Overview
Has your corporation been contemplating starting a political action committee (“PAC”) this election year? A PAC can offer a valuable way for a corporation and its employees to engage in the political process. Corporations are prohibited from making political contributions directly to federal candidates but they can utilize a PAC that uses employee funds to make such contributions instead.
The considerations for starting a federal PAC are relatively well-defined and straightforward, but the day-to-day operations, such as solicitations and reporting, will require time and advanced planning. Federal PACs are governed by the Federal Election Commission (“FEC”) under the Federal Election Campaign Act (“FECA”.) Under these regulations, a corporation can form a type of PAC known as a separate segregated fund (“SSF”) or connected PAC. An SSF must open a bank account that is separate and segregated from all other corporate funds for use only by the PAC.
Registering with the Federal Election Commission
At that point, and before making any financial transactions, the PAC will register with the FEC. The PAC name must contain the name of the sponsoring organization, here the corporation. The PAC must name a treasurer and custodian of records. We also recommend naming an assistant treasurer, as the PAC may not make any financial transactions without a treasurer in place.
You might be wondering if there is a requirement as to who can be a treasurer or if other officers are necessary. The FEC only requires those two people be named. There is no other required governance structure of a PAC. We recommend the corporation draft bylaws that will govern the PAC operations. This is for many reasons, including maintaining the integrity of the PAC and having a well-defined structure to PAC operations. These factors will be critical in obtaining employee trust in the PAC as well. Many corporations will use these bylaws to create a board that is multidisciplinary that will serve as the governing body of the PAC and to set the criteria for who the PAC will contribute to in the future.
Solicitation of the Restricted Class
One of the areas of PAC operations that takes the most energy is solicitation. An SSF may solicit contributions from a select group of employees known as the “restricted class.” The restricted class is made up of administrative and executive level employees and stockholders. The critical step here is determining which employees meet the FEC definition of administrative and executive employees. This will require a corporation to look at the job responsibilities of employees which can be time consuming. Many corporations will eventually decide to set the restricted class by title or pay band, based on that analysis.
Then once the restricted class is determined, the PAC can begin to solicit those employees and stockholders to contribute to the PAC. The solicitations need to contain several disclaimers per the FEC, such as letting the employee know that contributions are voluntary and will not impact their employment, for example. We recommend every solicitation be reviewed carefully to ensure it complies with all FEC regulations and also best practices.
Once employees start contributing to the PAC, currently limited to $5,000 per year per restricted class member, the next question is how to spend those funds. A corporate PAC may contribute up to $5,000 per election to federal candidates. We recommend that a corporation look to their PAC bylaws for the criteria for whom they will contribute. For many, the contributions are nonpartisan and to candidates who support a corporation’s business interests, but this can vary.
Compliance and Recordkeeping
The most important consideration is compliance. Accurate recordkeeping is crucial to every PAC. This includes every payroll deduction, other employee contributions, bank fees, certain fundraising costs, refunds, and all contributions made from PAC funds. The FEC requires a PAC to keep a detailed record of every financial transaction. Those transactions are reported to the FEC either monthly or quarterly, depending on how the PAC operates. These reports are intended to give the public full transparency of the PAC’s contributions and disbursements. All reports are reviewed by FEC analysts for accuracy and a request for additional information or an audit can ensure if there are discrepancies. FEC reports are also posted publicly on fec.gov. Corporations must follow the letter of the law and we recommend additional best practices for recordkeeping and reporting.
This article gives the basics of starting a federal PAC. Making contributions on the state and local level are a whole other thing for another post. Steptoe’s Campaign Finance and Political Law practice are here to help answer questions about PAC formation and operations at any time.
