RECEIVED 

FEDERAL ELECTIOH 

COKHISSIGN 

SECRETARIAT 

2012 OCT 31 PH2:21» FEDERAL ELECTION COMMISSION 

WASHINGTON. D.C:. 204(13 

October 31, 2012 

SENSmVE 

MEMORANDUM 

TO: The Commission 

FROM: Lisa J. Stevenson 

Deputy General Counsel 

Lorenzo Holloway 

Assistant General Counsel 

For Public Finance and Audit Advice 

HA Margaret J, Forman ^ t 

Attorney 

SUBJECT: Request for Consideration of a Legal Question - Democratic Party of Illinois 

(LRA921) 

I. INTRODUCTION 

On October 4,2012, the Commission received a Request for Consideration of a Legal 

Question ("Request") from counsel on behalf of the Democratic Party of Illinois ("DPI" or the 

"Committee"), which the Commission voted for audit pursuant to 2 U.S.C. § 438(b).' 

Attachment. 

The Request addresses a proposed audit finding pertaining to the requirement in 

11 C.F.R. § 106.7(d)(1) that state party committees maintain monthly payroll logs of the 

percentage of time each employee spent in connection with a Federal election. The auditors found 

that the Committee did not maintain a monthly log or any other supporting documentation for any 

' At least two 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 comminees. The Commission has 

also received another request regarding this issue, which has been addressed in a separate memorandum from the 

Office of General Counsel. 
Memorandum to the Commission 

Request for Consideration of a Legal Question- DPI (LRA 921) 

Page 2 

of its paid employees. The issue presented in the Request is whether the monthly time log 

requirement applies to employees who are paid with 100% federal iiinds. 

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)(I) and 106.7(d)(l)(iii). 

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 Committee's 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)(l). Where employees are paid with 100% federal funds, there is by definition no concern 

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

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

involving employees whom the comminee asserted spent no time on activity in connection with federal elections. In 
Memorandum to the Commission 

Request for Consideration of a Legal Question- DPI (LRA 921) 

Page 3 

questions the "rational connection between [section] 106.7(d)'s recordkeeping requirement, and 

the need to ensure compliance with the soft money spending limitations, when the employees are 

paid 100% federally." Attachment at 2. The Committee also states that requiring monthly logs 

under these circumstances "would create a whole new category of burden, while serving no 

evident or stated purpose." Id. 

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). Here, the Committee reported all of its payroll 

payments on line 30(b) as FEA. Because the Committee did not maintain monthly logs, the Audit 

Division cannot verify that these payroll payments have been disclosed on the correct line of the 

detailed summary page. 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 ll.CF.R. § 104.14(b)(1). 

The Committee states that because section 106.7 is located in Part 106, and not Part 104, of 

the Commission's regulations, this regulation is limited to allocation, and therefore a log is not 

required for employees paid with 100% federal funds. In support of its position, the Committee 

asserts that "[tjhe stated purpose of section 106.7(d)(1) was to 'provide documentationybr 

allocation purposes.'" Attachment at 1-2 (quoting Prohibited and Excessive Contributions: 

Non-Federal Funds or Soft Money, 67 Fed. Reg. 49064,49078 (Jul. 29,2002)) (emphasis added in 

attachment). But the Commission in this quote was not addressing the "stated purpose" for section 

106.7(d)( 1). The Commission was addressing the "stated purpose" for proposed 

11 C.F.R. § 300.33(b)(1), which was never promulgated. This proposed provision "would have 

required State, district, and local party committees to keep time records for all employees, the 

purpose being to provide documentation for allocation purposes." Prohibited and Excessive 

Contributions: Non-Federal 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 

that audit, the Commission split on the issue of whether the Commission 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. II-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 Comminee's employees 

may 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. 
Memorandum to the Commission 

Request for Consideration of a Legal Question- DPI (LRA 921) Page 4 

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 section 106.7(d)(1) indicates that the 

Commission's decision to place this recordkeeping requirement in Part 106 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 wi^ 100% federal 

lunds under (d)(l)(i) or (ii), allocation between federal and non-federal under (d)(l)(i), and paid 

with 100% state i^nds under (d)(l)(iii). 

