This is a partial transcript of "Special Report with Brit Hume", March 10, that has been edited for clarity.

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BRIT HUME, HOST: The legal status of the 527s (search) is a little unclear. It is the tax code that defines them. But as you heard, the Federal Election Commission (search) has been asked to determine whether they're being used to get around election laws.

Joining me now is Bradley Smith, the chairman of the Federal Election Commission.

So, tell me, soft money is money that -- I mean is, in fact, soft money that is supporting these 527 groups?

BRADLEY SMITH, CHMN., FEDERAL ELECTION COMMISSION: It is soft money in the sense that it is not money regulated under federal law.

HUME: All right. So, it -- what is the difference then, between what soft money is doing through 527s in this election, if any, and what soft money did in supporting various candidates and their ads directly, or indirectly in the last election?

SMITH: Well, based on what these groups are doing, there's very little difference. The McCain-Feingold bill eliminated soft money for the national political parties. And what's really in dispute is whether it eliminated soft money for these types of groups.

On its own term, the statute itself doesn't seem to do that. But what some people are arguing is that the Supreme Court's decision in McConnell v. FEC, which upheld the constitutionality of the McCain-Feingold law, provided added leeway as well to the FEC to redefine our definitions of political committee, which is a defined term.

And then call these groups political committees and bring them into the regulatory system.

HUME: Under the standard definition of a political committee, it was, I take it, an organization with a tie -- direct tie to a campaign, a candidate, or a political party. Am I correct in that?

SMITH: Well, yes, and it could be more because a political committee is basically a group that's spent $1,000 or more, but they had to be expressly advocating the election or defeat of a candidate. Saying things like, vote for this guy, vote against that guy, beat him or something like that.

If they weren't doing that, they weren't regulated. And that was believed to be a constitutional restriction under First Amendment purposes.

HUME: So under the old way of looking at it, the old definition before the Supreme Court weighed in here on this issue, these groups, these 527s, were operating within the law. Which is to say they may be attacking a political candidate but they're not directly urging the defeat. Right?

SMITH: Right.

HUME: And they are not urging the election of -- although they're Democratic groups, they're not saying vote for John Kerry either.

SMITH: Right.

HUME: They're not formally connected to the campaigns or the candidates, as far as we know.

SMITH: Right.

HUME: So, on paper they're legal but for this added leeway, the Supreme Court supposedly allowed your organization to regulate them.

SMITH: Well, supposed -- for a long time the Supreme Court (search) had said that you couldn't regulate them if they did not engage in this expressed advocacy. In the McConnell decision, the Court sort of swept away those barriers.

So the question really is should the Federal Election Commission take that act to change the definition, which would be a massive expansion of political regulation? Or should it be left to Congress? Because it's not really clear the McCain-Feingold bill actually changed that rule.

In fact, McCain-Feingold seemed to be written around it. And seemed to anticipate that this is exactly what would happen, was that a lot of this money would go to these outside groups. And it doesn't do just to say these groups are illegal or these groups are trying to influence elections.

HUME: Which is what McCain and other Republicans are saying.

SMITH: Right. What we have to do is look at what the law actually says. And the law has a series of very complex restrictions that apply to specific people at specific times. So, that's the tricky issue for the election commission, is do we expand our historic definition in ways that the McCain Feingold bill itself did not? Or do we suggest that Congress does that?

HUME: And you can't tell from the Supreme Court decision whether it authorized your organization, your regulatory body to expand this regulation. Or whether it simply left the door open for Congress to expand the regulations and ask you to enforce them.

SMITH: Right. It made clear -- I think the Court made clear that there would not be a constitutional barrier, for example, expanding this definition. But we at the commission are also limited by what the statute says, and the statute, the Court did not change its historic interpretation of the statute. It was not asked to, and the statute did not change itself in those particular areas.

HUME: So, when the -- so, when the campaign -- the Bush campaign, comes to your organization and says look, we're calling on you to do this, it is not at all clear that you have to authority to do it.

SMITH: I think that's right. And I begin to laugh here because I think for the average viewer their head has got to be starting to spin a little bit.

Senator McCain says, you know, "duh," why isn't this being regulated? But what we have to keep in mind is not everything that involves spending political money is necessarily regulated or subject to limits.

Historically in this country, we rely on free interchange and free political discourse. And so like I say it's not good enough merely to say these groups are influencing the election, therefore, must be acting against the law. You have to look at what the law actually says. And I think that's much less clear.

HUME: Now, is the kind -- you have been a critic of these efforts to strengthen these campaign finance laws in the areas particularly of speech. That is to say, advertising and other political discourse. Is this the kind of thing you believe ends up happening when you try to do that, that it's a fool's error, that you can't really do it?

SMITH: Well, I think it is. I think it becomes very difficult to start cut -- you know, slicing and dicing. And then the other thing is you find is that these laws are routinely used for partisan purposes.

I mean right now the Democrats, as we just saw on the lead-in, are arguing that this is a partisan assault by Republicans on their ability to compete effectively in the war of ideas. It probably is. Now that doesn't mean that Republicans are wrong, but it does -- it's always going to be a consequence that this will be used for partisan purposes.

HUME: Bradley Smith, it's always a pleasure to have you. Thanks for coming.

SMITH: Thank you.

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