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November 2002
Crackdown on Issue Ads: FEC Publishes Final Regulations on Electioneering Communications The Federal Election Commission (FEC) recently published final regulations to implement the Bipartisan Campaign Reform Act's (BCRA) restrictions on broadcast "issue ads"–what BCRA terms "electioneering communications." Issue ads often comment on the positions and records of federal candidates without expressly stating how a member of the audience should vote. The regulations track the legislation and generally prohibit labor unions and corporations, including incorporated 501(c)(4) organizations, trade associations, and 527 political organizations, from directly or indirectly paying for electioneering communications. If the ban survives a pending constitutional challenge, there may be a big change in the kinds of television and radio spots the public has grown accustomed to during election season. Electioneering Communications Defined
An "electioneering communication" is (1) any broadcast, cable or satellite communication that (2) refers to a clearly identified federal candidate; (3) is publicly distributed within 60 days before a general, special, or runoff election or 30 days before a primary, caucus or convention; and (4) is targeted to the relevant electorate, in the case of a House or Senate candidate. A communication is "targeted" if it can be received by 50,000 or more individuals in the congressional district or state in which the identified candidate is running for office. In the case of presidential and vice-presidential candidates, a communication is considered "publicly distributed" if it can be received by 50,000 or more people in a state where a primary election or caucus is being held or by 50,000 people anywhere in the United States within 30 days before the first day of the national party's nominating convention through the end of the convention. A candidate is deemed to be "clearly identified" in an electioneering communication even if the only reference to the candidate is in the popular name of legislation–for example, "McCain-Feingold" or "Shays-Meehan."
Electioneering communications do not include advertisements appearing in magazines, handbills, bumper stickers, signs and other written materials. Also excluded from the definition are communications transmitted over the Internet, via e-mail and by telephone. Thus, many kinds of communications are left untouched by BCRA and the regulations.
Corporate Ban on Electioneering Communications
Corporations, including incorporated nonprofits, and labor unions are prohibited from paying for electioneering communications, either directly or indirectly. While individuals, unincorporated entities, and federal PACs are generally permitted to make electioneering communications, they may not use funds provided by corporations or unions to do so.
While the FEC considered it, the final regulations fail to carve out an exception for all bona fide lobbying communications. It is therefore possible that a television or radio ad that asks members of the public to contact their elected officials on pending legislation could qualify as an electioneering communication. For example, an incorporated 501(c)(4) is now prohibited from running a state-wide radio ad in late September of an election year requesting the state's citizens to contact their congressmen to support legislation banning oil drilling in the Arctic.
During the course of the rulemaking, the FEC publicly questioned whether BCRA could be interpreted to allow incorporated 501(c)(4)'s and 527 organizations to make electioneering communications that refer solely to presidential or vice-presidential candidates if they were to use funds from a separate bank account set up to receive contributions only from individuals. As with the proposed lobbying exception, the FEC determined that such an interpretation was impermissible.
Some Exceptions to the Ban
While the prohibition against corporations and unions making electioneering communications is far-reaching, there are nevertheless some notable cases in which the ban does not apply:
- A television or radio ad that refers to a presidential or vice-presidential candidate and is aired within 30 days before a primary election (or caucus) must be capable of being received by 50,000 or more persons within the state holding the primary in order to qualify as an electioneering communication. This requirement prevents what would essentially be a nation-wide blackout on the broadcasting of ads referring to presidential or vice-presidential candidates for the better part of every year in which there is a presidential election. Such a blackout does ensue thirty days out from the national nominating convention of a presidential candidate's party through the end of the convention and sixty days prior to the general election.
- The ban does not apply to incorporated 501(c)(3) organizations because in order to maintain their federal tax-exempt status, these nonprofits are already prohibited from intervening or participating in elections on behalf of or in opposition to candidates for public office.
- Certain 501(c)(4) organizations known as "Qualified Nonprofit Corporations" (a.k.a. "MCFL" organizations), which are already permitted to make independent expenditures expressly advocating the election or defeat of a federal candidate, are exempt from the electioneering communication prohibition. Qualified Nonprofit Corporations do not engage in business activities and do not accept contributions from business corporations and labor unions.
