RfCEIVED 

FEDERAL ELECHOH 

COMMISSION 

SECRETARIAT 

FEDERAL ELECTION COMMISSION 2012 OCT 23 PH 3= 59 

wASHiNCUON. n.(;. '^oahi 

Ortober 23, 2012 

SENSITIVE 

MEMORANDUM 

TO: The Commission 

FROM: Lisa J. Stevenson 

Deputy General Counsel - Law 

Lorenzo Holloway 

Assistant General Counsel 1 

For Public Finance and Audit Advice 

Margaret J. Fonnan 

Attorney 

SUBJECT: Request for Consideration of a Legal Question (LRA 917) 

I. INTRODUCTION 

On September 28,2012. the Commission received a Request for Consideration of a Legal 

Question ("Request") from counsel on behalf of eight state party committees that the Commission 

voted to audit pursuant to 2 U.S.C. § 438(b).' Attachment. 

The Request addresses a proposed audit finding for each of the Committees pertaining to 

the requirement in 11 C.F.R. § 106.7(d)(l) that state party committees maintain monthly payroll 

logs of the percentage of time each employee spends in cormection with a federal election. The 

issue presented in the Request is whether the monthly time log requirement applies to employees 

' The eight committees are; the Mississippi Democratic Party PAC. the Massachusens Democratic State 

Committee - Fed. Fund, the State Democratic Executive Committee oT Alabama, the Nebraska Democratic Pany, the 

Vermont Democratic Party, the South Dakota Democratic Pany, the Democratic Pany of South Carolina, and the^| 

Commissioners agreed to consider this Request pursuant to the Policy 

Statement Regarding a Program for Requesting Consideration of Legal Questions by the Commission, 76 Fed. Reg. 4S798-4S799 (Aug. I 2011). 

The Commission's action on this Request affects a total of 13 state party committees. The Commission has 

also received another request regarding this issue, which will be addressed in a separate memorandum from the OfTice 

of General Counsel. 
Memorandum to the Commission 

Request for Consideration of a Legal Question (LRA 917) 

Page 2 

who are paid with 100% federal funds. We conclude that under the literal language of the 

regulation, it does. But there is a separate question, as a prudential matter, of whether the 

Commission wishes to pursue recordkeeping findings in these circumstances. Where employees 

are paid with 100% federal funds, the soft money concerns underlying the regulations are absent. 

The only significance a log could have in these circumstances is verifying whether the disclosure 

of disbursements is on the correct line on the Detailed Summary Page of a committee's disclosure 

reports. The Audit Division submits that it needs the logs for this purpose and a recordkeeping 

finding is appropriate. Whether the Commission believes this purpose is sufficiently important to 

require a recordkeeping finding where no logs (or affidavits) are available is a matter of policy for 

the Commission to determine. 

II. COMMITTEES ARE REQUIRED TO KEEP MONTHLY LOGS FOR 

EMPLOYEES PAID EXCLUSIVELY WITH FEDERAL FUNDS 

A state party committee "must keep a monthly log of the percentage of time each employee 

spends in connection with a Federal election." 11 C.F.R. § 106.7(d)(1). To determine if a state 

party committee must allocate the salary, wages, and benefits of its employees, it must examine the 

percentage of time that its employees spent on federal election activity ("FEA") or activity in 

connection with federal elections. Salaries and benefits for employees who spend more than 25% 

of their compensated time on FEA or activities in connection with a federal election in a given 

month must be paid only from a federal account. 2 U.S.C. § 431(20)(A)(iv); 11 C.F.R. 

§ 106.7(d)(l)(ii); see 2 U.S.C. § 441i(b)(2). Employees who spend less than 25% of their time on 

FEA or activities in connection with a federal election may be allocated as administrative costs or 

paid from the federal account. 11 C.F.R. § 106.7(d)(l)(i). Employees who spend none of their 

compensated time on FEA or activities in connection with a federal election may be paid entirely 

with funds that comply with state law. 11 C.F.R. §§ 106.7(c)(1) and 106.7(d)(l)(iii). The 

Committees concede that failure to keep logs for employees "who were paid either in part or with 

no federal funds would support a recordkeeping finding." Attachment at 2. The Committees, 

however, object to "any finding that employees who were paid exclusively with federal funds 

required any entry in a time log." Id. 

We conclude that, read literally, the regulations support the conclusion that state party 

committees must maintain a monthly log under 11 C.F.R. § 106.7(d)(1) for all employees, 

including those paid from and reported as solely 100% federal funds. Although 100% of the time 

spent on federal activity represents the whole or complete time spent on federal activity, this is still 

a percentage and therefore must be documented. 

