Chairman Thomas and Members of the Commission:
Thank you for yet another opportunity to testify in the Commission's periodic hearings addressing efforts to narrow the definition of a "member" of a membership association. (1)
Today I am here as legal co-counsel to the Free Speech Coalition, a nonpartisan group of ideologically diverse nonprofit organizations and for-profit organizations that help nonprofits raise funds and implement programs. Our membership ranges from the American Conservative Union and English First to the Coalition to Stop Gun Violence and the Feminist Majority.
While the proposed definition of a "member" is, with a minor modification, appropriate, the proposed new definitions of "membership organization" and "expenditure" are quite problematic, and constitute substantial changes (without adequate notice in the Notice of Proposed Rulemaking) and should therefore be withdrawn and rewritten.
A. Definition of a "Member"
As you know, the definition of a "member" is quite important to nonprofit organizations. Status as a "member" not only dictates who may receive solicitations from a membership organization's Separate Segregated Fund ("SSF") without the communication constituting an expenditure (11 CFR section 114.7), but also who the organization may contact with partisan communications regarding federal elections (11 CFR section 100.8(b)(4)(iv)).
It is gratifying to see that last year's "Alternative C" provides the basis for the definition of "member" at issue in this year's proposed rulemaking (i.e., that persons who pay a specific amount of annual dues as predetermined by the organization would qualify as members, without any additional requirements). The absence of a minimum dues level is particularly welcome.
This proposed definition is generally consistent with the Commission's original definition of "member" as expressed in 11 CFR section 114.1(e), Advisory Opinion ("A.O.") 1977-67 (issued to the Public Service Political Action Committee), the U.S. Supreme Court decision in Federal Election Commission, et al. v. National Right to Work Committee, et al., 459 U.S. 196 (1982) ("NRWC"), and the decision of the U.S. Court of Appeals for the D.C. Circuit in Chamber of Commerce of the United States v. FEC, 69 F.3d 600 (D.C. Cir. 1995) ("Chamber of Commerce"). However, the Free Speech Coalition submits that the proposed regulations should restore fully the pre-1993 status quo ante, and modify the proposed definition to also permit an organization to waive the dues criterion in appropriate instances according to predetermined specific criteria (such as financial hardship) approved by the organization's governing body.(2)
B. Definition of a "Membership Organization"
The proposed definition of "membership organization" is far more problematic, exceeds the Commission's statutory authority, and presents the same Administrative Procedure Act difficulties which led the U.S. Court of Appeals to reject the Commission's current membership regulations in the Chamber of Commerce decision.
The Proposed Definition of "Membership Organization" Is Unlawful and Excessively Burdensome
The first problem is that the proposed regulations would attempt to regulate unincorporated entities by including them within the definition of "membership organization." Proposed section 100.8(b)(4)(iv)(A) states that "membership organization means an unincorporated association, trade association, cooperative, corporation without capital stock, or a local, national, or international labor organization...."
The Federal Election Campaign Act, 2 U.S.C. section 431, et seq. ("FECA"), prohibits most corporations and labor organizations from making contributions or expenditures with regard to federal elections. 2 U.S.C. section 441b(a). It is within the context of that statutory provision -- allowing incorporated nonprofit membership organizations to have SSFs -- that the need to define "membership organization" exists. This permissive statutory grant does not apply to unincorporated associations, notwithstanding the language of the proposed regulations. The Act does not prohibit contributions or expenditures by unincorporated entities. Regulations purporting to implement the Act therefore lack authority to regulate such contributions or expenditures.
The Act clarifies and establishes that "membership organizations," as well as other corporations and the SSFs created by those organizations, may solicit contributions from their membership:
This paragraph shall not prevent a membership organization, cooperative, or corporation without capital stock, or a separate segregated fund established by a membership organization, cooperative, or corporation without capital stock, from soliciting contributions to a fund from members of such organization, cooperative, or corporation without capital stock. [2 U.S.C. section 441b(b)(4)(C) (emphasis added).]
This language, originally contained in the 1976 amendments to the FECA, was intended to regulate nonstock corporations' solicitations of their members in the same way that it regulated how stock corporations could solicit their stockholders, and labor organizations could solicit their members. The language was to make sure that the solicitable class of a nonprofit corporation would not be limited to the directors, officers and employees, but would also extend to members. But the statutory language does not in any way reach unincorporated entities.
Until the 1993 amendments to 11 CFR redefined "member," the regulations did not define a membership organization/association. With those amendments, the Commission created three requirements: that such associations expressly provide for "members" in their organizational documents; that associations expressly solicit members; and that members expressly acknowledge membership. These standards were generally in keeping with common practice among membership organizations/associations, as best explained in A.O. 1977-67.