- The ban applies only to electioneering communications as defined in the regulations (i.e., paid broadcast, cable and satellite transmissions). Corporations may continue to pay for communications that identify federal candidates during elections by means other than television and radio, so long as they do not expressly advocate the election or defeat of a federal candidate and are not coordinated with candidates or political parties.
- The ban does not apply to federal political action committees (PACs) that are registered with and report contributions and expenditures to the FEC, regardless of whether they are separately incorporated or a separate segregated fund of a corporation. Federal PAC's may make electioneering communications without limit so long as they are not coordinated with any candidate or political party.
- The ban does not apply to television and radio advertisements of candidate forums and debates.
BCRA provides that every person or entity that spends more than $10,000 in a year on electioneering communications must file detailed reports with the FEC. The reports must contain information not only about the expenditures but also about anyone who contributed $1,000 or more to the person making the communication. The final regulations on electioneering communications do not address these reporting requirements. Rather, the FEC reserved reporting for a subsequent rulemaking, which is currently underway. Final regulations on the reporting requirements are expected within the next month.
The Impact on Advocacy Organizations
Incorporated 501(c)(4)'s, unions, trade associations, and 527 political organizations will still be able to publicly distribute communications referring to federal candidates during the height of campaign season using media other than television and radio so long as they do not expressly advocate the election or defeat of a federal candidate and do not coordinate with candidates or political parties. Nevertheless, the corporate ban on electioneering communications can be expected to have a negative impact on incorporated advocacy organizations with the resources and desire to otherwise pay for issue ads and lobbying communications on television and radio prior to elections. If the regulations are held to be constitutional, these groups will need to find other ways of delivering some of their messages to the public.
By Paul J. Murphy
A Friendlier Form 1023?
The IRS recently publicized a working draft of the revised Form 1023, the Application for
Recognition of Exemption, and requested comments from nonprofits and all other interested
parties on proposed revisions. Changes to the 1023 include a more user-friendly and easy-to-read
format, expanded use of yes/no check boxes, and extra sections to replace the use of additional
forms (e.g., Form 872-C, the form requesting an advance ruling). The draft 1023, however,
broadly remains the same in requesting corporate documents, a narrative description of the
organization's activities, and a detailed budget.
The proposed draft is available to view at:http://www.irs.gov/pub/irs-tege/draft_f1023.pdf .
Anyone interested in providing comments is encouraged to address any or all
of the following four issues: (1) Ease of comprehension, (2) Degree of burden
on the organization to provide the necessary information, (3) Technical accuracy,
and (4) Sufficiency of the information requested to make a determination.
Written public comments are due by December 2, 2002 via e-mail at
tege.eo2@irs.gov
or at the following address:
Internal Revenue Service
1111 Constitution Avenue, NW
Washington, DC 20224
Attn: Amy Henchey, Form 1023 Announcement
T:EO:CEO
By Miguel de Baca
New Legislation Makes Major Changes to Reporting Requirements for 527s
The bill, which was signed into law by President Bush on November 2, effectively modifies current law, which requires Section 527 organizations and other federal PACs to register and file periodic reports with the IRS [see NN 7-8/00]. Passed in July 2000 as a first step in campaign finance reform, the current 527 law was designed to bring more transparency to secretive 527s, but has also resulted in subjecting organizations to notoriously time-consuming and complex sets of paperwork. H. R. 5596 is intended to reduce and streamline often duplicative reporting. Local and state PACs are the 527 organizations most affected by the new legislation, but federal PACs will benefit as well.
