[Federal Register Volume 63, Number 133 (Monday, July 13, 1998)]
[Proposed Rules]
[Pages 37722-37737]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 98-18543]



[[Page 37721]]

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Part V





Federal Election Commission





_______________________________________________________________________



11 CFR Parts 102, 103, and 106



Prohibited and Excessive Contributions; ``Soft Money''; Proposed Rule

  Federal Register / Vol. 63, No. 133/ Monday, July 13, 1998 / Proposed 
Rules  

[[Page 37722]]



FEDERAL ELECTION COMMISSION

[Notice 1998-12]

11 CFR Parts 102, 103, and 106


Prohibited and Excessive Contributions; ``Soft Money''

AGENCY: Federal Election Commission.

ACTION: Notice of Proposed Rulemaking (NPRM).

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SUMMARY: The Federal Election Commission today seeks comments on 
proposed rules relating to funds received by party committees outside 
the prohibitions and limitations of the Federal Election Campaign Act, 
also known as ``soft money.'' This NPRM addresses issues raised in two 
petitions for rulemaking, one submitted by President William J. Clinton 
and the other submitted by five Members of the United States House of 
Representatives. The two petitions seek limits on the use of soft money 
for activities that have an impact on federal elections. The draft 
rules which follow do not represent a final decision by the Commission 
regarding the changes sought in the petitions. Further information is 
provided in the supplementary information that follows.
DATES: Statements in support of or in opposition to the proposed rules 
must be filed on or before September 11, 1998. The Commission will hold 
a public hearing at 10:00 a.m. on September 23, 1998. Persons wishing 
to testify must so indicate in their written comments.
ADDRESSES: All comments should be addressed to Susan E. Propper, 
Assistant General Counsel, and must be submitted in either written or 
electronic form. Written comments should be sent to the Federal 
Election Commission, 999 E Street, N.W., Washington, DC 20463. Faxed 
comments should be sent to (202) 219-3923, with printed copy follow up. 
Electronic mail comments should be sent to [email protected]. 
Commenters sending comments by electronic mail should include their 
full name and postal service address within the text of their comments. 
Electronic mail comments that do not contain the full name, electronic 
mail address and postal service address of the commenter will not be 
considered. The public hearing will be held in the Commission's public 
hearing room, 999 E Street, N.W., 9th Floor.

FOR FURTHER INFORMATION CONTACT: Ms. Susan E. Propper, Assistant 
General Counsel, or Paul Sanford, Staff Attorney, 999 E Street, N.W., 
Washington, D.C. 20463, (202) 694-1650 or (800) 424-9530.

SUPPLEMENTARY INFORMATION: With this NPRM, the Commission is publishing 
and seeking comments on proposed rules relating to the receipt and use 
of prohibited and excessive contributions, also known as ``soft 
money,'' by national, state and local party committees. The Commission 
is publishing these rules in response to two petitions for rulemaking 
that seek limits on the use of soft money in activities that may 
influence federal elections.
    For reasons that will be explained further below, the Commission 
has decided that the issues raised in the petitions warrant further 
consideration. The Commission believes that changes in the regulations 
relating to soft money may be necessary to give full force and effect 
to the prohibitions and limitations in the Federal Election Campaign 
Act, 2 U.S.C. 431 et seq. [``FECA'' or ``the Act'], and ensure that 
impermissible funds are not used to influence federal elections. 
Therefore, the Commission is seeking comments on proposed rules that 
would limit the use of soft money by party committees. The proposed 
rules are described in detail below.
    However, the Commission would like to emphasize that no final 
decision has been made on whether or not to promulgate new rules in 
this area. At this point, the Commission is merely seeking comments on 
possible approaches for limiting the impact of soft money on federal 
elections. No final decision will be made until after the comment 
period has concluded and a public hearing has been held.

Prior History

    The Act limits the amount that individuals can give to candidates, 
political committees and political parties for use in federal 
elections. 2 U.S.C. 441a. The Act also prohibits corporations and labor 
organizations from contributing their general treasury funds for these 
purposes. 2 U.S.C. 441b. Federal contractors are also prohibited from 
making these contributions. 2 U.S.C. 441c, 11 CFR 115.2(a). Note that, 
under 2 U.S.C. 441b and 441e, national banks, Congressionally-chartered 
corporations, and foreign nationals are prohibited from making 
contributions in connection with any election to any political office.
    In contrast, some state campaign finance statutes allow 
corporations and labor organizations to make contributions to state and 
local candidates, and also allow individuals to make contributions to 
state and local candidates in amounts that would exceed the dollar 
limits in 2 U.S.C. 441a. In addition, the Act's prohibition on 
contributions by federal contractors does not apply to contributions 
made in connection with state or local elections. 11 CFR 115.2(a).
    Today, most party committees receive some contributions that are 
permissible under the FECA and also receive other contributions that 
are not permissible under the Act if they are to be used in connection 
with federal elections. Contributions that are permissible under the 
FECA are often referred to as ``hard money'' contributions. 
Contributions that are not permissible, i.e., individual contributions 
in excess of the section 441a dollar limits, all corporate and labor 
organization general treasury contributions, and contributions from 
federal contractors, are often referred to as ``soft money,'' and are 
to be used exclusively for state and local campaign activity or other 
party committee activities that do not influence federal elections.
    Typically, party committees set up separate bank accounts into 
which they deposit the hard and soft money contributions they receive. 
Hard money contributions are to be deposited into a federal account, 
and soft money contributions are to be deposited into a non-federal 
account. Some party committees have a federal account and multiple non-
federal accounts. However, since 2 U.S.C. 441b and 441e prohibit 
national banks, Congressionally-chartered corporations, and foreign 
nationals from making contributions in connection with any election to 
any political office, contributions from these entities to a party 
committee's non-federal accounts are also prohibited.
    It is usually a relatively simple matter for the party committee to 
distinguish between hard and soft money contributions and segregate 
them in separate bank accounts. However, it can be more difficult to 
distinguish between a party committee's federal and non-federal 
expenses, because many party committee activities benefit both federal 
and non-federal candidates. For example, when a party committee 
conducts a get-out-the-vote drive urging people to support the party's 
candidates, it presumably increases the turnout of voters who favor 
that party's candidates. If there are both federal and non-federal 
candidates on the ballot, the drive benefits both the federal and the 
non-federal candidates. Consequently, if the party committee pays the 
costs of such a drive entirely with soft dollars, the committee is 
using prohibited contributions to benefit federal candidates. This 
would violate the contribution prohibitions and limitations in the 
FECA.

[[Page 37723]]

    Since early in its history, the Commission has struggled with the 
fact that many party functions have an impact on both federal and non-
federal elections, and has sought to give force and effect to the 
FECA's prohibitions and limitations by requiring party committees to 
pay at least a portion of the cost of these ``mixed'' activities with 
hard dollars. For example, in Advisory Opinion 1975-21, the Commission 
required a local party committee to use hard dollars to pay for a 
portion of its administrative expenses and voter registration costs. 
The Commission said that even though some party functions do not relate 
to any particular candidate or election, ``these functions have an 
indirect effect on particular elections, and since monies contributed 
to fulfill these functions free other money to be used for 
contributions and expenditures in connection with Federal elections, it 
is appropriate to ascribe a certain portion of the administrative 
functions of a party organization to Federal elections during time 
periods in which Federal elections are held.'' Id.
    The Commission incorporated part of Advisory Opinion 1975-21 into 
regulations promulgated in 1977. The regulations required political 
committees active in both federal and non-federal elections to allocate 
their administrative expenses between separate federal and non-federal 
accounts ``in proportion to the amount of funds expended on federal and 
non-federal elections, or on another reasonable basis.'' 11 CFR 
106.1(e) (1978). Sections 106.1 and 106.5 of the current rules contain 
updated versions of these regulations.
    In two opinions issued after AO 1975-21, the Commission took an 
even more restrictive view of the use of soft money for registration 
and get-out-the-vote drive activity. In its response to Advisory 
Opinion Request 1976-72, the Commission said that ``even though the 
Illinois law apparently permits corporate contributions for State 
elections, corporate/union treasury funds may not be used to defray any 
portion of a registration or get-out-the-vote drive conducted by a 
political party.'' Thus, the Commission concluded that this type of 
activity would have to be paid for with hard dollars. In its response 
to Advisory Opinion Request 1976-83, the Commission reached a similar 
conclusion.
    However, in Advisory Opinion 1978-10, the Commission modified its 
position. In that opinion, the Commission concluded that the costs of 
voter registration and GOTV drives should be allocated in the same 
manner as party administrative expenditures. In reaching this 
conclusion, the Commission superseded Re: AOR 1976-72 and 1976-83 and 
said that corporate and union treasury funds could be used for the 
portion of the costs allocated to the party committee's non-federal 
account.
    In Advisory Opinion 1979-17, the Commission recognized the ability 
of a national party committee to establish a separate account to be 
used ``for the deposit and disbursement of funds designated 
specifically and exclusively to finance national party activity limited 
to influencing the nomination or election of candidates for public 
office other than elective `federal office.' '' Thus, the Commission 
concluded that a national party committee could accept corporate 
contributions ``for the exclusive and limited purpose of influencing 
the nomination or election of candidates for nonfederal office.''
    The 1979 amendments to the Federal Election Campaign Act sought to 
encourage the participation of state and local party committees in 
federal elections by carving out exceptions to the definitions of 
contribution and expenditure for certain volunteer, voter registration 
and get-out-the-vote activity conducted by these committees. Under 
sections 431(8)(B)(x) and 431(9)(B)(viii), payments for the costs of 
campaign materials used in connection with volunteer activities on 
behalf of the party's nominee are not contributions or expenditures so 
long as the payments do not finance any general public political 
advertising, and are made from contributions that are permissible under 
the Act but were not designated for a particular candidate. Sections 
431(8)(B)(xii) and 431(9)(B)(ix) contain the same rule for voter 
registration and get-out-the-vote drive costs conducted by the 
committee on behalf of its presidential and vice-presidential nominees. 
These provisions supplement a similar provision for slate cards and 
sample ballots that existed in the Act prior to the 1979 amendments. 2 
U.S.C. 431(8)(B)(v) and 431(9)(B)(iv). Since then, these activities 
have collectively been referred to as ``exempt activities.'' The House 
Report accompanying the 1979 amendments recognizes the ability of state 
and local party committees to allocate the costs of slate card and 
volunteer activities in certain circumstances. H.R. Rep. No. 96-422 at 
8, 9 (1979).
    In 1984, the Commission received a petition for rulemaking from 
Common Cause seeking new rules relating to the use of soft money. The 
petition requested that the Commission take action to address what the 
petitioner alleged was the use of soft money by national party 
committees to influence federal elections. The Commission published a 
Notice of Availability on January 4, 1985, and subsequently published a 
Notice of Inquiry on December 18, 1985. See 50 FR 477 (Jan. 4, 1985), 
50 FR 51535 (Dec. 18, 1985). These two notices sought comments from the 
public on the issues raised in the petition. The Commission also held a 
public hearing on January 29, 1986, at which several witnesses 
testified.
    After reviewing the petition, the comments and the witness' 
testimony, the Commission denied the Common Cause petition, concluding 
that neither the petition nor the comments ``constitute concrete 
evidence demonstrating that the Commission's regulations have been 
abused so that funds purportedly raised for use in nonfederal elections 
have in fact been transferred to the state and local level with the 
intent that they be used to influence federal elections.'' Notice of 
Disposition, 51 FR 15915 (Apr. 29, 1986).
    Common Cause challenged the Commission's denial of the petition in 
U.S. District Court. In court, Common Cause asserted that no allocation 
method is permissible under the FECA. Consequently, Common Cause 
argued, the Commission's denial of the petition was arbitrary and 
capricious under the Administrative Procedure Act, 5 U.S.C. Sec. 706. 
Common Cause also argued that allowing committees to allocate on a 
reasonable basis was contrary to law because it failed to ensure proper 
allocation between federal and non-federal accounts.
    The court rejected Common Cause's first argument, saying that the 
Act cannot be read to prohibit allocation. Common Cause v. FEC, 692 F. 
Supp. 1391, 1395 (D.D.C. 1987). However, the court then agreed that the 
Commission's policy of allowing state party committees to allocate 
slate card expenses on any reasonable basis was contrary to law, 
``since Congress stated clearly in the FECA that all monies spent by 
state committees on these activities vis-a-vis federal elections must 
be paid for `from contributions subject to the limitations and 
prohibitions of this Act.''' Id. (quoting 2 U.S.C. 431(8)(B)(x)(2) and 
(xii)(2), 431(9)(B)(viii)(2) and (ix)(2)). The court said that