In the proposed regulations, the Commission seeks to create unprecedented limitations on membership organizations. Most notably, as mentioned above, the requirements are now to be imposed on unincorporated associations. There is no warrant for this extension of the scope of FECA to unincorporated groups; therefore, this language should be deleted from the proposed definition.
Express Statements Required
Further, under the proposed regulations, a membership organization would be required to state expressly -- in its articles, bylaws and other formal organizational documents -- the rights, qualifications, obligations, and requirements for membership. (See Proposed section 114.1(e)(1)(ii).) Also, such organizations would be required to make their articles, bylaws, and other formal organizational documents freely available to their members. (See Proposed section 114.1(e)(1)(iv).)
The Commission is incorrect in stating (as it has erroneously certified in the Notice of Proposed Rulemaking) that these provisions would not have a significant economic impact on a substantial number of small entities -- or that the proposed rules would not require any expenditure of funds. There are innumerable membership organizations which provide for members in their formal organizational documents, without expressly stating -- with the Commission's new and preferred level of specificity -- the rights, qualifications, obligations, and requirements for membership. (Presumably the Commission is aware of this reality; otherwise, it would not find any "need" to impose this requirement.) For some membership organizations, the amendment of such organizational documents, including bylaws, can only occur by a meeting or vote of the membership. Further, while organizations may already make certain organizational documents freely available to its members, the Commission's catch-all "and other formal organizational documents" undoubtedly would create confusion, undue administrative effort, and extra expenses. The very process of amendment is likely to stimulate additional demands for such documentation, resulting in additional costs. Moreover, such a regulatory requirement would appear to be an unusually intrusive interjection by the Commission into the governance of membership organizations, and enforcement of such a provision could open the door to all sorts of mischief. Therefore, the Free Speech Coalition urges that these requirements be stricken from the final regulations.
Finally, proposed Sections 100.8(b)(4)(iv)(F) and 114.1(e)(7) of the regulations also explicitly reject state law definitions of "membership organization" and "member." Unfortunately, this appears to be consistent with prior Commission misreadings of the U.S. Supreme Court's decision in NRWC. For example, the 1997 NPRM attempting to redefine "member" quoted the Supreme Court: "'since there is no body of federal law of corporations ... Congress intended at least some reference to the laws of the various states dealing with nonprofit corporations.' Id. at 558." Dismissing this quote as an assumption of the "NRWC Court," the Commission concluded in the NPRM that a reference to state law "is not an appropriate standard to include in the regulatory language."(3) 62 Fed. Reg. 66833-34. Actually, the Commission's current assertion that NRWC dictated changes in the definition of "member" directly contradicts the language of the decision itself, in which the Supreme Court characterized the Commission's then-existing standard as "sufficiently tailored ... to avoid undue restriction on the associational interests asserted by respondent." 459 U.S. at 208.
The Proposed Regulation Violates the Administrative Procedure Act, by Failing to Provide Adequate Notice of the Dramatic Changes Proposed
Several commenters, myself included, warned the Commission in 1992 that the proposed regulations (adopted in 1993) appeared to violate the Administrative Procedure Act. At that time, I raised the failure of the Commission, in its NPRM, to provide adequate notice of the dramatic proposed change in 11 CFR Section 100.8(b)(4)(iv), which governs which "members" may receive partisan communications from an association.
Just as with the 1993 regulations, this NPRM does not provide adequate notice of the proposed changes both in the types of organizations to be regulated under FECA, or of the burden which these proposed regulations will impose on membership organizations. The Supplementary Information in the NPRM, published on December 16, 1998 states that:
The Commission is therefore proposing to replace the term "membership association" with "membership organization" in paragraphs 100.8(b)(4)(iv)(A) and 114.1(e)(1). The revised definitions would provide that, for purposes of these rules, membership organization means a trade association, cooperative, corporation without capital stock, or local, national or international labor organization. [63 Fed. Reg. 69226, emphasis added.]
However, the actual text of the proposed regulation is as follows:
(iv) (A) For purposes of paragraph (b)(4) of this section membership organization means an unincorporated association, trade association, cooperative, corporation without capital stock, or a local, national, or international labor organization that:.... [63 Fed. Reg. 69228, emphasis added.]
The Supplementary Information issued by the FEC is, at best, inaccurate and misleading. It misrepresents the intended expansion of the scope of the proposed regulation. The Free Speech Coalition urges the Commission to withdraw this language from the proposed regulations.