We understand the Committees' concern about the necessity for a log when employees are 

paid with 100% of federal funds. Section 106.7(d) supports the statute's requirement that state and 

local party committees treat as "federal election activity," payable with 100% federal funds, the 

salaries and benefits of any employee who spends more than 25% of his or her compensated time 

during the month on activities in connection with a federal election. 2 U.S.C. §§ 431(20)(A)(iv), 

441 i(b)( 1). Where employees are paid with 100% federal funds, there is by definition no concern 
Memorandum to tte Commission 

Request for Consideration of a Legal Question (LRA 917) 

Page 3 

that an inadequate share of federal funds was used to pay these employees.^ Thus, the Committees 

might question why the Audit Division would inquire about time logs in this situation and, in the 

absence of such logs, impose a recordkeeping finding 

The additional purpose served by the logs is to differentiate salary and benefits payments 

that qualify as FEA - which are reported on line 30(b) of the Detailed Summary Page - from 

payments to employees who spent less than 25% of their compensated time during a month on 

activities in connection with a federal election, but whose salaries and benefits the Committee 

voluntarily chose to pay with 100% federal funds. Payments in this latter category should be 

reported as federal operating expenses on line 21(b) of the Detailed Summary Page, not as FEA. 

See 11 C.F.R. §§ 104.14(b)(1), 104.17(a)(4). In these audits, it appears that many of the 

Committees recognized this distinction because a number of the Committees reported payroll 

payments as other federal operating expenditures on Schedule B, line 21b. The Audit Division 

submits that it needs the logs to verify that the salary and benefit payments at issue have been 

disclosed on the correct lines of the Detailed Summary Page. See 1 l.CF.R. § 104.14(b)(1). 

In support of their assertion that a log is not required for employees that are paid with 100% 

fedefal funds, the Committees cite a proposed regulation which was never promulgated, which 

provided: "Committees must keep time records for all employees for purposes of determining the 

percentage of time spent on activities in connection with a Federal election." Prohibited and 

Excessive Contributions; Non-Federal Funds or Soft Money, 67 Fed. Reg. 35654,35684 (May 20, 

2002) (Proposed section 300.33(b)(1)). The Committees apparently assert that the fact that the 

Commission (1) moved the recordkeeping requirement from proposed section 300.33 to section 

106.7; and (2) changed the words "all employees" in the proposed provision to "each employee," 

in 11 C.F.R. § 106.7(d)(1), signifies that the monthly log requirement excludes employees paid 

with 100% federal fimds.^ 

There is no indication in the regulatory history that the Commission moved this proposed 

provision into section 106.7 and changed the language because it intended to exclude employees 

^ We recognize the Commission's 3-3 split on a similar issue in the Georgia Federal Elections Conunittee audit 

involving employees whom the committee asserted spent no time on activity in connection with federal elections. In 

that audit, the Commission split on the issue of whether the Conunission could require a committee to keep a log for 

such employees. In a motion that failed 3-3, three Commissioners asserted that "the Commission does not have 

jurisdiction to impose recordkeeping and documentation requirements on employee activity that a State party 

committee claims is solely non-Federal." See Commission Agenda Document No. 11-IO-B (Motion on Audit 

Division Recommendation memorandum on the Georgia Federal Elections Committee, considered in Open Session 

Mar. 3,2011). Here, unlike with the Georgia Federal Elections Committee, a number of the employees of each of the 

Committees nuiy have spent 100%, or some part thereof, of their time on activities in connection with a federal 

election and were paid with 100% federal funds, so the three Commissioners' concerns regarding jurisdiction over 

"solely non-federal" activity may be reduced. 

^ In their Request, the Committees appear to assert that section 106.7 applies to the allocation of expenses, and 

not to Federal Election Activities (FEA). We reiterate that section 106.7 supports the statute's requirement that state 

and local party corrunittees treat as "federal election activity," payable with 100% federal funds, the salaries and 

benefits of any employee who spends more than 2S% of his or her compensated time during the month on activities in 

connection with a federal election. 2 U.S.C. §§ 431(20)(A)(iv), 441i(b)(l). 
Memorandum (o the Commission 

Request for Consideration of a Legal Question (LRA 917) 

Page 4 

paid with 100% federal funds. Rather, as the Commission explained, the proposed regulation at 

300.33(b)( 1) would have required state party committees to keep detailed time records for all 

employees to provide documentation for allocation purposes. Prohibited and Excessive 

Contributions: Non-Federai Funds or Soft Money, 67 Fed. Reg. 49064,49078 (Jul. 29, 2002). 