    [t]he plain meaning of the FECA is that any improper allocation 
of nonfederal funds by a state committee would be a violation of the 
FECA. Yet, the Commission provides no guidance whatsoever on what 
allocation methods a state or local committee may use; . . . Thus, a 
revision of the Commission's

[[Page 37724]]

regulations to ensure that any method of allocation used by state or 
local party committees is in compliance with the FECA is warranted. 
Id. at 1396.

    The court directed the Commission to replace the ``any reasonable 
basis'' allocation method with more specific allocation formulas that 
would ensure that only contributions subject to the limitations and 
prohibitions of the Act are used to influence federal elections. 
However, the court also acknowledged that the Commission could 
``conclude that no method of allocation will effectuate the 
Congressional goal that all moneys spent by state political committees 
on those activities permitted in the 1979 amendments be `hard money' 
under the FECA. That is an issue for the Commission to resolve on 
remand.'' Id. (emphasis in original).
    In a subsequent order, the same court stated that ```[s]oft money' 
denotes contributions to federally regulated campaign committees in 
excess of the aggregate amounts permitted for federal elections by the 
FECA; these contributions, even if directed to national campaign 
entities, are permissible if the money is not to be used in connection 
with federal elections.'' Common Cause v. FEC, 692 F.Supp. 1397, 1398 
(D.D.C. 1988).
    The Commission initiated a rulemaking in response to the court's 
decision in which it made several efforts to obtain input from the 
regulated community. In addition to the two comment periods and public 
hearing held before the court's decision, the Commission sought 
comments on proposed rules through a new Notice of Proposed Rulemaking 
published on September 29, 1988. 53 FR 38012. The Commission also held 
another public hearing on the proposed rules on December 15, 1988, at 
which a cross section of the regulated community had an opportunity to 
testify. The Commission took the additional step of sending 
questionnaires to the chairs of all the Democratic and Republican state 
party committees, and also sought input from the chief fundraisers for 
each of the major political parties during the 1988 election year.
    The Commission issued final rules in 1990 and put them into effect 
on January 1, 1991. Methods of Allocation Between Federal and Non-
Federal Accounts; Payments; Reporting, 55 FR 26058 (June 26, 1990). 
These rules currently govern the allocation of expenses between federal 
and non-federal accounts. They seek to address the issue of soft money 
in two ways.
    First, the current rules replace the ``any reasonable basis'' 
allocation method with specific allocation methods to be used to pay 
the costs of activities that impact both federal and nonfederal 
elections. The method to be used depends on the type of committee 
incurring the expense and the type of activity for which expenses are 
to be allocated.
    National party committees, other than the Senate and House campaign 
committees, are required to allocate a minimum of 60% of their 
administrative expenses and costs of generic voter drives to their 
federal accounts each year (65% in presidential election years). 11 CFR 
106.5(b). In addition, national party committees must allocate the 
costs of each combined federal and non-federal fundraising program or 
event using the funds received method described in 11 CFR 106.5(f).
    Senate and House campaign committees are required to allocate their 
administrative and generic voter drive expenses using a funds expended 
formula, subject to a 65% minimum federal percentage, 11 CFR 106.5(c), 
and, like the national party committees, they must allocate the costs 
of each combined federal and non-federal fundraising program or event 
using the funds received method described in 11 CFR 106.5(f), with no 
minimum federal percentage required.
    State and local party committees must allocate (1) their 
administrative expenses and generic voter drive costs using the ballot 
composition method, described in 11 CFR 106.5(d); (2) the costs of 
communications exempt from the contribution and expenditure definitions 
under 11 CFR 100.7(b) (9), (15) or (17), and 100.8(b) (10), (16) or 
(18), according to the proportion of time or space devoted to federal 
and nonfederal candidates in the communication, 11 CFR 106.5(e); (3) 
expenses incurred in joint fundraising activities using the funds 
received method, 11 CFR 106.5(f); and (4) direct candidate support 
activity according to the time or space devoted to each candidate in 
the communication. 11 CFR 106.1. The new rules also set up procedures 
to be used by all three types of committees to pay for their mixed 
activities.
    Second, the rules impose additional reporting requirements in order 
to enhance the Commission's ability to monitor the allocation process. 
All three types of party committees are required to report their 
allocations of administrative expenses, voter drive costs, fundraising 
costs and costs of exempt activities, and also to itemize any transfer 
of funds from their non-federal to their federal or allocation 
accounts. In addition, all six national party committees are now 
required to disclose the financial activities of their nonfederal 
accounts. Specifically, the committees are required to report all 
nonfederal receipts and disbursements. The Commission believed this 
additional reporting would help to ensure that impermissible funds were 
not used for federal election activities.
    On May 20, 1997, the Commission received a petition for rulemaking 
from five Members of the United States House of Representatives urging 
the Commission ``to modify its rules to help end or at least 
significantly lessen the influence of soft money.'' On June 5, 1997, 
the Commission received a second petition for rulemaking relating to 
soft money, this one submitted by President Clinton. President 
Clinton's petition asks the Commission to ``ban soft money'' and 
``adopt new rules requiring that candidates for federal office and 
national parties be permitted to raise and spend only `hard dollars.'''
    In accordance with its usual procedures, the Commission published a 
Notice of Availability in the June 18, 1997 edition of the Federal 
Register announcing that it had received the petitions and inviting the 
public to submit comments on them. 62 FR 33040 (June 18, 1997). The 
comment period closed on July 18, 1997. The Commission received 188 
comments in response to the Notice of Availability.

Summary of Comments on the Petitions for Rulemaking

    Most of the comments on the Notice of Availability were directed at 
the question of whether the Commission should promulgate new rules on 
soft money, and if so, what those rules should be. However, a few 
commenters raised threshold issues regarding the petitions that should 
be addressed before examining the substantive issues raised. These 
threshold issues will be discussed in subsection 1, below. The 
remaining comments will be summarized in subsection 2.

1. Comments Raising Threshold Issues Regarding the Petitions

a. Sufficiency of the Petitions
    One comment raised a threshold question about the sufficiency of 
the petitions. This comment asserted that the petitions should be 
denied because they do not set forth the factual and legal grounds 
supporting the proposed change in the rules. See 11 CFR 200.2(b)(4). 
The comment said that the Commission should require petitioners to put 
on record ``specific, detailed and credible instances of abuse that in 
terms of seriousness and scope will justify'' the rules sought in the 
petition, and

[[Page 37725]]