Definition of "Expenditure"
It is not evident why the Commission now proposes to redefine "expenditure" as part of this rulemaking, which addresses the definitions of "member" and "membership organization."
First, as with the attempted expansion of the Commission's regulatory authority to encompass contributions and expenditures by unincorporated associations discussed infra, the
Supplementary Information for the NPRM fails to provide adequate notice of this dramatic proposed expansion of the Commission's regulatory scope to encompass any and all communications between corporations and labor organizations and their members. The proposed regulation states:
Any cost incurred for any communications by a membership organization, including a labor organization, to its members, or by a corporation to its stockholders or executive or administrative personnel, is not an expenditure, as long as the communication is subject to the direction and control of that entity and not any other person.... [63 Fed. Reg. 69228, emphasis added.]
Of course, if the communication is found to be an expenditure, it is then subject to regulations promulgated and enforced by the Commission. The Supplementary Information does not discuss this expansion of Commission authority. It blandly states that:
Consistent with these changes, the Commission is also proposing to amend 11 CFR 100.8(b)(4) to clarify that the membership communications exception established by that section applies only to those communications made at the direction and control of the membership organization, and not of any other person. [63 Fed. Reg. 69228, emphasis added.]
No explanation is ever given how this proposed expansion of Commission regulation of corporate and union communications is consistent either with the other changes, or with the FECA. Thus, this proposed regulation violates the Administrative Procedure Act.
Second, this imposition of a new requirement, without any statutory basis, that correspondence between a membership organization and its members is an expenditure unless "the communication is subject to the direction and control of that entity and not any other person" bears no relationship to the nature of the party sending the communication (i.e., the membership organization), or the status of the recipient of the communication (i.e., the member of the organization). It may be that the FEC staff wants to be able to demonstrate that a membership organization was controlled from the outside. If so, the recent decision in United Cancer Council, Inc. v. Commissioner, 165 F.3d 1173 (7th Cir. 1999), in which a unanimous panel of the U.S. Court of Appeals for the Seventh Circuit rejected efforts by the Internal Revenue Service to expand its regulatory authority beyond statutory limits, to find "control" over a nonprofit organization by persons who are not "insiders," should present to the Commission a salutary warning against such ultra vires experiments.
Third, the prospect of publicly-funded enforcement actions initiated and undertaken by the Commission to examine the origins of correspondence between a corporation and its members -- let alone the additional development of standards and regulations to explain what constitutes direction and control of a communication -- is quite problematic. The prospect that the Commission will undertake the regulation of First Amendment-protected communications, not based upon their content (e.g., the presence of express advocacy) but on perceptions of whether the corporation sufficiently "controlled" the communication, appears to be nothing more than a fishing license, offering the opportunity to open selectively chosen enforcement actions. This provision should be withdrawn.
The Free Speech Coalition submits that the Commission should truly restore the status quo ante, as it existed when NRWC was decided, by modifying the proposed definition of "member" so as to permit an organization to waive the dues criterion in appropriate instances, according to predetermined specific criteria (such as financial hardship) which have been approved by the organization's governing body.
More critically, the definition of "membership organization" should be withdrawn and redrafted to conform to the current statutory definition, without the additional burdens which Proposed sections 114.1(e)(1)(ii) and (iv) would impose, as well as without the baseless rejection of state law standards.
Additionally, the Commission's efforts to regulate communications -- not based upon the presence or absence of express advocacy, but to pursue questions of direction and control of the communications -- is without statutory basis, and also should be withdrawn and redrafted.
The decision rests with the Commission. It can continue to promulgate -- and litigate -- standards that infringe on First Amendment freedoms, in the hope that it may somewhere, sometime find a sympathetic ear. Or the Commission can give serious and careful consideration to the constitutional and statutory limitations on its power -- and adopt the proposed definition of "member," with the modification proposed by FSC, while withdrawing and rewriting the proposed definition of "membership organization."
1. I had the pleasure to testify on this issue before the FEC first on December 9, 1992 with respect to the proposed regulations which were eventually adopted by the Commission in 1993, and again on April 29, 1998.
2. This criterion was established by the Commission in A.O. 1977-67, which stated that: "the Commission believes that sufficient indicia of a membership relationship exists for these people to be solicited pursuant to 2 U.S.C. § 441b(b)(4)(C), if two further conditions are met...second, the waiver of the dues or contributions requirement is granted on the bases of predetermined specific criteria."
3. The U.S. Supreme Court states that it is making an assumption here. 459 U.S. at 204. However, the Commission would be ill-advised to dismiss the Court's interpretation of Congressional intent so lightly, premised upon the Court's choice of verb.