expenditures, and for disclosing the potential use of 
donations for political purposes.
    (b) Definitions. For the purposes of this section--
    (1) The promotion of political ideas includes issue advocacy, 
election influencing activity, and research, training or educational 
activity that is expressly tied to the organization's political goals.
    (2) A corporation's express purpose includes:
    (i) The corporation's purpose as stated in its charter, articles of 
incorporation, or bylaws, except that a statement such as ``any lawful 
purpose,'' ``any lawful activity,'' or other comparable statement will 
not preclude a finding under paragraph (c) of this section that the 
corporation's only express purpose is the promotion of political ideas;
    (ii) The corporation's purpose as publicly stated by the 
corporation or its agents; and
    (iii) Purposes evidenced by activities in which the corporation 
actually engages.
    (3) (i) The term business activities includes but is not limited 
to:
    (A) Any provision of goods or services that results in income to 
the corporation; and
    (B) Advertising or promotional activity which results in income to 
the corporation, other than in the form of membership dues or 
donations.
    (ii) The term business activities does not include fundraising 
activities that are expressly described as requests for donations that 
may be used for political purposes, such as supporting or opposing 
candidates.
    (4) The term shareholder has the same meaning as the term 
stockholder, as defined in 11 CFR 114.1(h).
    (c) Qualified nonprofit corporations. For the purposes of this 
section, a qualified nonprofit corporation is a corporation that has 
all the characteristics set forth in paragraphs (c)(1) through (c)(5) 
of this section:
    (1) Its only express purpose is the promotion of political ideas, 
as defined in paragraph (b)(1) of this section;
    (2) It cannot engage in business activities;
    (3) It has:
    (i) No shareholders or other persons, other than employees and 
creditors with no ownership interest, affiliated in any way that could 
allow them to make a claim on the organization's assets or earnings; 
and
    (ii) No persons who are offered or who receive any benefit that is 
a disincentive for them to disassociate themselves with the corporation 
on the basis of the corporation's position on a political issue. Such 
benefits include but are not limited to:
    (A) Credit cards, insurance policies or savings plans; and
    (B) Training, education, or business information, other than that 
which is necessary to enable recipients to engage in the promotion of 
the group's political ideas.
    (4) It:
    (i) Was not established by a business corporation or labor 
organization;
    (ii) Does not directly or indirectly accept donations of anything 
of value from business corporations, or labor organizations; and
    (iii) If unable, for good cause, to demonstrate through accounting 
records that paragraph (c)(4)(ii) of this section is satisfied, has a 
written policy against accepting donations from business corporations 
or labor organizations; and

[[Page 35306]]

    (5) It is described in 26 U.S.C. 501(c)(4).
    (d) Permitted corporate independent expenditures.
    (1) A qualified nonprofit corporation may make independent 
expenditures, as defined in 11 CFR part 109, without violating the 
prohibitions against corporate expenditures contained in 11 CFR part 
114.
    (2) Except as provided in paragraph (d)(1) of this section, 
qualified nonprofit corporations remain subject to the requirements and 
limitations of 11 CFR part 114, including those provisions prohibiting 
corporate contributions, whether monetary or in-kind.
    (e) Qualified nonprofit corporations; reporting requirements.
    (1) Procedures for demonstrating qualified nonprofit corporation 
status. If a corporation makes independent expenditures under paragraph 
(d)(1) of this section that aggregate in excess of $250 in a calendar 
year, the corporation shall certify, in accordance with paragraph 
(e)(1)(ii) of this section, that it is eligible for an exemption from 
the prohibitions against corporate expenditures contained in 11 CFR 
part 114.
    (i) This certification is due no later than the due date of the 
first independent expenditure report required under paragraph (e)(2). 
However, the corporation is not required to submit this certification 
prior to making independent expenditures.
    (ii) This certification may be made either as part of filing FEC 
Form 5 (independent expenditure form) or by submitting a letter in lieu 
of the form. The letter shall contain the name and address of the 
corporation and the signature and printed name of the individual filing 
the qualifying statement. The letter shall also certify that the 
corporation has the characteristics set forth in paragraphs (c)(1) 
through (c)(5) of this section.
    (2) Reporting independent expenditures. Qualified nonprofit 
corporations that make independent expenditures aggregating in excess 
of $250 in a calendar year shall file reports as required by 11 CFR 
109.2.
    (f) Solicitation; disclosure of use of contributions for political 
purposes. Whenever a qualified nonprofit corporation solicits 
donations, the solicitation shall inform potential donors that their 
donations may be used for political purposes, such as supporting or 
opposing candidates.
    (g) Non-authorization notice. Qualified nonprofit corporations 
making independent expenditures under this section shall comply with 
the requirements of 11 CFR 110.11.

    Dated: June 30, 1995.
Danny L. McDonald,
Chairman.
[FR Doc. 95-16502 Filed 7-5-95; 8:45 am]
BILLING CODE 6715-01-M