should hold certain petitioners to a higher standard of evidence.
    This comment misconstrues the purpose of the petition for 
rulemaking procedures. These procedures provide the public with 
guidance on how to seek changes in the Commission's rules, and should 
be read in light of the Commission's long-standing practice of making 
its policymaking processes as open and accessible as possible. The 
rules do not place a heavy evidentiary burden on a petitioner to prove, 
on the face of a petition, that policy changes are necessary. 
Petitioners need only raise policy issues that are within the 
Commission's jurisdiction, and request that the Commission consider 
whether policy changes are warranted. If a petitioner does so, the 
Commission will publish a Notice of Availability and begin its 
consideration process. The Commission will use the comments received on 
the petition and its own experience in interpreting and enforcing the 
Act to determine whether to proceed with a rulemaking.
    Furthermore, implicit in the Commission's commitment to making its 
rulemaking process easily accessible to the public is a commitment to 
making that process available to all members of the public on an equal 
basis. Consequently, the Commission does not believe it would be 
appropriate to hold certain petitioners to higher evidentiary 
standards.
    The Commission concludes that the letters submitted by President 
Clinton and the five Members of Congress adequately explain the factual 
and legal grounds upon which they rely, and demonstrate that there are 
issues related to the use of soft money that are worthy of Commission 
consideration. Therefore, they qualify as petitions under 11 CFR 
200.2(b). The Commission also notes that even if it were to conclude 
that the letters do not qualify as petitions, it has the discretionary 
authority to treat them as the basis for a sua sponte rulemaking. 11 
CFR 200.2(d).
b. Statutory Authority
    Another threshold issue raised by the comments is whether the 
Commission has the authority to regulate soft money. Several of the 
comments that opposed the petitions take the position that soft money 
is outside the Commission's jurisdiction, and that imposing limits on 
soft money would exceed the Commission's statutory authority. They 
assert that, since the Act does not restrict the use of non-federal 
funds by the national party committees unless those funds are used for 
federal election activity, the Commission cannot impose restrictions on 
its own.
    In contrast, several of the comments that support the petitions 
argued that the Commission has the power to ban the use of soft money 
by party committees to the extent necessary to avoid having soft money 
influence federal elections. Another comment argued that, in the Common 
Cause case, discussed above, the court said that when the Commission 
fails to issue regulations, and the policy resulting from that failure 
flatly contradicts Congress's purpose, the Commission can be held to 
have acted contrary to law. Since the Act prohibits the use of soft 
money in federal elections, this comment asserts that a Commission-
imposed limitation serving the same purpose would be upheld.
    The Commission has reviewed this threshold question and reached the 
preliminary conclusion that it has the authority to issue new rules 
relating to soft money, at least insofar as it is used in connection 
with Federal elections. The FECA limits the amounts that individuals 
and political committees can contribute for the purpose of influencing 
federal elections, and also prohibits corporations, labor organizations 
and federal contractors from using their general treasury funds to make 
contributions in connection with federal elections. 2 U.S.C. 441a, 
441b, 441c. Section 438(a)(8) of the Act authorizes the Commission to 
``prescribe rules, regulations and forms to carry out the provisions of 
this Act. * * *'' The Commission believes this broad grant of 
rulemaking authority includes the authority to promulgate rules to 
limit the use of soft money in connection with federal elections.
    There is ample judicial authority supporting this conclusion. As 
the United States Court of Appeals for the District of Columbia Circuit 
has recognized, courts have shown a ``lack of hesitation in construing 
broad grants of rule-making power to permit promulgation of rules with 
the force of law as a means of agency regulation of otherwise private 
conduct.'' National Petroleum Refiners Association v. Federal Trade 
Commission, 482 F.2d 672, 680 (D.C. Cir. 1973) (``NPRA''). ``An agency 
with a general grant of rulemaking authority has jurisdiction to 
promulgate regulations reasonably related to the purposes of its 
enabling legislation.'' Pinney v. National Transportation Safety Board, 
993 F.2d 201, 202 (10th Cir. 1993). The Supreme Court has said that 
``[w]here the empowering provision of a statute states simply that the 
agency may `make * * * such rules and regulations as may be necessary 
to carry out the provisions of this Act,' we have held that the 
validity of a regulation promulgated thereunder will be sustained so 
long as it is `reasonably related to the purposes of the enabling 
legislation.' '' Mourning v. Family Publications Service, Inc., 411 
U.S. 356, 369 (1973) (quoting Thorpe v. Housing Authority of City of 
Durham, 393 U.S. 268, 280-81 (1969). The ``authority of the [Federal 
Power Commission] need not be found in explicit language. [A general 
rulemaking provision] demonstrates a realization by Congress that the 
Commission would be confronted with unforeseen problems of 
administration in regulating this huge industry and should have a basis 
for coping with such confrontation. While the action of the Commission 
must conform with the terms, policies and purposes of the Act, it may 
use means which are not in all respects spelled out in detail.'' Public 
Service Comm'n of State of New York v. Federal Power Commission, 327 
F.2d 893, 897 (D.C. Cir. 1964). Thus, the Commission believes that it 
has the authority to promulgate rules to ensure that contributions that 
would violate sections 441a, 441b or 441c are not used to influence 
federal elections.
    The Commission also believes that, given the complexity of the 
issues raised, this is an area in which providing additional guidance 
to the regulated community is particularly important. ``More than 
merely expediting the agency's job, use of substantive rule-making is 
increasingly felt to yield significant benefits to those the agency 
regulates. Increasingly, courts are recognizing that use of rule-making 
to make innovations in agency policy may actually be fairer to 
regulated parties than total reliance on case-by-case adjudication.'' 
NPRA, 482 F.2d at 682.
    However, the Commission does not regard this as a closed issue. 
Therefore, as part of its effort to explore the question of whether new 
rules are needed, commenters are invited to further address the issue 
of whether the Commission has the authority to promulgate rules in this 
area. Commenters are also encouraged to express their views on whether 
the proposed rules set out in this notice are within the scope of that 
authority.

2. General Comments on the Petitions for Rulemaking

a. Comments Supporting the Petitions
    Approximately \3/4\ of the 188 comments received in response to the 
Notice of Availability expressed support for the petitions for 
rulemaking. Among

[[Page 37726]]

those supporting the petition were twelve United States Senators, three 
United States Congressmen, the Secretaries of State of five states, and 
eleven state Attorneys General.
    These supporting comments suggested a number of different 
strategies for addressing the issues raised in the petition. For 
example, more than a hundred comments urged the Commission to ban soft 
money completely, while other comments urged the Commission to limit 
certain uses of soft money. A dozen comments urged the Commission to 
ban soft money contributions to the national party committees, or to 
prohibit the party committees from receiving soft money contributions. 
Three other commenters urged the Commission to prohibit the 
solicitation of soft money contributions by national party committees, 
federal officeholders, and federal candidates. Another comment 
suggested that the Commission prohibit the party committees from 
spending soft money or transferring it to other committees. Other 
comments were directed at the use of soft money by state and local 
party committees. These comments suggested that the Commission prohibit 
state and local party committees from spending soft money on any 
activity or event that might influence a federal election, and limit 
their use of soft money to general overhead expenses.
    Several comments suggested that the Commission impose partial 
limits on soft money. One comment suggested that the use of soft money 
be reduced or limited so that the amount will not influence a party or 
candidate. Two comments suggested that specific dollar limits be 
imposed, one on the amount that a party committee could receive, and 
the other on the amount that a contributor could give.
    The comments contained a number of arguments as to why additional 
limits on the use of soft money are needed. Four comments asserted that 
soft money destroys the integrity of the political process, and said 
that a ban on soft money would help to restore public confidence in the 
integrity of the process. Eight comments said that the widespread use 
of soft money alienates voters, and creates the perception of 
impropriety, thereby discouraging involvement in the process. Five 
commenters argued that soft money increases the demand for campaign 
contributions, and distracts government officials from the 
responsibilities of governance.
    Many of the comments also argued that soft money is a loophole 
being used to circumvent the prohibitions and limitations of the Act. 
One comment asserted that the current system essentially allows money 
laundering to occur by allowing impermissible soft dollars to be 
exchanged for hard dollars that can be used without limitation. Other 
comments said that soft money results in actual quid pro quo 
corruption, thereby frustrating the purposes of 2 U.S.C. 441a and 441b. 
Another comment expressed concern that soft money is having a negative 
impact on the public financing system for presidential campaigns.
    Several comments were directed at the system of allocating federal 
and non-federal expenses, as set out in the current rules. Most of 
these comments urged the Commission to abandon the system and prohibit 
any combined use of federal and nonfederal funds. Several comments 
asserted that the soft money problem has grown significantly worse 
since the rules were promulgated, indicating that the rules have failed 
to ensure that only hard dollars are used to influence federal 
elections. One of these comments said that reporting under the 
allocation rules is inadequate, and that the Commission does not have 
the resources necessary to enforce the rules.
b. Comments Opposing the Petitions
    As indicated above, about one quarter of the comments spoke out 
against limits on soft money, for a variety of reasons. Several 
comments argued that the proposals set out in the petitions would 
violate the First Amendment. Others expressed concern that the 
proposals would effectively federalize all national party activities, 
and could weaken parties, which play an important role in our political 
system. Two other comments urged the Commission to take action on soft 
money only when it has addressed the issue of compulsory union dues. 
Three comments urged the Commission to reject the petitions and devote 
its resources to enforcing existing laws.

Analysis

    Prior to 1991, it was difficult to determine how much soft money 
the party committees were raising and spending, because there was no 
systematic disclosure of soft money activity, and no uniform guideline 
for allocating expenses. Although some states required party committees 
to disclose their non-federal account activity, others did not, and 
even in those states where disclosure was required, not all activity 
appeared on the public record. Consequently, most of the available 
information was anecdotal.
    The Commission is generally reluctant to make significant changes 
in existing policy in the absence of clear evidence that such changes 
are needed to effectuate the Act's mandate. Consequently, the 
Commission concluded that it would be inappropriate to impose the 
significant restraints on the use of soft money sought in the 1984 
petition for rulemaking. Instead, the Commission established specific 
allocation methods and required additional disclosure by the party 
committees. Based upon the information available at the time, the 
Commission believed this approach struck the appropriate balance 
between the need to effectuate the prohibitions and limitations of the 
Act, and also recognize the interests of the states in regulating non-
federal activity.
    However, recent developments--brought to light in many instances 
because of the additional disclosure requirements imposed in 1991--have 
reopened the question of whether allowing party committees to pay a 
portion of their mixed activities costs with soft dollars is consistent 
with the mandate of the FECA. Concerns have been raised that the 
allocation rules have allowed party committees to use large 
contributions from prohibited sources and in excess of the hard dollar 
limits in ways that, in fact, influence federal elections, even though 
they are ostensibly being used for nonfederal election activity.
    One such development is the dramatic increase in the amount of soft 
money raised and spent by the national party committees since 
promulgation of the allocation rules. According to summaries of the 
reports filed with the Commission, which do not include transfers among 
the national party committees, the national committees raised $262.1 
million during the 1995-96 election cycle, or an average of 
approximately $131.05 million per year, up from $86 million in the 1992 
election cycle or an average of $43 million per year. Similarly, soft 
money disbursements by the committees totaled $271.5 million in the 
1996 election cycle, a significant increase from the $79.1 million 
spent in the 1992 election cycle. The reports also show that soft money 
receipts by the national party committees continued to increase in 
1997. Soft money fundraising by the Democratic committees increased 25% 
during the first six months of the year, when compared to the same 
period during the previous election cycle. Soft money fundraising by 
the Republican national party committees increased 17% during this 
period.

[[Page 37727]]