A major change is the exemption of many state and local PACs from the requirement to file periodic reports with the IRS, provided they report to a state agency that then makes those reports public. To qualify for this exemption a PAC's state-level reports must fulfill several requirements, so organizations should confirm whether their state reporting satisfies the new law rather than assuming they qualify. This exemption is retroactive to the enactment of the law. H. R. 5596 affects tax return filing requirements as well. The legislation raises the threshold for qualified state and local PACs to file Form 990, from an annual gross income of $25,000 to $100,000 and exempts Federal PACs from filing Form 990 altogether. In addition, under prior law all 527s with $25,000 in gross receipts were required to file Form 1120-POL to report political organization taxable income– even if none of the organization's income qualified as taxable. Now political organizations without taxable income are exempted from filing an 1120-POL. These changes are also retroactive, protecting those organizations which had failed to file reports on a timely basis. Seemingly in exchange for lightening the reporting load, H. R. 5596 implements a new rule about registration. The new legislation mandates that 527s report any material change in the information on their Form 8871, the form used to register a political organization with the IRS, within 30 days of the change. The definition of a "material change" has not yet been further clarified. Section 527 organizations with annual contributions or expenditures greater than $50,000 that are neither federal PACs or qualified state or local PACs are mandated to file federal contribution and expenditure reports in electronic form as of June 30, 2003. Finally, the bill requires the IRS to improve the search mechanism for its Internet database of 527 organizations. The database, which contains scanned versions of Forms 8871 and 8872 of all registered 527s, can currently only be searched by the name of an organization. H. R. 5596 mandates that the database be searchable by more criteria, including names of contributors, expenditure recipients and related organizations. The new configuration of the database is intended to make it more useful for searchers and effectively increase public access to this information. These changes are mandated to go into effect by June 30, 2003.Text of the legislation is available at http://thomas.loc.gov by searching for H. R. 5596. As of November 19, the IRS website had not been updated to reflect the new requirements.
By Amy Licht
Master Business License Update: New Charitable Solicitation Requirements Obtaining a DC Master Business License (MBL) has just gotten more complicated for nonprofit organizations. Changes in the charitable solicitation registration requirement and other filing instructions recently released by the DC Department of Consumer and Regulatory Affairs (DCRA) will affect many area nonprofits' applications.
As a reminder, the MBL program requires that all businesses and nonprofits with an annual DC income greater than $2,000 obtain a Master Business License. The program is intended to streamline the city's business license registration and renewal process [see NN, 6/02].
According to new instructions issued on the DCRA website, organizations that receive grants from public and private agencies are required to obtain a charitable solicitation registration along with the Master Business License. The new instructions expand the reach of the charitable solicitation registration requirement to include almost all nonprofits in the District, even those that do not solicit individuals.
Organizations seeking to comply with the new instructions should be aware that obtaining a charitable solicitation registration and a MBL does not require two different forms. Rather, organizations should submit the Master Business License application and select "Charitable Solicitation Registration" as the Business Activity/License Endorsement. An organization must also submit more than half a dozen additional documents along with the application, including its bylaws and a financial statement. Applicants should check with the DCRA for a list of all required documentation.
Finally, be aware that the DCRA Business Activity Chart now indicates that organizations obtaining a charitable solicitation registration should apply for a "Class A" Master Business License. Previously, MBL telephone hotline representatives directed all nonprofits to obtain a "Class B" license. Organizations should consult the DCRA about the appropriate license category before submitting an application.
In other licensing news, MBL applications are now available at some branches of the DC Public Library and at Department of Employment One-Stop Career Centers throughout the city. Other forms, including the MBL application, instructions and Business Activity Chart, have been recently made available in .pdf form at the DCRA's website, www.dcra.dc.gov.
By Amy Licht
Bylaws 101
Bylaws are the corporate roadmap for good governance. Unfortunately, directors and staff often do not review their organization's bylaws. Periodic bylaws reviews are important to make sure corporate procedures comply with relevant laws and reflect your organization's current practices and needs. Whether you're writing bylaws for a new organization or reviewing procedures written years ago, this primer focuses on frequently asked questions regarding corporate law and also reports on governance trends. Click on the links below to take you to a particular question or scroll down to review this sampling of key bylaws issues. Topic #1: Detailed Language in the Bylaws
Sound bylaws will have sufficiently detailed language to avoid ambiguity and arguments and provide
a framework for an organization's hitch-free governance. A recent Delaware case illustrates the pitfalls of
detailed requirements. In that case, bylaw amendments had to be approved at three consecutive
"regular meetings," but the Board of Directors did not properly re-schedule a regular meeting.
