The 2012 election cycle, already underway, promises to be closely-fought and terribly expensive.

A Congress divided along party lines, the decennial redistricting of House seats, a wide-open race for the Republican presidential nomination and President Obama’s proven fundraising record will combine to drive intense interest in the next federal campaign season.

Republicans will seek to defend and expand their new majority in the House of Representatives. Control of the Senate will be up for grabs, with a large number of Democratic-held seats in play. And passions will surely run high as a Republican nominee seeks to deny the president a second term.

Corporations, trade associations and unions will approach the election with much at stake. Those with active government affairs operations and agendas will see numerous opportunities over the next two years to build relationships with policymakers and seek to influence the elections.

An earlier column in this series detailed corporate options for direct political expenditures in the wake of the Supreme Court’s decision in Citizens United. Another column described issues associated with individual political activity by corporate personnel.

The third area of focus for in-house counsel addressing political activity is the corporate political action committee, or PAC.

PACs are the most widely-used vehicle for corporations to participate in the federal political process. At the beginning of 2010, there were more than 4,600 federal PACs registered with the Federal Election Commission (FEC) – with both corporate and other sponsors – and they raised more than $550 million from individual donors in the prior year.

PACs are valuable because federal law forbids direct corporate contributions to federal candidates and committees. The Citizens United decision did not affect this prohibition.

Despite the ban on corporate contributions, the law allows corporations to sponsor PACs that may make contributions affecting federal elections. A corporate PAC raises funds through voluntary contributions by employees and other eligible individuals. These monies, in turn, are used to make contributions to candidates and committees.

Corporate funds may be used to pay for the administrative costs of the PAC, including the cost of soliciting contributions and managing the PAC, but no corporate money may be deposited in the PAC.

In the last 20 years, the public perception of PACs has evolved considerably. In the 1980s, PACs were criticized as distorting the political process, and some candidates ran for office successfully on pledges that they would refuse PAC contributions altogether.

However, over the years, concerns about PACs have diminished as other political forces have emerged. Unlimited corporate “soft money” contributions to the political parties became the focus of reformers’ efforts (and were eventually banned in 2002). And now, Citizens United has affirmed the ability of corporations and others to spend large sums on independent expenditures, often undisclosed.

By contrast, PACs are now seen as relatively benign. The money used for contributions is personal, not corporate, and donated voluntarily. The sums are relatively small; no one may give more than $5,000 a year and the PAC itself has limits on its contributions to candidates. Moreover, every transaction is disclosed publicly in regular reports to the FEC.

For a business, sponsorship of a PAC has certain distinct advantages:

  • A PAC may help a company build relationships with policymakers in support of its government affairs objectives.
  • PAC events and activities are favored under congressional ethics rules, which limit the ability of a member of Congress to accept a meal in other circumstances but allow them to do so at a political fundraising or campaign event.
  • PAC contributions can help brand a business among policymakers (because under the law, a PAC’s name must include the sponsoring company’s name).
  • The use of a PAC addresses some of the legal risks associated with individual political giving. Corporation facilitation – the illegal use of corporate resources to facilitate a personal political contribution – is not at issue when the contribution is from a corporate PAC.
  • Finally, a PAC can educate corporate personnel about political matters and the impact of government policies on business and the future of the company. A PAC helps develop an educated workforce that can effectively advocate for corporate priorities.

If a company is considering a PAC, now – at the beginning of an election cycle – would be an appropriate time to launch such an effort. Under the law, a new PAC must meet certain conditions before it attains “multicandidate” status, which permits the higher contribution limits available to most PACs. One of those mandatory conditions is to have been registered for at least six months. By the time the 2012 elections heat up, and donor interest is at its highest point, a new PAC can be well-established within a company if planning begins now.

When a new PAC is launched, there are a number of issues for counsel to address. Although not required by law, most PACs will benefit from adopting organizational documents such as bylaws or articles of association. Typically, they will also create a PAC Board or similar body to supervise the activities of the PAC.

The solicitation process should also be the subject of careful legal review. Federal law and FEC regulations place a number of requirements on the format and content of solicitations, and they may only be directed to a limited audience within an organization.

Finally, companies that already sponsor a federal PAC should consider whether an audit of the PAC’s operations would be in order. Even well-functioning PACs can benefit from such a review to ensure compliance with the solicitation rules, recordkeeping and reporting mandates, deposit timeframes and other legal requirements and best practices.

[This is the sixth in a series of articles on the intersection of corporate compliance, lobbying, and political activities.]

Read William Minor’s previous column.