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FEC Rejects New 527 Regulations

On a 4-2 vote, the Federal Election Commission today rejected a bipartisan plan to regulate so-called 527 groups, thus opening the door for tax-exempt organizations to pour millions of dollars into the 2004 elections.

Commissioners rejected a proposal that would have made 527s subject to the same disclosure laws as other federal political committees.

The move, which came just 10 weeks after the watchdog agency commenced its rulemaking on the thorny issue of whether the outside groups registered under Section 527 of the Internal Revenue Code should be regulated by the FEC, provoked an outcry from campaign finance watchdogs, who have disparaged the organizations as “shadow parties” that are exploiting a tax loophole to pump soft money into federal elections. “Because of the FEC’s action today, we’ll see more soft money spent in another presidential election,” said Trevor Potter, a former member and chairman of the FEC who is president and general counsel of the Campaign Legal Center.

Commissioners also rejected a narrower-proposed rules change to the existing allocation ratios (the split of soft and hard money that 527s use to pay for their expenses) with a 3-3 deadlock. At least four commissioners must vote in the affirmative to carry a motion at the watchdog agency.

One such entity, the Democratic-leaning 527 known as America Coming Together, has been criticized for funding 98 percent of its activities with soft money and paying only 2 percent of its expenses out of its more tightly regulated hard-money account.

But Commissioner Ellen Weintraub (D) and others on the panel — while acknowledging that current allocation ratios aren’t necessarily working well — voiced concerns about changing any significant rules in the middle of an election cycle and said they need more time both to study the allocation issue and address the broader 527 question.

Chairman Bradley Smith, a Republican, said the allocation issue should be “revisited.”

In a last-ditch effort to change the rules on 527s, the authors of the proposal on the table today — Republican Michael Toner and Democrat Scott Thomas — made a motion to make the effective date for their proposal Jan. 1, 2005, so as not to cause confusion this cycle, but that was also rejected by a majority of the agency’s officials.

The commission broke for lunch until 2:30 p.m. with the intention of discussing and voting on the general counsel’s suggestion of a 90-day delay in considering new regulations.

But Thomas painted a bleak future for any potential regulation of 527 groups if new rules were not adopted at today’s meeting, arguing that “the climate for taking action is never going to be better.”

“If the FEC does not approve a regulation now, there probably won’t be a four-vote consensus on this topic down the road,” Thomas stated. “For one thing, I’m due to be replaced by someone whose views are likely to be unfavorable to any regulation like that proposed by Commissioner Toner and myself.”

Additionally, Thomas pointed out that delay would have the effect of “institutionalizing” current practices, “making it difficult for commissioners to later vote to restrain any similar activity.”

FEC critics like Potter also suggested time is of the essence.

“By the time 90 days has passed, as a practical matter it is going to be too late to do anything about the 527 problem in this cycle,” Potter said. “And the history of soft money proves that it is always difficult to remove it from the system after it’s been allowed to gain a foothold.”

Several FEC officials referenced Congress in their explanations of why they were rejecting the Thomas-Toner proposal and asking for more time to consider the issue.

Republican Commissioner Dave Mason said unequivocally that nothing in the Bipartisan Campaign Reform Act of 2002, which ushered in a new era of campaign finance laws, mandated a crackdown on the 527 groups.

Mason said Congress “could have addressed non-authorized, non-party organizations,” if they had so desired, but pointed out that they chose not to do that.

Democratic Danny McDonald said it “may well be that we don’t have a fix on what Congress has intended one way or another” but suggested that Congress could take action on 527s if it feels the FEC erred. “I do think Congress could act — and they could act in short order if we had it wrong,” McDonald said.

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