Therefore, the court determined that the proposed bylaws amendment was invalid.
When should bylaws be more specific?
For example, it is in your organization's best interest to have clear compensation and conflict
of interest policies and procedures in the bylaws. Board and senior staff will know how to
react in these situations from the beginning and will be better able to avoid sanctions for
violating IRS regulations on inappropriate compensation [NN, 02/02]. The Board may elaborate
on these policies through a resolution instead of incorporating the details in the bylaws.
But the Bylaws should still mention the fact that the organization shall have such policies
and should adopt any relevant resolutions at the earliest possible date to provide specific
guidance to decision-makers.
Which are better: Board resolutions or bylaws provisions?
Should provisions for committees be in the bylaws?
The Board should adopt a resolution for each of the committees created at the same time
as the committee is constituted or begins operations. Most of the detailed language regarding
the committee's work should be included in the resolution.
If the Board wishes to be more specific in the bylaws, it is fine to mention several of
the more significant committees the Board may create. For example, an organization may want
to specify that the Board may appoint an executive committee exercising Board authority between
Board meetings. The organization might mention in the bylaws the general purpose of the
committee, its powers and voting procedures. It might then leave for the Board resolution
formally creating the executive committee more specific information regarding the committee's
mandate and other aspects of its work.
Be sure to consult your nonprofit corporation law which may have provisions governing who
can serve on certain committees and what authority Boards may give to committees.
For example, the District of Columbia requires that committees carrying out the authority
of the Board, such as executive committees, must be comprised only of Board members. Other
committees may include non-Board members. In California, the statutes provide a detailed
list of the powers that an executive committee cannot exercise. Reviewing state statutory
requirements will help ensure legal compliance.
Are perpetual provisions a good or bad idea?
The way an organization is governed evolves as the organization develops. Some organizations
want to include overly stringent or overly descriptive language in the bylaws. Such language
may increase the need for amendment as the organization changes. On the other hand, certain
situations call for more specific bylaws provisions to better protect the organization and offer
clear guidance to the Board and staff from the start.
Amendments to bylaws are frequently harder to enact than new resolutions.
Special notices may be required for directors' meetings before they can consider bylaw
amendments. Other procedural hurdles may be: supermajority requirements, requirements that
the amendment be passed at two or more consecutive meetings, or the necessity of member as
well as director approval. Therefore, highly detailed information that is subject to frequent
change is better left out of the bylaws and placed into Board resolutions, which can usually
be adopted and changed more easily than bylaws.
Some organizations use the bylaws to spell out every committee they plan to form and to specify
the work of those committees. However, it is often better to state in the bylaws that the Board
has the authority to constitute, charge, and appoint committees by resolution. The Board then can
appoint particular committees as the organization's needs arise and change. This affords greater
flexibility to the organization and limits the need for amendments to the Bylaws.
For most organizations, bylaws provisions that cannot be changed are a disaster waiting to
happen. Consider instead creating high procedural hurdles to amending certain provisions.
These might include: supermajority requirements; notice to members or other affected people
as well as directors; or requiring the adoption of provisions at several consecutive meetings.
Topic #2: Guidelines for Sound Voting Rights
Establishing sound voting rights and practices for directors and members is extremely
important to corporate governance. Think carefully about who has voting rights and how votes
will take place.
How complex should an organization's Board structure be?
Do my organization's members have voting rights?
Some new organizations allow members a broad range of voting powers in the organization's
formative period. Once members have certain voting rights, in many cases state laws require
the members to vote on whether to forfeit those rights. This process can be time-consuming,
costly, and embarrassing for the organization. It is wiser to expand members' voting rights
by amendment to the bylaws after the organization has developed.
In some jurisdictions, such as in Maryland, it is assumed that members have voting
rights unless otherwise specified. The Articles of Incorporation and the bylaws should
clearly state that members may not vote if that is the case.
Are directors allowed to vote by proxy?
When a director is unable physically to attend a meeting, state laws provide for and bylaws
should reflect alternative voting procedures. Generally, the absent director may communicate
with the Board and vote by any means through which all directors can hear each other. This may
include conference calls and teleconference arrangements. Alternatively, directors may vote by
unanimous written consent.