    In addition to the increase in the total dollar amount of soft 
money contributions, there has also been an increase in the number of 
contributions made to the party committees' nonfederal accounts that 
would have been prohibited under FECA if they had been made to a 
federal account. As explained above, the Act limits individual 
contributions to the national party committees' federal accounts to 
$20,000 per calendar year, and also limits total contributions by an 
individual to $25,000 per year. 2 U.S.C. 441a(a)(1)(B) and 441a(a)(3). 
In addition, the Act prohibits contributions by corporations, labor 
organizations and federal contractors. 2 U.S.C. 441b, 441c. Entities 
that are prohibited from making contributions to a federal account and 
individuals wishing to make contributions in excess of the dollar 
limits have generally been permitted to direct those contributions to a 
nonfederal account, even though contributions to nonfederal accounts 
are often used for activities that have an impact on federal elections.
    The reports indicate that contributors are doing so with increasing 
frequency. The national party committees' nonfederal accounts received 
at least 381 individual contributions of more than $20,000 during the 
1992 presidential election cycle, and also received about 11,000 
contributions from sources that are prohibited from contributing to 
federal accounts. In the 1996 election cycle, both numbers more than 
doubled. The committees' nonfederal accounts received nearly 1000 
individual contributions in excess of $20,000, and also received 
approximately 27,000 contributions from FECA-prohibited sources. Thus, 
it appears that an increasing number of contributors see the party 
committees' nonfederal accounts as an avenue through which they can 
make contributions that would be prohibited under sections 441b or 441c 
or would exceed the $20,000 individual contribution limit. Some 
individual contributors may also be using these accounts to make 
contributions that would otherwise exceed their $25,000 overall limit.
    Ironically, there are also indications that the allocation rules 
themselves may have increased the amount of soft money raised by the 
national party committees, although it may not be possible to establish 
cause and effect. Although the national party committees were not 
required to report soft money receipts in 1984, one national party 
committee official submitted testimony stating that his party raised 
$3.7 million in soft money during the 1984 Presidential election year. 
Federal Election Commission Hearing on the Use of Undisclosed Funds or 
``Soft Money'' to Influence Federal Elections, January 29, 1986 
(written testimony of Frank J. Fahrenkopf, Chairman, Republican 
National Committee, at 4). That same party committee raised $23.5 
million in 1992, the first Presidential election year in which the 
allocation rules applied. This party committee subsequently raised 
$66.2 million in the 1996 Presidential election year, approximately 18 
times the amount reportedly raised in 1984. In addition, two national 
party committees that did not have a non-federal money account before 
promulgation of the allocation rules established such an account and 
began raising soft money after the rules went into effect.
    In some situations, the national party committees have interpreted 
the allocation rules to allow transfers of funds to state and local 
party committees in order to take advantage of more favorable 
allocation ratios. Although the allocation rules prohibit state party 
committees from using transferred funds for certain volunteer and GOTV 
activities, see 11 CFR 100.7(b)(15)(vii), and (b)(17)(vii), 
100.8(b)(16)(vii) and (b)(18)(vii), they do not prohibit the use of 
transferred funds for voter drive or other activities, nor do they 
explicitly require state parties to apply the national party 
committee's allocation ratio when they use transferred funds for those 
purposes.
    Generally speaking, it is easier to raise soft money than hard 
money. As a result, the national party committees look for ways to make 
their hard dollars go farther. Transferring funds helps them achieve 
this goal in a number of ways. For example, a national party may try to 
stretch its hard dollars by transferring them to a state or local party 
committee and instructing the committee to use the funds for a 
particular mixed activity. Generally, the rules permit a state or local 
party committee to pay a higher percentage of its mixed activity costs 
with soft dollars than a national party is able to when conducting the 
same activity. In many cases, the difference is significant. To 
illustrate, a national party committee conducting a $100,000 voter 
drive under the current rules would be required to pay for the drive 
with at least $60,000 in hard money. In contrast, a state party 
committee conducting the same drive might only be required to use 
$35,000 in hard money, and could pay the remaining costs with soft 
money. This creates an incentive for the national committee to transfer 
hard dollars to the state committee and have the recipient committee 
conduct the activity.
    There have also been allegations that both national and state party 
committees have transferred soft dollars to nonprofit organizations for 
them to use in conducting activities that influence federal elections, 
such as voter registration drives or get-out-the-vote campaigns. 
Ordinarily, a party committee would be required to allocate the costs 
of such an activity, i.e., pay part of the cost of the activity with 
hard dollars. However, many nonprofit organizations are not political 
committees under the FECA, and thus are generally not subject to the 
allocation rules. Currently, in many situations, nonprofit 
organizations that are not political committees under the FECA can pay 
the costs of voter registration or get-out-the-vote activities entirely 
with soft dollars. Thus, as with the hard dollar transfers described 
above, the party committees may believe that transferring soft money to 
these types of nonprofit organizations will enable them to conserve 
hard dollars. However, in applying the allocation rules, one court has 
said that when an organization conducts an allocable activity with 
funds received from a party committee, the recipient organization can 
be required to use the allocation rules applicable to the party 
committee from which the funds were obtained. FEC v. California 
Democratic Party, No. S-97-891, (E.D.Cal. Jun. 11, 1998).
    The disclosure reports show that, in election years, the national 
party committees transfer more soft money to state and local party 
committees in states that appear to have closely contested races for 
federal office. For example, reports indicate that the national party 
committees transferred a combined $14.3 million in soft money to state 
and local party committees in California during the 1995-96 election 
cycle. California was an important battleground state in the 
Presidential election. Polls indicated that both major party candidates 
had a chance to win the state's 54 electoral votes.
    In contrast, polls indicated that President Clinton had a 
substantial lead in New York State. One national party committee did 
not transfer any soft money to state and local party committees in New 
York during the 1995-96 election cycle, and the other national party 
committee transferred only $325,332, even though New York represents 33 
electoral votes. While this is only one example and there are other 
possible explanations for this disparity, one likely explanation for it 
is that the national party committees were

[[Page 37728]]

directing their soft money to those states in which it would have the 
most impact on federal elections.
    In addition, there have been allegations in the press and other 
fora that suggest that federal candidates and officeholders may be more 
involved in the process of raising soft money for the parties than they 
have been in the past. Federal officeholders, in particular, appear to 
be directly involved in soliciting contributions for the party 
committees' soft money accounts. In 1990, the Commission recognized 
that some solicitations for soft money contributions may lead 
contributors to believe that funds contributed will be used to benefit 
federal candidates, when, in fact, soft money can only be used for non-
federal election activity. In order to address this concern, the 
Commission created a presumption that party committee solicitations 
that refer to a federal candidate or election are for the purpose of 
influencing a federal election, and thus any contributions received in 
response to those solicitations are subject to the prohibitions and 
limitations of the Act. 11 CFR 102.5(a)(3). 55 FR at 26059 (June 26, 
1990). The Commission now believes it may be appropriate to seek 
comments as to whether solicitations by a federal candidate or federal 
officeholder should be covered by Sec. 102.5(a)(3), and thus whether 
the resulting contributions should be subject to the Act's prohibitions 
and limitations.
    Of course, the discussion of the above allegations should not be 
read as a determination by the Commission that these allegations 
involve violations of the FECA. Determinations by the Commission of 
violations of FECA by specific persons in specific factual contexts can 
only be made in an enforcement proceeding.
    However, the record described above suggests that the use of soft 
money has expanded far beyond what the Commission anticipated when it 
promulgated the allocation rules. This appears to be particularly true 
for the national party committees. They are directly tied to federal 
officeholders in Congress and the White House. They also play a major 
role in raising funds to elect candidates for federal office, and in 
directing those funds to states in which key elections are being held. 
Thus, it is reasonable to conclude that at least one dominant focus of 
the national party committees is in electing federal candidates. This 
is in contrast to state and local party committees, who focus more of 
their activities on raising funds for and assisting in the election of 
state and local candidates.
    On the other hand, the Commission is also aware that only a small 
percentage of the 500,000 elected positions in this country are 
federal, and that national party committees may have an interest in the 
outcome of both federal and nonfederal elections. In some cases, the 
national party committees promote ideas, issues and agendas of 
importance to their respective parties, activities which, they assert, 
do not fall within the FECA. Thus, it is reasonable to conclude that 
another dominant focus of the national party committees is advocating 
issues and electing state and local candidates, although the level of 
direct involvement in non-federal elections varies among the national 
party committees. In recognition of this interest, national party 
committees have, to date, been permitted to set up separate nonfederal 
accounts to raise and spend money as allowed under applicable state and 
local law.
    Putting aside the question of how much national party committee 
activity is not federal-election related, it appears that by allowing 
national party committees to pay a portion of their mixed activities 
costs with soft dollars, the allocation rules appear to be allowing the 
national party committees to use large soft money contributions in ways 
that unavoidably influence federal elections, even though they are 
ostensibly raised for nonfederal election activity. This is 
inconsistent with the policy goals of the FECA, which seeks to limit 
corruption and the appearance of corruption that is created when large 
individual contributions and corporate, labor organization and federal 
contractor funds are used to influence federal elections. The number 
and percentage of comments expressing the view that soft money has a 
corrupting influence on the federal election process is a strong 
indication that soft money is ``eroding * * * public confidence in the 
electoral process through the appearance of corruption.'' FEC v. 
National Right to Work Committee, 459 U.S. 197, 209 (1982) (citing 
Buckley v. Valeo, 424 U.S. 1, 26-27 (1976)).
    Consequently, the Commission believes that it may be necessary to 
promulgate new rules to ensure that soft money is not used to influence 
federal elections, and give full force and effect to the prohibitions 
and limitations of the Act. The Commission has drafted proposed rules 
that seek to achieve this goal. These rules are set out below, along 
with several alternative proposals.
    The Commission is also interested in receiving comments on any 
other issues relating to soft money. In particular, as discussed above, 
comments are invited on the scope of the Commission's authority to 
promulgate rules in this area. Comments are also invited on whether the 
allegations discussed above are accurate, relevant to this inquiry, and 
adequate to justify changes in Commission policy.
    The Commission would like to re-emphasize that the rules and 
alternatives set out below are preliminary proposals only. They do not 
represent a final decision, and may be modified by the Commission or 
rejected and not adopted at all. Also note that these proposals focus 
on soft money activity conducted by party committees, and would not 
directly impact issue advocacy conducted by other entities, which, 
unless it expressly advocates the election or defeat of a clearly 
identified candidate, or in certain cases is coordinated with a 
candidate or party, is outside the Commission's jurisdiction. 
Coordination is currently being addressed in another rulemaking. See 62 
FR 24367 (May 5, 1997).

Rulemaking Proposals

    In an effort to generate a full range of views, the Commission is 
seeking comment on two options for addressing the issues raised above, 
and is also seeking comment on three variations on the second of these 
two options.
    The first option would be to make no changes to the current rules. 
Under the first option, the national parties would continue to be 
prohibited from receiving and using soft money in connection with 
federal elections. Soft money raised for non-federal election related 
purposes would be permitted. Non-federal accounts would be permitted 
for these non-federal election purposes along with the building fund 
accounts specifically authorized by the FECA.
    The second option would be to make revisions to the current rules. 
The Commission has drafted proposed revisions to the current rules that 
would address these issues. The proposed revisions are described in 
detail in the next two sections. Draft rules implementing these 
proposals are set out in the proposed rule section of this notice.
    The proposed revisions consist of a core proposal, and three 
variations on the core proposal. The core proposal would prohibit the 
receipt and use of soft money by the national party committees, and 
would eliminate all national party committee nonfederal accounts other 
than the building fund accounts specifically authorized by the FECA. 
This proposal also clarifies portions of section 102.5 relating to 
solicitations by federal candidates and officeholders. However, the 
core proposal would not change the

[[Page 37729]]

allocation rules for state and local party committees.
    The first variation to the core proposal would modify it to make a 
narrow exception to the prohibition on the receipt of soft money by 
national party committees. This exception would allow national party 
committees to raise soft money for the limited purpose of making direct 
or earmarked contributions to state and local candidates. The section 
of the proposed rules titled ``variation one'' sets out those rule 
provisions that would be different from the core proposal if this 
variation were adopted. All the other provisions of the core proposal 
would remain the same.
    The second variation on the core proposal would modify the core 
proposal to ensure that hard money transferred from a national to a 
state or local party committee is spent using the rules applicable to 
the national party committees, rather than the state or local party 
committee's more favorable allocation ratios. Variation two would 
require the national party committee to earmark transfers of funds for 
use in a particular activity, and would require the state or local 
party committee to finance the identified activity entirely with hard 
dollars. Variation two could be implemented if either one of the two 
options were adopted as is, or if the core proposal of the second 
option were adopted with variation one. As with variation one, 
variation two of the proposed rules sets out those rule provisions that 
would be different from the core proposal if variation two were 
adopted.
    Finally, the third variation on the second option's core proposal 
would extend portions of the core proposal's treatment of national 
party committees to state and local party committees. Under variation 
three, state and local party committees would be required to finance 
their mixed activities entirely with hard dollars. Like variation two, 
variation three could be implemented in conjunction with the core 
proposal, or in conjunction with both the core proposal and variation 
one. Those provisions that would differ from the core proposal of the 
second option are set out in variation three of the proposed rules, 
below.
    The Commission invites commenters to submit their views on the 
first and second options, including the core proposal and all three 
variations of the second option.