The Commission rejected the original proposed provision because it chose not to allocate 

employee salary, noting "in response to the NPRM, a State party committee asserted that time 

sheets would be 'burdensome,' that written certifications by employees would be 'equally 

impractical,' but that a tally sheet kept by the employer would be 'more reasonable.' The same 

commenter nonetheless urged the Commission not to require any particular method of 

documentation." Id. The Commission, acknowledging the reasons provided by the commenters, 

decided to "require[] only that a monthly log be kept of the percentage of time each employee 

spends in connection with a Federal election." Id. Thus, the Commission chose a recordkeeping 

requirement in the form of a monthly log as a lesser burden than the detailed time records as part of 

an allocation formula. 

Nothing in the Commission's explanation for this requirement indicates that the 

Commission's change in the location of the recordkeeping requirement or change from the plural 

"all employees" to the singular "each employee" excludes employees paid with 100% federal 

funds. To the contrary, the subparagraphs of the regulatory provision imposing a monthly log 

requirement anticipate three allocation scenarios - paid with 100% federal funds under (d)( 1 )(i) or 

(ii), allocation between federal and non-federal under (d)(l)(i), and paid with 100% state hinds 

under (d)( 1 )(iii). The Committees fail to explain how the language of the regulation, or its drafting 

history, supports imposing a monthly log requirement in the latter two scenarios but somehow 

excludes the first scenario where employees are paid with 100% federal funds. 

The Committees also assert that the proposed finding is inconsistent with the 

Commission's approach in prior audits in other election cycles.* The Committee cites the 2006 

audit of the Georgia Federal Elections Committee, and the 2006 Audit of the Tennessee 

Republican Party Federal Election Account as examples of audits where no recordkeeping finding 

was addressed for failure to maintain a log pursuant to section 106.7(d)(1). The Committees are 

correct about the findings in those prior audits - the Commission did not pursue a separate 

recordkeeping finding under section 106.7(d)(1), regardless of whether those committees 

maintained the logs.^ 

* The Commiuees suggests that the Commission should provide the regulated coiiununity with advance notice 

of its decision to apply the requirements of 11 C.F.R. § 106.7(d)(1) to employees paid with 100% federal iunds. We 

do not believe there is a notice issue because nothing in section 106.7(d)( I) addresses a different category of 

employees for whieh committees would not be required to keep a log. 

' In the audit of the Georgia Federal Eleetions Committee, the Coirunission split on whether that committee 

was required to keep a log. See supra note 2. 
Memorandum to the Commission 

Request for Consideration of a Legal Question (LRA 917) 

Page S 

The Commission, as an administrative agency charged with administering the Federal 

Election Campaign Act, has discretion in deciding which matters of non-compliance will be 

findings in its audit reports. Cf. Nader v. FEC, 823 F. Supp. 2d S3,65 (D.D.C. 2011); Akins v. 

FEC, 736 F. Supp. 2d 9,21 (D.D.C. 2010) ("The FEC has broad discretionary power in 

determining whether to investigate a claim, and whether to pursue civil enforcement under the 

[FECA]."); see also Heckler v. Chaney, 470 U.S. 821, 831 (1985). 

III. RECOMMENDATION 

The Office of the General Counsel recommends that the Commission conclude that 

11 C.F.R. § 106.7(d)(1) requires the Committees to keep a monthly log for employees paid 

exclusively with federal funds. 

Attachment 

Request for Legal Consideration from Neil Reiff, as counsel representing the Mississippi 

Democratic Party PAC, the Massachusetts Democratic State Committee - Fed. Fund, the 

State Democratic Executive Committee of Alabama, the Nebraska Democratic Party, the 

Vermont Democratic Party, the South Dakota Democratic Party, the Democratic Party of 

and 
SANDLER, REIFF, YOUNG & LAMB, RC. 