The practice of voting by electronic transmission is developing, even though states are
more frequently permitting members to vote by e-mail rather than directors. Organizations
should periodically check their state laws to determine who may vote in this way. Issues
related to electronic voting and communications are discussed below.
Topic #3: New Trends in Corporate Governance
E-voting and e-notice
Nonprofits would be well advised to check state laws to determine what is permitted.
They should amend their bylaws to specifically include electronic voting and notice if
interested in this method (or specifically exclude this type of communication if undesirable).
Laws regarding electronic voting and notice vary from state to state
[NN, 03/01].
Audit Committees
The ex-officio director has the same voting rights as any other director. If an organization
does not want an ex-officio director to vote, it must specifically state so in the bylaws.
Organizations should also think about the relationship between term limits placed on directors
and the status of ex-officio directors. Since the ex-officio director serves by reason of her
position, term limits do not necessarily apply. The bylaws should reflect whether term limits
will apply to ex-officio directors.
Quorums
This primer assembles a sampling of issues and questions that frequently arise
regarding bylaws and corporate governance. It is a good idea to periodically review
your organization's bylaws to ensure compliance with any changes in the laws and
consistency with the needs and practices of your organization.
By Miguel de Baca
Most organizations periodically elect new directors onto the Board rather than allow
directors to remain in place indefinitely. Organizations may impose term limits or create
involved voting structures. Staggered voting, for example, permits a portion of the directors
to be elected at any given election rather than electing an entire new slate of directors at
one time. Any combination of techniques may work, and some are better for one organization
than for another. The key is to clearly draw out the voting structures in the bylaws and aim
to implement them with as much administrative ease as possible.
The voting rights of members are reflected in the Articles of Incorporation. In some
jurisdictions, if the Articles of Incorporation say an organization has members, it is
assumed they are voting members unless specified otherwise. Membership votes may then
be required to amend Articles of Incorporation, elect directors, and approve significant
transactions such as mergers.
The presence of the director at a meeting is important to show she is exercising her fiduciary
duties. For this reason, most jurisdictions prohibit proxy voting by directors. Even if permitted,
it is still not a good idea because it limits discussion on policy and distances directors from
their corporate responsibilities. To avoid any confusion, bylaws should specifically state that
no director may vote by proxy.
Illinois is one of the latest states to permit members to vote via e-mail, Internet usage,
or remote communication. This represents a growing trend toward permitting electronic
transmissions for voting and providing notice of meetings.
Congress passed corporate accountability legislation earlier this year that in part calls for
business corporations to create audit committees. While not required to, nonprofits may want
to consider creating similar audit committees that will periodically review the corporation's
finances and financial systems. Preferably, the audit committee will be comprised of directors,
and, to ensure independence, cannot include the CEO, CFO, or other senior managers. At least one
director should have financial expertise. Smaller nonprofits may find it difficult to create an
audit committee possessing financial expertise without the executive officer or executive
financial officer, but larger nonprofits should consider such an oversight body.
There is a tendency to think that "ex-officio" refers to whether a board member can vote.
In fact, "ex-officio" refers to a person who serves on a board or a committee by virtue
of her position in the organization. For example, the Executive Director can be an
ex-officio member of the Board of Directors, simply by virtue of her office. As soon as she
is no longer the Executive Director, she is no longer an ex-officio Board member. She may of
course seek election to the Board through the organization's established election procedures.
A quorum is the minimum number of directors or members required to be present in order
to hold a vote. Most jurisdictions require a quorum to constitute a legal vote. Most
statutes provide a minimum and/or default percentage that will constitute a quorum; or,
above the minimum, the corporation is free to choose any appropriate percentage. For example,
the Virginia statute says that a quorum for directors is at least one-third, and a membership
quorum is at least one-tenth. An organization may set the quorum requirements in the bylaws
to better reflect the needs and purposes of its organization.
This publication is designed to provide accurate and authoritative information about the subject matter covered. It is not distributed with the intent to render legal, accounting, or other professional advice. The services of a competent professional should be sought if legal advice or other expert assistance is required.
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