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

    The objective of the proposed rules is to ensure that soft money is 
not used to influence federal elections. In order to achieve this 
result, the core proposal virtually eliminates the soft money available 
to the national party committees to subsidize activities that influence 
federal elections.
    Both the first and second options recognize the limited scope of 
the FECA, and acknowledge that national party committees have other 
purposes besides the election of federal candidates. The major 
difference between the two options is whether most national party 
committees' federal and nonfederal activities are inextricably 
intertwined, or, as the current rules suggest, can be separated in a 
way that will ensure that soft money is not used to influence federal 
elections.
    One way to attempt to reduce the amount of soft money used to 
influence federal elections would be to adjust the allocation ratios so 
that national party committees are required to use a larger percentage 
of hard dollars to pay the costs of their mixed activities. However, 
adjusting the allocation ratios would have limited impact for several 
reasons.
    First, unless the ratios were increased to 100%, the national party 
committees could continue to pay for a portion of their mixed 
activities with soft dollars. Thus, increasing the ratios would merely 
reduce, rather than eliminate, the amount of soft money spent by the 
national party committees on mixed activities that influence federal 
elections.
    In addition, this approach would have no impact on soft money spent 
by the national party committees that is not spent directly on mixed 
activities. Of the $271.5 million in soft money disbursed by the 
national party committees during the 1996 election cycle, only $90.5 
million, or one third, was spent directly on mixed activities that were 
subject to the allocation ratios. An even greater amount, $114.8 
million, or 42% of the total spent during the cycle, was transferred to 
state and local party committees. An additional amount, which cannot be 
as readily determined from the committees' reports, was transferred to 
outside groups that are not subject to the allocation rules. Adjusting 
the allocation ratios would only affect those amounts spent on mixed 
activities. Amounts transferred between party committees would be 
unaffected.
    The preliminary evidence described above indicates that soft money 
transferred by the national party committees, except for money not used 
in connection with federal elections, is having a significant impact on 
federal elections. If the proposed rules do not take these transfers 
into account, they will not adequately effectuate the Congressional 
intent that only hard money be used to influence the outcome of federal 
elections. See Common Cause v. FEC, 692 F. Supp. 1391 (D.D.C. 1987), 
enforced, 692 F. Supp. 1397 (D.D.C. 1987).
    The first option, described in the introduction above, assumes that 
money raised by national party committees to elect candidates to state 
and local offices and to promote party positions on issues of local, 
regional, and national importance can be spent in a way that will not 
influence federal elections, and thus is beyond the Commission's 
jurisdiction. The Commission invites comments on this option. In 
particular, the Commission encourages commenters to help clarify the 
various purposes of national party committees by discussing those 
national party committee activities that promote party positions, 
agendas and ideas on issues of local, regional, and national 
importance.
    In addition to seeking comments on this approach, the Commission is 
also seeking comments on whether Schedule I should be revised so that 
transfers between party committees can be more accurately tracked as 
well as money used to elect candidates to state and local offices and 
to promote party positions on issues of local, regional, and national 
importance. This information would greatly enhance the available 
information on how soft money is spent by national party committees.
    The second option is based on the conclusion that the only way to 
limit the amount of soft money spent by the party committees to 
influence federal elections would be to reduce the amount of soft money 
raised by the party committees, and in particular, by the national 
party committees. This option concludes that the dominant focus of the 
national party committees is on electing federal candidates, and 
virtually all national party committee activities influence federal 
elections. Thus, it would be more consistent with the purposes of the 
FECA and the statute's jurisdictional reach to require national party 
committees to finance their mixed activities entirely with hard 
dollars. The most effective way of carrying out the Act's requirements 
is to prohibit the national party committees

[[Page 37730]]

from raising soft money for most purposes.
    The core proposal of the second option would achieve this goal by 
revising the allocation rules for national party committees. 
Specifically, the core proposal would revise section 102.5 to prohibit 
all three types of national party committees from operating non-federal 
accounts and accepting soft money. The only exception would be that 
committees could continue to operate the building fund accounts, since 
these accounts are specifically permitted by the FECA. See 2 U.S.C. 
431(8)(B)(viii), 11 CFR 100.7(b)(12) and 11 CFR 100.8(b)(13).
    The core proposal of the second option would also make related 
changes to Part 106. Proposed sections 106.1(a) and 106.5(b) would 
require the national party committees to defray expenses, other than 
building fund expenses, entirely with hard dollars. This would include 
the costs of expenditures that are on behalf of both federal and 
nonfederal candidates, section 106.1(a), and the costs of combined 
federal and non-federal fundraising programs currently allocated using 
the funds received method in section 106.5(f). It would also include 
costs incurred in fundraising for the committees' building funds, in 
order to ensure that fundraising for building funds does not become an 
avenue for spending soft money to influence federal elections, such as 
by soliciting building fund contributions with communications that 
expressly advocate the election or defeat of federal candidates.
    Sections 106.1(a) and 106.5(b) of the core proposal would apply to 
all of the national party committees, including the Senate and House 
campaign committees. The core proposal would also make minor structural 
modifications to section 106.1. Paragraph (a) would be broken into two 
parts, and several reporting requirements in separate paragraphs of the 
current rule would be relocated to paragraph (b). In addition, current 
section 106.5(c), would be removed and replaced with an entirely new 
provision, to be discussed below. The Commission invites comments on 
these proposals.
    Variation one on the second option's core proposal is largely the 
same as the core proposal. However, variation one would create a narrow 
exception to the prohibition on the receipt of soft money by national 
party committees. Under section 102.5(c) of variation one, national 
party committees other than the Senate and House campaign committees 
would be allowed to maintain a second non-federal account for the 
limited purpose of receiving donations that are either earmarked for 
and subsequently donated to clearly identified non-federal candidates 
or are raised and spent solely in the form of donations to non-federal 
candidates, either directly or through an earmarked transfer to a state 
or local party committee. This would allow national party committees to 
continue raising soft dollars for the very limited purpose of making or 
passing on contributions directly to nonfederal candidates. However, 
the national party committees would still be required to finance their 
mixed activities entirely with hard dollars. Comments are invited on 
this proposal.
    If the second option were to be adopted, either with or without 
variation one of the core proposal, a modest reorganization of section 
106.5 of the regulations would be necessary. This reorganization is 
shown in the core proposal section of the proposed rules. First, the 
section heading would be revised to reflect the substantive changes in 
the section. Second, since the national party committees would no 
longer be allocating expenses, the list of costs to be allocated in 
current section 106.5(a)(2) would be relocated to section 106.5(c)(2). 
Revised section 106.5(b) would apply to all national party committees, 
including the Senate and House campaign committees, and new section 
106.5(c) would state the general rule that state and local party 
committees are required to allocate the expenses in paragraph (c)(2) in 
accordance with paragraphs (d) through (f). Comments are invited on the 
reorganization of section 106.5.
    The version of section 106.5 in variation three of the second 
option also reflects this reorganization, although variation three 
would also make other changes to section 106.5 that will be discussed 
further below.

2. State and Local Party Committees

    The Commission is seeking comment on whether the rules governing 
state and local party committees should be changed to address some of 
the issues raised above.
    As with the national party committees, the current allocation rules 
appear to be allowing state and local party committees to use soft 
money to subsidize activities that, at least in part, influence federal 
elections. In addition, as discussed above, the differences between the 
allocation methods applicable to national party committees and those 
applicable to state and local party committees create an incentive for 
a national party committee that wants to engage in a mixed activity to 
transfer hard dollars to a state or local party committee and have the 
recipient committee conduct the activity using its more favorable 
allocation ratios. This problem exists under the current rules. 
However, it would be made more acute if the second option were adopted, 
because the core proposal for national party committees would eliminate 
the national party committees' non-federal accounts and require 
national party committees to use 100% hard money for all activities.
    Implementing the core proposal of the second option could also 
encourage soft money donors to redirect their contributions to the 
state and local party committees, which would then use the funds for 
mixed activities that influence federal elections. The national party 
committees might assist their state and local affiliates by employing a 
type of directed donor strategy, in which the national committee 
solicits soft money contributions and instructs contributors to send 
their contributions directly to the state or local committee. Thus, 
instead of reducing the amount of soft money activity, the core 
proposal for national party committees may merely redirect that 
activity to the state and local level, where reporting may be less 
complete than at the federal level.
    Variations two and three on the core proposal would address these 
issues. If the core proposal of the second option were implemented with 
variation two, the rules would eliminate the national party committees' 
nonfederal accounts and would also seek to limit the incentive for 
national party committees to transfer funds to state and local party 
committees in order to take advantage of the recipient committee's more 
favorable allocation ratios. Specifically, variation two would require 
a national party committee that transfers hard dollars to a state or 
local party committee to include a written communication identifying 
the state or local party committee activity for which the transferred 
funds are to be used. The national party committee would also be 
required to include a copy of the written communication in its next 
regularly scheduled disclosure report to the Commission. See section 
106.5(b) of variation two.
    The recipient state or local party committee would then be required 
to use the transferred funds for the identified activity, and pay any 
additional costs incurred in the identified activity entirely with hard 
dollars. This would ensure that funds that originate with a national 
party committee are used in accordance with the rules that apply to 
national party committees. Finally, like the national