September 28,2012 

Shawn Woodhead Worth 

Secretary 

Federal Election Commission 

999 E Street, NW 

Washington. DC 20463 

Dear Ms. Worth: 

1'he undersigned serves as counsel to the following Democratic State Party Committees: 

Mississippi Democratic Pany PAC 

Massachusetts Democratic Slate Committee - Fed. Fund 

State Democratic E.xecutive Committee of Alabama 

Nebraska Democratic Party 

Vcmiont Democratic Party 

South Dakota Democratic Party 

Democratic Pany of South Carolina 

This letter serves as a request for consideration of a legal question raised during each of 

the Audits of the above referenced committees for the 2010 election cycle. This request is being 

made in accordance with the FEC's recent Policy Statement, Notice 2011-11. Policy Statement 

Retturdina a Proaram for Reouestine Consideration of Leaal Questions bv the Commission. 76 

Fvii Reg. 43798 (August 1,2011). Our office received notification of this proposed finding, via 

conference call, on September 10,2012. 

Specincally, during this call, our office was notified by the Audit Division that it 

intended to include, as a finding in the Interim Audit Report for each Audit that the committee 

failed to comply with Commission recordkeeping requirements by failing to maintain employee 

time logs for those employees who were paid exclusively with federal funds. It is my 

understanding that all of the above referenced committees would be affected by this proposed 

finding. Our clients disagree with this proposed finding as a "novel" approach to this issue" and 

"inconsistent with prior Commission matters dealing with the same issue" 76 Fed. Reg. at 43799. 

During the ficldwork and the Exit Conference for each of these committees, the Audit 

Division raised the issue of time logs and suggested that, according to 11 C.F.R. § 106.7(d)(1), 

1025 VERMO!^ AVENUE. N.W.. SUITE 300 • WASHINGTON. DC 20005 • TEL: (202) 479-1111 • FAX: (202) 479-1115 

Altachmenl. page 1 of 4 
logs must be kept for all employees percentage of time spent on federal activity regardless of 

whether they were paid all, in part, or with no federal funds. During the fieldwork, each 

committee conceded that the failure to keep logs for employees who were paid either in part or 

with no federal funds would support a recordkeeping finding. However, each committee 

objected to any finding that employees who were paid exclusively with federal funds required 

any entry in a time log.' 

DISCUSSION 

Commission regulations at 11 C.F.R. § 106.7(d)(1) require that party committees "keep a 

monthly log of the percentage of time each employee spends in connection with a Federal 

election." Contrary to the proposed regulation that preceded the final regulation, the final 

regulation does not appear to specify that such a log be kept for aU employees. 

The proposed regulation at proposed 11 C.F.R. § 300.33(b)(1) stated: "Committees must 

keep time records for aU employees for purposes of determining the percentage of time spent on 

activities in connection with a Federal Election." Notice of Proposed Rulemaking, Prohibiied 

and Excessive Contributions: Non-Federal Funds or Soft Money, 97 Fed. Reg. 35654, 35684 

(May 20, 2002) (emphasis added). 

Although the Commission left provisions regarding the allocation of salary in the final 

section 300.33, it also created a new section of the regulations, 11 C.F.R. § 106.7, to address all 

issues relating to the allocation of expenses between federal and non-federal activities by state 

and local party committees. In doing so, it moved the recordkeeping requirement, in its entirety 

from proposed section 300.33 to section 106.7. The shift of this language from section 300.33 

which relates to Federal Election Activities, to section 106.7, which deals exclusively with the 

allocation of expenses is significant. In our view, this shift signifies that the Commission 

believed that the recordkeeping requirement related solely to issues relating to the use of nonfederal funds and did not intend to create a universal, burdensome recordkeeping requirement for 

all employees. 

More significantly, the Commission changed the language of the proposed regulation and 

specifically deleted the word "all" from the proposed version of the regulation. This clearly 

shows the intent of the Commission to not require time records for all employees but only for 

those covered by 11 C.F.R. § 106.7, which would include only those employees that the party 

was claiming to pay either entirely non-federal funds or with a combination of federal and nonfederal funds. 

' Noiwllhslanding this concession, ii should be noted that prior to the 2010 election c>'cle, it is my understanding 

that the committees were permiiied to demonstrate during the audit process that employees did not exceed the 25% 

threshold by providing afTidaviis where inadequate records were maintained. Provision of these affidavits would 

negate a potential rinding that the committee potentially over-funded its federal account from its non-federal 

account. Once these affidavits were adequately provided, and the over-funding issue resolved, the Commission did 

not pursue any separate recordkeeping finding for employee time log recordkeeping. Although the Audit Division 

continues to allow affidavits to be provided to resolve over-funding issues, to the extent that providing for a separate 

recordkeeping finding under any circumstances where the committee provides subsequent, acceptable 

documentation during the audit process appears to be inconsistent with past practice in Commission audits. 