[[Page 37731]]

party committee, the state or local party committee would be required 
to submit a copy of the written communication with its next regularly 
scheduled disclosure report. Section 106.5(c)(1)(ii)(A) of variation 
two. Comments are encouraged on these proposals.
    Paragraph (c)(1)(ii)(B) of variation two contains an exception for 
transfers to state and local party committees in states that hold 
federal and non-federal elections in different years. The transfer 
requirements described above would not apply to transfers made to these 
entities if the funds transferred were used exclusively for generic 
voter drive activity conducted in a calendar year in which no 
candidates for federal office appear on any primary, general, or 
special election ballot.
    Variation two also contains a conforming amendment to section 
106.1. Revised section 106.1(a)(1) would require state and local 
committees to follow the transfer rules in section 106.5 if they use 
transferred funds to pay for expenditures on behalf of both federal and 
nonfederal candidates. The Commission also notes that it may be 
necessary to make other conforming amendments to the reporting 
requirements in Part 104 of the regulations, should variation two be 
implemented.
    Variation three of the core proposal would extend portions of the 
core proposal's treatment of national party committees to state and 
local party committees in order to ensure that state and local 
committees do not use soft money donations to influence federal 
elections. The core proposal would require national party committees to 
pay their expenses entirely with hard dollars. Similarly, variation 
three would require state and local party committees to pay the costs 
of their mixed activities entirely with hard dollars, regardless of 
whether the funds used were transferred from a national party 
committee. Under this approach, state and local party committees would 
be required to pay all of the costs they incur in the activities 
described in current section 106.5(a)(2) with funds that are 
permissible under the FECA. This is in contrast to the current rules, 
under which they allocate the costs of all of these activities, and is 
also in contrast to variation two, under which they would allocate the 
costs of any mixed activities not partially financed with funds 
transferred from a national party committee. Variation three would also 
amend section 106.1 to require state and local committees to use hard 
dollars for expenditures made on behalf of both federal and nonfederal 
candidates.
    Variation three would contain two exceptions to the general 
requirement that state and local party committees pay the costs of 
their mixed activities entirely with hard dollars. First, national and 
state party committees could continue to defray their building fund 
expenses with funds in a building fund account established in 
accordance with section 102.5(c)(2). In addition, state and local party 
committees in states that do not hold federal and non-federal elections 
in the same year could continue to use funds that are not subject to 
the prohibitions and limitations of the Act to defray the costs of 
generic voter drive activity conducted in a calendar year in which no 
candidates for federal office appear on any primary, general, or 
special election ballot.
    Comments are invited on variation three of the core proposal. The 
Commission recognizes that this would be a significant change for 
committees that operate on the state and local level, and would raise 
issues regarding the scope of the FECA. The concept underlying this 
approach is that all mixed activity, by its very nature, affects 
federal elections, and must be paid for with hard dollars. Commenters 
are encouraged to address the question of whether the Commission has 
the statutory authority to implement such a rule.
    The Commission would like to emphasize that, under variations two 
and three, state and local party committees would be able to continue 
raising soft money to pay for activities that exclusively influence 
nonfederal elections.
    Finally, the core proposal and all three variations of the core 
proposal would amend current section 106.5(a)(2)(iv) to address the 
allegation that party committees have transferred funds to nonprofit 
organizations in order to avoid the allocation requirements. The 
revised provisions are set out in section 106.5(c)(2)(iv) of the core 
proposal, variation one and variation two, and in section 106.5(b) of 
variation three. Section 106.5(c)(2)(iv) would indicate that the costs 
of generic voter drives must be allocated if the drive is conducted 
directly by a state or local party committee or is financed by the 
party committee and conducted by another entity. Section 106.5(b) of 
variation three would indicate that the costs of generic voter drives 
must be defrayed entirely with hard dollars, whether the drive is 
conducted directly by a state or local party committee or is financed 
by the party committee and conducted by another entity. The Commission 
invites comments on these proposals.

3. Other Proposed Rules

a. Party committee solicitations by federal candidates and 
officeholders
    The Commission is considering changes to section 102.5(a)(3) to 
make it clear that contributions solicited by a federal candidate or 
officeholder are subject to the prohibitions and limitations of the 
Act. As discussed above, when a federal candidate or officeholder 
solicits a contribution, the contributor is likely to assume that his 
or her contribution will be used to benefit a federal candidate. 
Proposed revisions to section 102.5(a)(3) set out in the core proposal 
would make it clear that contributions resulting from a solicitation 
made by a federal candidate or officeholder are subject to the 
prohibitions and limitations of the Act. However, in the case of a 
solicitation for a national party committee, this presumption could be 
rebutted if the donor, in writing, expressly designates the 
contribution for the committee's building fund account, as described in 
section 102.5(c)(2). In the case of a solicitation for a state party 
committee, this presumption could be rebutted if the donor, in writing, 
expressly designates the contribution for the committee's building fund 
account, or for its non-federal account, as described in section 
102.5(a)(1)(i). Donors to a local party committee could also designate 
their contributions for a nonfederal account. The core proposal also 
contains a conforming amendment to current section 102.5(a)(2), which 
would add to the list of contributions that may be deposited in a 
federal account those contributions that, due to the operation of 
proposed paragraph (a)(3), would be presumed to be for the purpose of 
influencing an election. The Commission invites comments on these 
proposals.
b. Allocating Joint Fundraising Expenses
    Section 102.17 sets out rules for committees, other than separate 
segregated funds, that engage in joint fundraising. Generally, this 
provision only applies to joint fundraising activities conducted on 
behalf of more than one federal candidate or on behalf of multiple non-
connected committees. Fundraising activities conducted by party 
committees for both their federal and nonfederal accounts are currently 
governed by 11 CFR 106.5(f), although under the core proposal of the 
second option, national party committee

[[Page 37732]]

fundraising would be governed by paragraph (b).
    The core proposal of the second option would insert a cross 
reference into section 102.17(c)(7) directing party committees that 
collect both federal and nonfederal funds through a joint fundraiser to 
allocate their expenses for the fundraiser in accordance with section 
106.5. Even though no comparable language appears in the current rule, 
this new language would merely make explicit the Commission's long-
standing interpretation of these two provisions. Thus, this proposal 
would not be a change in Commission policy. Comments are invited on 
this proposed revision.
c. Curing prohibited and excessive contributions
    Under section 103.3(b) of the Commission's rules, committee 
treasurers are responsible for examining all contributions received to 
ensure that they do not violate the prohibitions or limitations of the 
Act. Contributions that present genuine questions as to whether they 
are from a prohibited source may be deposited in the committee's 
account or returned to the contributor within ten days of receipt. 
However, if such a contribution is deposited, the treasurer has thirty 
days to determine the legality of the contribution. If unable to 
confirm that the contribution is legal, the treasurer must refund the 
contribution. 11 CFR 103.3(b)(1).
    Similarly, if a treasurer receives a contribution that does not 
initially appear to be from a prohibited source, and subsequently 
determines that the contribution is from a prohibited source, the 
treasurer is required to refund the contribution within 30 days. 11 CFR 
103.3(b)(2).
    Paragraph (b)(3) contains similar rules for contributions that 
exceed the limitations in 2 U.S.C. Sec. 441a, either on their face or 
when aggregated with other contributions from the same contributor. See 
also 11 CFR 110.1 or 110.2. The treasurer has the option of depositing 
the excessive contribution or returning it to the contributor. However, 
if the contribution is deposited, the treasurer has sixty days to seek 
redesignation of the contribution to another election, or reattribution 
to another contributor. If unable to obtain redesignation or 
reattribution, the treasurer is required to refund the contribution. 11 
CFR 103.3(b)(3).
    The Commission is considering the situation where a committee has 
received an excessive or prohibited contribution and wants to cure this 
problem by transferring the contribution to a nonfederal account. 
Proposed revisions to sections 103.3(b)(1), (2) and (3), as shown in 
the core proposal of the second option, would allow a treasurer to make 
such a transfer to a non-federal account established in accordance with 
11 CFR 102.5(a)(1)(i) or 102.5(c), but only after obtaining an express 
written redesignation of the contribution to the non-federal account. 
If a written redesignation cannot be obtained within thirty days of 
receiving the contribution, the treasurer would be required to return 
the contribution to the contributor. The Commission invites comments on 
these proposals.
    The treasurer's ability to transfer the prohibited or excessive 
contribution would also be subject to other applicable federal laws. 
For example, if a treasurer receives a contribution from a foreign 
national, he or she would not be able to cure the illegality of that 
contribution by transferring it to a non-federal account, because 
foreign nationals are prohibited from making contributions in 
connection with any election to any political office. Similarly, the 
transfer would be subject to applicable state laws. The proposed rule 
would not preempt, under 2 U.S.C. 453, any state-imposed contribution 
prohibitions or limitations. Comments on these limitations are welcome.

Conclusion

    The Commission welcomes comments on the issues raised by the 
proposed rules, and on the general question of whether changes to the 
regulations relating to soft money are warranted at this time. As 
mentioned above, the Commission is also interested in comments on the 
issue of whether it has the authority to promulgate rules in this area. 
Those interested are also welcome to raise other issues that should be 
addressed if the Commission decides to issue final rules.

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

    I certify that the attached proposed rules, if promulgated, would 
not have a significant economic impact on a substantial number of small 
entities. The basis of this certification is that the national, state 
and local party committees of the two major political parties are not 
small entities under 5 U.S.C. Sec. 601, and the number of other party 
committees to which the rule would apply is not substantial.

List of Subjects

11 CFR Part 102

    Political committees and parties.

11 CFR Part 103

    Campaign funds, Political committees and parties.

11 CFR Part 106

    Campaign funds, Political committees and parties.

First Option

    The Commission would make no changes to the existing regulations.

Second Option

    The Commission is proposing to make the following changes to the 
regulations:
    For the reasons set out in the preamble, it is proposed to amend 
subchapter A, chapter I of title 11 of the Code of Federal Regulations 
as follows:

Core Proposal

PART 102--REGISTRATION, ORGANIZATION, AND RECORDKEEPING BY 
POLITICAL COMMITTEES (2 U.S.C. 433)

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

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

    2. Section 102.5 would be amended by revising paragraph (a) and 
adding paragraph (c), to read as follows:


Sec. 102.5  Organizations financing political activity in connection 
with Federal and non-Federal elections, other than through transfers 
and joint fundraisers.

    (a) Organizations, other than national party committees, that are 
political committees under the Act. (1) Except as provided in paragraph 
(c) of this section, any organization that finances political activity 
in connection with both federal and non-federal elections and that 
qualifies as a political committee under 11 CFR 100.5 shall either:
    (i) Establish a separate federal account in a depository in 
accordance with 11 CFR part 103. Such account shall be treated as a 
separate federal political committee which shall comply with the 
requirements of the Act including the registration and reporting 
requirements of this part and 11 CFR part 104. Only funds subject to 
the prohibitions and limitations of the Act shall be deposited in such 
separate federal account. All disbursements, contributions, 
expenditures and transfers by the committee in connection with any 
federal election shall be made from its federal account. No transfers 
may be made to such federal account from any other account(s) 
maintained by such organization for the purpose of financing activity 
in connection with non-federal elections, except as