Attachment, page 2 of 4 
To be sure, there is no reason, as a matter of policy, to make a finding that state party 

committees have violated Commission recordkeeping requirements by requiring time sheets that 

serve no purpose. When queried by our office during the teleconference call as to the reason 

such documentation should be kept, the Audit Division replied that such time sheets would help 

track state party allocation transfers for payroll, by employee. However, the Commission 

already has access to sufficient information from committee payroll and other financial records, 

as well as the actual reports filed by the committee which show whether that the employee's 

payroll was intended to be paid for exclusively with federal funds. Adding a time log 

requirement for such employees serves absolutely no additional purpose other than to increase 

the recordkeeping requirements of state parties. In fact, it is my understanding that several state 

parties have chosen to not allocate their payroll costs because they find the time recordation 

requirements to be too burdensome. 

We also find it troubling that the Audit Division has chosen to include this finding in an 

Audit Report with respect to a regulation that the Commission has addressed in the Audit context 

on several occasions in prior cycles without once making a separate recordkeeping violation 

finding. The 2010 election cycle was the fourth election cycle under this regulation and the 

Audit Division's decision to include this as a finding now af^er three prior cycles under this 

regulation is clearly inconsistent with the Commission's approach in prior audits where no time 

logs were maintained. For example, in the 2006 Final Audit Report for the Georgia Federal 

Elections Committee, the Commission determined that the failure to maintain proper 

documentation would result in the requirement that employees must be disclosed on Line 30(b): 

The Audit staffs review of payroll expenses reported on Schedules H4 revealed that 

GFEC failed to maintain supporting documentation detailing the time spent on federal 

activities for employees whose salaries and related expenses totaled S231,366. Absent the 

supDortine documentation. GFEC should have disclosed these salarv and related 

expenses as non-allocable FEA on Schedules B. Line 30b. (Federal Election Activity 

Paid Entirely with Federal Funds). 

The Audit staff discussed this matter with GFEC's representatives during the audit and 

requested monthly logs, timesheets and affidavits. GFEC representatives were unable to 

locate any of the items requested 

....The Commission considered the Audit Division's Recommendation Memorandum in 

which the Audit Division recommended that the Commission adopt a finding that GFEC 

had not maintained adeouate documentation detailing the time spent on federal activities 

for employees whose earnings and related navroll expenses were allocated on Schedules 

H4. 

Final Audit Report of the Georgia Federal Elections Committee for the 2006 Election 

Cycle, p. 10 (emphasis added). 

Similarly, the Commission treated the same issue for the Tennessee Republican Party 

Federal Election Account as purely an over-funding and reporting issue in its 2006 Audit. The 

Audit Report did not discuss any specific recordkeeping violation. 

Attachment, page 3 0(4 
According to these prior audits, the recordkeeping requirement exists for the sole purpose 

of determining the appropriateness of allocation by the committee under section 106.7(d) and the 

Commission did not create a separate recordkeeping finding in these prior audits. The 

recordkeeping requirement merely supports the need to further document the use of non-federal 

funds for these activities. Therefore, the separate recordkeeping finding is clearly duplicative 

and unnecessary. 

Thus, this recordkeeping provision is not mandated by the Federal Election Campaign 

Act and it was the Commission who created this regulation for the apparent and sole purpose of 

assisting the Commission in monitoring compliance with the 25% provision found in 2 U.S.C. § 

431 (20)(A)(iv). The payment by a state party of an employee's salary and benefits with 100% 

federal dollars, and the disclosure of such payments on Line 30(b) of the committee's report is a 

clear concession that it is subject to the mandate found in this statute and the need to comply 

with the FEC's recordkeeping requirement is completely moot with respect to that employee. 

I can assure you that slate parties have, as a general matter, proceeded with this 

assumption, and 1 would expect that, due to the burden of the recordkeeping requirement, that 

few, ifany, maintain time logs for 100% federal employees. If the Commission wishes to create 

a new standard for this recordkeeping requirement, it should do so by providing the regulated 

community with advanced notice and not penalize state parties by creating a new and novel 

finding of a violation of Commission regulations during the Audit process. 

Based upon the above, it is clear that the Audit Division's recommendation to include a 

separate finding of a violation of Commission regulations if a state party committee does not 

maintain time logs for employees who are paid exclusively with federal funds is inconsistent 

with Commission regulations. Therefore, the Commission should direct the Audit Division to 

omit such a finding in the Interim Audit Report. 

If you have any additional questions regarding this matter, I can be reached at (202) 479-

1111. 

/ 

Neil ReifT 

Attachment, page 4 of 4