[[Page 37733]]

provided in 11 CFR 106.5(g) and 106.6(e). Administrative expenses shall 
be allocated pursuant to 11 CFR part 106 between such federal account 
and any other account maintained by such committee for the purpose of 
financing activity in connection with non-federal elections; or
    (ii) Establish one account, which shall receive only contributions 
subject to the prohibitions and limitations of the Act, regardless of 
whether such contributions are for use in connection with federal or 
non-federal elections. Such organization shall register as a political 
committee and comply with the requirements of the Act.
    (2) Only contributions described in paragraphs (a)(2)(i), (ii), 
(iii) or (iv) of this section may be deposited in a federal account 
established under paragraph (a)(1)(i) of this section or may be 
received by a political committee established under paragraph 
(a)(1)(ii) of this section:
    (i) Contributions designated for the federal account;
    (ii) Contributions that result from a solicitation which expressly 
states that the contribution will be used in connection with a federal 
election;
    (iii) Contributions from contributors who are informed that all 
contributions are subject to the prohibitions and limitations of the 
Act; or
    (iv) Contributions that, due to the operation of paragraph (a)(3) 
of this section, are presumed to be for the purpose of influencing an 
election.
    (3) Any party committee solicitation that is made by a federal 
candidate or federal officeholder or that makes reference to a federal 
candidate or a federal election shall be presumed to be for the purpose 
of influencing a federal election. The full amount of any funds 
received as a result of that solicitation shall be presumed to be a 
contribution under 11 CFR 100.7(a) that is subject to the prohibitions 
and limitations in 11 CFR parts 110 and 114. However, this paragraph 
does not apply to a donation that is made payable to or is accompanied 
by a writing, signed by the donor, which clearly indicates that the 
donation is for a non-federal account or building fund account 
described in paragraphs (a)(1)(i) or (c) of this section.
* * * * *
    (c) National party committees. (1) National party committees, 
including the Senate and House campaign committees of a national party, 
shall establish one or more federal account(s) in accordance with 11 
CFR part 103. The federal account(s) shall receive only contributions 
subject to the prohibitions and limitations of the Act. Except as 
provided in paragraph (c)(2) of this section, national party committees 
shall not establish any nonfederal account or receive any contribution 
or donation of anything of value that is not subject to the 
prohibitions and limitations of the Act.
    (2) National party committees, including the Senate and House 
campaign committees of a national party, may establish a building fund 
account to be used solely for the purpose of receiving gifts, 
subscriptions, loans, advances or deposits of money or anything of 
value described in 11 CFR 100.7(b)(12) or 11 CFR 100.8(b)(13).
    3. Section 102.17 would be amended by revising paragraph 
(c)(7)(ii), redesignating current paragraph (c)(7)(iii) as paragraph 
(c)(7)(iv), and adding new paragraph (c)(7)(iii), to read as follows:


Sec. 102.17  Joint fundraising by committees other than separate 
segregated funds.

* * * * *
    (c) * * *
    (7) * * *
    (ii) If participating committees are affiliated as defined in 11 
CFR 110.3 prior to the joint fundraising activity, expenses need not be 
allocated among those participants. Payment of such expenses by an 
unregistered committee or organization on behalf of an affiliated 
political committee may cause the unregistered organization to become a 
political committee.
    (iii) If the participants are party committees of the same 
political party, expenses need not be allocated among those 
participants, unless the committees collect both federal and non-
federal funds, in which case, expenses must be allocated in accordance 
with 11 CFR 106.5. Payment of such expenses by an unregistered 
committee or organization on behalf of an affiliated political 
committee may cause the unregistered organization to become a political 
committee.
* * * * *

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

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

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

    5. Section 103.3 would be amended by adding a new sentence at the 
end of paragraphs (b)(1), (b)(2) and (b)(3), to read as follows:


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

* * * * *
    (b) * * *
    (1) * * * Treasurers of committees that are not authorized by any 
candidate may also transfer the contribution to a non-federal account 
established in accordance with 11 CFR 102.5(a)(1) (i) or (c) and treat 
the funds as a contribution to the non-federal account, so long as the 
donor provides an express written redesignation of the contribution to 
the non-federal account within thirty days of the treasurer's receipt 
of the contribution.
    (2) * * * Treasurers of committees that are not authorized by any 
candidate may also transfer the contribution to a non-federal account 
established in accordance with 11 CFR 102.5(a)(1) (i) or (c) and treat 
the funds as a contribution to the non-federal account, so long as the 
donor provides an express written redesignation of the contribution to 
the non-federal account within thirty days of the treasurer's receipt 
of the contribution.
    (3) * * * Treasurers of committees that are not authorized by any 
candidate may also transfer the contribution to a non-federal account 
established in accordance with 11 CFR 102.5(a)(1)(i) or (c) and treat 
the funds as a contribution to the non-federal account, so long as the 
donor provides an express written redesignation of the contribution to 
the non-federal account within thirty days of the treasurer's receipt 
of the contribution.
* * * * *

PART 106--ALLOCATIONS OF CANDIDATE AND COMMITTEE ACTIVITIES

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

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

    7. Section 106.1 would be amended by revising paragraphs (a) and 
(b) to read as follows:


Sec. 106.1  Allocation of expenses between candidates.

    (a) General rule. (1) Expenditures, including in-kind 
contributions, independent expenditures, and coordinated expenditures 
made on behalf of more than one clearly identified federal candidate 
shall be attributed to each such candidate according to the benefit 
reasonably expected to be derived. For example, in the case of a 
publication or broadcast communication, the attribution shall be 
determined by the proportion of space or time devoted to each candidate 
as compared to the total space or time devoted to all candidates. In 
the case of a fundraising program or event where funds are collected by 
one committee

[[Page 37734]]

for more than one clearly identified candidate, the attribution shall 
be determined by the proportion of funds received by each candidate as 
compared to the total receipts by all candidates.
    (2) (i) Except as provided in paragraph (a)(2)(ii) of this section, 
the methods described in paragraph (a)(1) of this section shall also be 
used to allocate payments involving both expenditures on behalf of one 
or more clearly identified federal candidates and disbursements on 
behalf of one or more clearly identified non-federal candidates. When 
such a payment is made by a political committee with separate federal 
and non-federal accounts, the payment shall be made according to the 
procedures set forth in 11 CFR 106.5(g) or 106.6(e), as appropriate.
    (ii) When a national party committee, including a Senate or House 
campaign committee of a national party, makes a payment involving both 
expenditures on behalf of one or more clearly identified federal 
candidates and disbursements on behalf of one or more clearly 
identified non-federal candidates, the payment shall be made entirely 
from the committee's federal account(s), i.e., with funds subject to 
the prohibitions and limitations of the Act.
    (b) Reporting. An expenditure made on behalf of more than one 
clearly identified federal candidate shall be reported pursuant to 11 
CFR 104.10(a). A payment that includes amounts attributable to one or 
more non-federal candidates, and that is made by a political committee 
with separate federal and non-federal accounts, shall also be reported 
pursuant to 11 CFR 104.10(a). An authorized expenditure made by a 
candidate or political committee on behalf of another candidate shall 
be reported as a contribution in-kind to the candidate on whose behalf 
the expenditure was made, except that expenditures made by party 
committees pursuant to 11 CFR 110.7 need only be reported as an 
expenditure.
* * * * *
    8. In Sec. 106.5, the section heading and paragraphs (a), (b), (c), 
(d)(1) introductory text, (d)(2) heading, the first sentence of 
paragraph (e), and paragraph (f) heading, would be revised to read as 
follows:


Sec. 106.5  Party committee federal and non-federal activities; 
payments by national party committees; allocation by state and local 
party committees.

    (a) Scope and general rule. This section covers payment of expenses 
by national party committees, general rules regarding federal and non-
federal expenses incurred by state and local party committees, methods 
for allocation of administrative expenses, costs of generic voter 
drives, exempt activities, and fundraising costs by state and local 
party committees, and procedures for payment of allocable expenses. 
Requirements for reporting of allocated disbursements are set forth in 
11 CFR 104.10. Party committees that make disbursements in connection 
with federal and non-federal elections shall make those disbursements 
entirely from funds subject to the prohibitions and limitations of the 
Act, or from accounts established pursuant to 11 CFR 102.5. Political 
committees that have established separate federal and non-federal 
accounts under 11 CFR 102.5(a)(1)(i) shall allocate expenses between 
those accounts according to this section. Organizations that are not 
political committees but have established separate federal and non-
federal accounts under 11 CFR 102.5(b)(1)(i), or that make federal and 
non-federal disbursements from a single account under 11 CFR 
102.5(b)(1)(ii) shall also allocate their federal and non-federal 
expenses according to this section.
    (b) National party committees. (1) Except as provided in paragraph 
(b)(2) of this section, national party committees, including the Senate 
and House campaign committees of a national party, shall defray their 
expenses entirely from funds subject to the prohibitions and 
limitations of the Act.
    (2) National party committees may defray the expenses described in 
11 CFR 100.7(b)(12) and 11 CFR 100.8(b)(13) with funds from an account 
established in accordance with 11 CFR 102.5(c)(2).
    (c) State and local party committees. (1) General rule. State and 
local party committees shall allocate the costs described in paragraph 
(c)(2) of this section in accordance with paragraphs (d) through (f) of 
this section.
    (2) Costs to be allocated. Committees that make disbursements in 
connection with federal and non-federal elections shall allocate 
expenses according to this section for the following categories of 
activity:
    (i) Administrative expenses including rent, utilities, office 
supplies, and salaries, except for such expenses directly attributable 
to a clearly identified candidate;
    (ii) The direct costs of a fundraising program or event, including 
disbursements for solicitation of funds and for planning and 
administration of actual fundraising events, through which a committee 
collects both federal and non-federal funds, whether the committee 
conducts the program or event individually or in conjunction with 
another committee;
    (iii) State and local party activities exempt from the definitions 
of contribution and expenditure under 11 CFR 100.7(b) (9), (15) or 
(17), and 100.8(b) (10), (16) or (18) (exempt activities) including the 
production and distribution of slate cards and sample ballots, campaign 
materials distributed by volunteers, and voter registration and get-
out-the-vote drives on behalf of the party's presidential and vice-
presidential nominees, where such activities are conducted in 
conjunction with non-federal election activities; and
    (iv) Generic voter drives either conducted by the committee itself 
or paid for by the committee and conducted by another entity, including 
voter identification, voter registration, and get-out-the-vote drives, 
or any other activities that urge the general public to register, vote 
or support candidates of a particular party or associated with a 
particular issue, without mentioning a specific candidate.
    (d) State and local party committees; method for allocating 
administrative expenses and costs of generic voter drives--(1) General 
rule. Except as provided in paragraph (d)(2) of this section, all state 
and local party committees shall allocate their administrative expenses 
and costs of generic voter drives, as described in paragraph (c)(2) of 
this section, according to the ballot composition method, described in 
paragraphs (d)(1)(i) and (ii) of this section as follows:
* * * * *
    (2) State and local party committees in states that do not hold 
federal and non-federal elections in the same year. * * *
    (e) State and local party committees; method for allocating costs 
of exempt activities. Each state or local party committee shall 
allocate its expenses for activities exempt from the definitions of 
contribution and expenditure under 11 CFR 100.7(b) (9), (15) or (17), 
and 100.8(b) (10), (16) or (18), when conducted in conjunction with 
non-federal election activities, as described in paragraph (c)(2) of 
this section, according to the proportion of time or space devoted in a 
communication. * * *
    (f) State and local party committees; method for allocating direct 
costs of fundraising. * * *
* * * * *

[[Page 37735]]

Variation One

PART 102--REGISTRATION, ORGANIZATION AND RECORDKEEPING BY POLITICAL 
COMMITTEES (2 U.S.C. 433)

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

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

    2. Section 102.5 would be amended by revising paragraph (a) and 
adding paragraph (c), to read as follows:


Sec. 102.5  Organizations financing political activity in connection 
with Federal and non-Federal elections, other than through transfers 
and joint fundraisers.

    (a) [Same as core proposal of second option.]
* * * * *
    (c) National party committees. (1) National party committees, 
including the Senate and House campaign committees of a national party, 
shall establish one or more federal account(s) in accordance with 11 
CFR part 103. The federal account(s) shall receive only contributions 
subject to the prohibitions and limitations of the Act. Except as 
provided in paragraphs (c)(2) and (3) of this section, national party 
committees shall not establish any nonfederal account or receive any 
contribution or donation of anything of value that is not subject to 
the prohibitions and limitations of the Act.
    (2) National party committees, including the Senate and House 
campaign committees of a national party, may establish a building fund 
account to be used solely for the purpose of receiving gifts, 
subscriptions, loans, advances or deposits of money or anything of 
value described in 11 CFR 100.7(b)(12) or 11 CFR 100.8(b)(13).
    (3) National party committees, other than the Senate and House 
campaign committees of a national party, may establish one or more 
accounts for receiving donations that are:
    (i) Earmarked for and subsequently donated to a clearly identified 
non-federal candidate; or
    (ii) Raised and spent solely in the form of donations to non-
federal candidates, either directly or through an earmarked transfer to 
a state or local party committee.
    3. Proposed Sec. 102.17 would be the same as the core proposal of 
the second option.

PART 103--[AMENDED]

    4. Proposed Sec. 103.3 would be the same as the core proposal of 
the second option.

PART 106--[AMENDED]

    5. Proposed Secs. 106.1 and 106.5 would be the same as the core 
proposal of the second option.

Variation Two

PART 102--[AMENDED]

    1. Proposed Secs. 102.5 and 102.17 would be the same as the core 
proposal of the second option.

PART 103--[AMENDED]

    2. Proposed Sec. 103.3 would be the same as the core proposal of 
the second option.

PART 106--ALLOCATIONS OF CANDIDATE AND COMMITTEE ACTIVITIES

    3. The authority citation for part 106 would continue to read as 
follows:

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

    4. Section 106.1 would be amended by revising paragraphs (a) and 
(b) to read as follows:


Sec. 106.1  Allocation of expenses between candidates.

    (a) General rule. (1) [same as core proposal of second option.]
    (2) (i) Except as provided in paragraph (a)(2)(ii) of this section 
and in 11 CFR 106.5(c)(1)(ii)(A), the methods described in paragraph 
(a)(1) of this section shall also be used to allocate payments 
involving both expenditures on behalf of one or more clearly identified 
federal candidates and disbursements on behalf of one or more clearly 
identified non-federal candidates. When such a payment is made by a 
political committee with separate federal and non-federal accounts, the 
payment shall be made according to the procedures set forth in 11 CFR 
106.5(g) or 106.6(e), as appropriate.
    (ii) [Same as core proposal of second option.]
    (b) [Same as core proposal of second option.]
* * * * *
    5. In Sec. 106.5, the section heading and paragraphs (a), (b), (c), 
(d)(1) introductory text, (d)(2) heading, the first sentence of 
paragraph (e), and paragraph (f) heading, would be revised to read as 
follows:


Sec. 106.5  Party committee federal and non-federal activities; 
payments and transfers by national party committees; allocation by 
state and local party committees.

    (a) Scope and general rule. This section covers general rules 
regarding federal and non-federal expenses incurred by party 
committees, payment of expenses by national party committees and 
transfers of funds from national party committees to state and local 
party committees, methods for allocation of administrative expenses, 
costs of generic voter drives, exempt activities, and fundraising costs 
by state and local party committees, and procedures for payment of 
allocable expenses. Requirements for reporting of allocated 
disbursements are set forth in 11 CFR 104.10. Party committees that 
make disbursements in connection with federal and non-federal elections 
shall make those disbursements entirely from funds subject to the 
prohibitions and limitations of the Act, or from accounts established 
pursuant to 11 CFR 102.5. Political committees that have established 
separate federal and non-federal accounts under 11 CFR 102.5(a)(1)(i) 
shall allocate expenses between those accounts according to this 
section. Organizations that are not political committees but have 
established separate federal and non-federal accounts under 11 CFR 
102.5(b)(1)(i), or that make federal and non-federal disbursements from 
a single account under 11 CFR 102.5(b)(1)(ii) shall also allocate their 
federal and non-federal expenses according to this section.
    (b) National party committees--(1) Disbursements for mixed 
activities. (i) Except as provided in paragraph (b)(1)(ii) of this 
section, national party committees, including the Senate and House 
campaign committees of a national party, shall defray their expenses 
entirely from funds subject to the prohibitions and limitations of the 
Act.
    (ii) National party committees may defray the expenses described in 
11 CFR 100.7(b)(12) and 11 CFR 100.8(b)(13) with funds from an account 
established in accordance with 11 CFR 102.5(c)(2).
    (2) Transfers to state or local party committees. Whenever a 
national party committee, including the Senate and House campaign 
committees of a national party, transfers funds from any account of the 
national party committee to any account of a state or local party 
committee, the transfer shall be accompanied by a written communication 
specifically identifying the state or local party committee activity or 
expense for which the transferred funds are to be used. The national 
party committee shall attach a copy of the written communication to the 
schedule of itemized disbursements submitted with its next regularly 
scheduled report.
    (c) State and local party committees. (1)(i) General rule. Except 
as provided

[[Page 37736]]

in paragraph (c)(1)(ii) of this section, state and local party 
committees shall allocate the costs described in paragraph (c)(2) of 
this section in accordance with paragraphs (d) through (f) of this 
section.
    (ii) State and local party committees defraying expenses with funds 
transferred from a national party committee--(A) General rule. A state 
or local party committee that receives a transfer from a national party 
committee shall:
    (1) Use the funds transferred exclusively for the activity 
specifically identified by the national party committee in the written 
communication accompanying the transfer, except that no funds 
transferred from a non-federal account shall be used for any portion of 
the costs of any activity described in paragraph (c)(2) of this 
section;
    (2) Defray 100% of the remaining costs of the specifically 
identified activity with funds drawn from the state or local party 
committee's federal account, i.e., with funds that are subject to the 
prohibitions and limitations of the Act; and
    (3) Attach a copy of the written communication to the schedule of 
itemized receipts submitted with its next regularly scheduled report.
    (B) Exception for transfers to state and local party committees in 
states that do not hold federal and non-federal elections in the same 
year. The requirements of paragraph (c)(1)(ii)(A) of this section shall 
apply to transfers made to state and local party committees in states 
that do not hold federal and non-federal elections in the same year, 
unless the funds transferred are used exclusively for generic voter 
drive activity conducted in a calendar year in which no candidates for 
federal office appear on any primary, general, or special election 
ballot.
    (2) [Same as core proposal of second option.]
    (d) [Same as core proposal of second option.]
    (e) [Same as core proposal of second option.]
    (f) [Same as core proposal of second option.]
* * * * *

Variation Three

PART 102--[AMENDED]

    1. Proposed Secs. 102.5 and 102.17 would be the same as the core 
proposal of the second option.

PART 103--[AMENDED]

    2. Proposed Sec. 103.3 would be the same as the core proposal of 
the second option.

PART 106--ALLOCATIONS OF CANDIDATE AND COMMITTEE ACTIVITIES

    3. The authority citation for part 106 would continue to read as 
follows:

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

    4. Section 106.1 would be amended by revising paragraphs (a) and 
(b) to read as follows:


Sec. 106.1  Allocation of expenses between candidates.

    (a) General rule. (1) [same as core proposal of second option.]
    (2) Payments that involve both expenditures, in-kind contributions, 
independent expenditures, or coordinated expenditures on behalf of one 
or more clearly identified federal candidates and disbursements on 
behalf of one or more clearly identified non-federal candidates shall 
be made entirely from the committee's federal account(s), i.e., with 
funds subject to the prohibitions and limitations of the Act.

[[Page 37737]]

    (b) [Same as core proposal of second option.]
* * * * *
    5. Section 106.5 would be revised to read as follows:


Sec. 106.5  Federal and non-federal activities by party committees and 
use of party committee funds by other organizations.

    (a) National party committees. (1) Except as provided in paragraph 
(a)(2) of this section, national party committees, including the Senate 
and House campaign committees of a national party, shall defray their 
expenses entirely from funds subject to the prohibitions and 
limitations of the Act.
    (2) National party committees may defray the expenses described in 
11 CFR 100.7(b)(12) and 11 CFR 100.8(b)(13) with funds from an account 
established in accordance with 11 CFR 102.5(c)(2).
    (b) State and local party committees--(1) General rule. Except as 
provided in paragraph (b)(3) of this section, state and local party 
committees, and other party committees that are not national party 
committees but that have established separate federal and non-federal 
accounts under 11 CFR 102.5(a)(1)(i), shall defray the following 
expenses entirely from funds subject to the prohibitions and 
limitations of the Act:
    (i) Administrative expenses including rent, utilities, office 
supplies, and salaries, except for such expenses directly attributable 
to a clearly identified candidate;
    (ii) The direct costs of a fundraising program or event, including 
disbursements for solicitation of funds and for planning and 
administration of actual fundraising events, through which a committee 
collects federal funds or a combination of federal and non-federal 
funds, whether the committee conducts the program or event individually 
or in conjunction with another committee;
    (iii) State and local party activities exempt from the definitions 
of contribution and expenditure under 11 CFR 100.7(b) (9), (15) or 
(17), and 100.8(b) (10), (16) or (18) (exempt activities) including the 
production and distribution of slate cards and sample ballots, campaign 
materials distributed by volunteers, and voter registration and get-
out-the-vote drives on behalf of the party's presidential and vice-
presidential nominees, whether or not such activities are conducted in 
conjunction with non-federal election activities; and
    (iv) Generic voter drives either conducted by the committee itself 
or paid for by the committee and conducted by another entity, including 
voter identification, voter registration, and get-out-the-vote drives, 
or any other activities that urge the general public to register, vote 
or support candidates of a particular party or associated with a 
particular issue, without mentioning a specific candidate.
    (2) Use of party committee funds by other organizations. When a 
state or local party committee pays for a generic voter drive conducted 
by another entity, such as a voter identification, voter registration, 
get-out-the-vote drive, or any other activity that urges the general 
public to register, vote or support candidates of a particular party or 
associated with a particular issue without mentioning a specific 
candidate, the costs of the voter drive shall be defrayed entirely from 
funds subject to the prohibitions and limitations of the Act.
    (3) Generic voter drives in exclusively non-federal elections. 
State and local party committees in states that do not hold federal and 
non-federal elections in the same year may use funds that are not 
subject to the prohibitions and limitations of the Act to defray the 
costs of generic voter drive activity conducted in a calendar year in 
which no candidates for federal office appear on any primary, general, 
or special election ballot.

    Dated: July 8, 1998.
Lee Ann Elliott,
Commissioner, Federal Election Commission.
[FR Doc. 98-18543 Filed 7-10-98; 8:45 am]
BILLING CODE 6715-01-P