III. RECOMMENDATION 

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

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

exclusively with federal funds. 

Attachment 

Request for Legal Consideration from the Democratic Party of Illinois. 
Perkins Coe 

TOO Thirteenth Street. N.W., Suite 600 

Brine Svoboda we.hington.aCaooos-5960 

rHO« (202)434.1654 «».6s4.6«>0 

r*x (202)654-9150 .«= 20j.6s4.6j1l 

uMAiL- DSvoboda@perkinicoie.com wwi»iperkinicole.eoni 

October 4,2012 

BY HAND 

Ms. Shawn Woodhead Werth 

Secretary and Clerk 

Federal Election Commission 

999 E Street, N.W. 

Washington, DC 20463 

Re: Democratic Party of Illinois 

Request for Consideration of Legal Question 

Dear Ms. Werth: 

I write on behalf of my client, the Democratic Party of Illinois ("the DPI"), pursuant to the Policy 

Statement Regarding a Program for Requesting Consideration of Legal Questions by the 

Commission, 76 Fed. Reg. 45,798 (2011). The Commission should reject the Audit Division's 

contention that, under the allocation rules, a state party, when paying employees entirely with 

federal funds, must still keep logs showing the percentage of time they spent in connection with 

a federal election. Neither the Act nor Commission rules support this position. 

The Commission selected the DPI for audit under 2 U.S.C. § 438(b) for its 2010 election cycle 

activities. The DPI cooperated with the auditors throughout, providing the requested records and 

responding to the auditors' inquiries. The auditors began field work on April 30,2012, and held 

the exit conference on May 18,2012. On September 12,2012, the auditors formally informed 

the DPI of a Ending that it failed to keep monthly logs for its employees in violation of 11 C.F.R. 

§ 106.7(d)(1), even though the DPI did not allocate the costs of these employees' salaries and 

benefits, but rather paid them entirely with federal funds. 

It is not the Commission's recordkeeping rules at part 104 that are at issue here, but rather its 

allocation rules at part 106. The particular rule involved, 11 C.F.R. § 106.7(d)(1), implements 

the restrictions on financing Federal election activity under the Bipartisan Carhpaign Reform Act 

of 2002, which generally prohibit state political parties from paying for FEA with nonfederal 

funds. The stated puipose of section 106.7(d)(l) was to "provide documentationybr allocation 

399204)001/1 J-:OAl.24BI563I.I 

ANCHOIACE ' BIIIINC • 111117111 • BOISI • CHICAGO • DALIAS . DENVEI • LOS ANCEIES • MAUiSON - NEW VUIK 

PAIO ALIO • PIIOINIX . POETIANO • SAN OIEGO • SAN CEANCISCO - SCATIll - SIlANCHAI . WASHINGTON. D.C. 

Perkins Coie UP 

Anachment I, Page I 
Ms. Sha^vn Woodhead Wcrth 

October 4,2012 

Page 2 

purposes." Prohibited wd Excessive Contributions; Non-Federal Funds or Soft Money, 67 Fed. 

Reg. 49,064,49,078 (2002) (emphasis added). The reason was clear. If BCRA allows state 

parties to pay employees with nonfederal funds only when they devote no more than 25 percent 

of their time to federal elections, then there must be a way to determine how they spent tfieir 

time. But when the state party pays its employees 100% federally, then there is no need to verify 

its decision not to allocate. In that case, there is no allocation, and the employees by definition 

have been properly paid. 

The Commission wrote section 106.7(d)(1) with some sensitivity for the burdens that it would 

place on state parties. It rolled back an initial proposal to have the employees keep "time 

records," realizing after notice and comment that this proposal would be "burdensome" and 

"impractical." Id. The auditors' novel interpretation would have the Commission lurch in the 

opposite direction. It would create a whole new category of burden, while serving no evident or 

stated purpose. 

If adopted and enforced, the auditors' interpretation would violate the Administrative Procedure 

Act, which bars "agency actions, findings, and conclusions" that are "arbitrary, capricious, an 

abuse of discretion, or otherwise not in accordance with the law." 5 U.S.C. § 706(2)(A). The 

agency must examine the relevant data and articulate a satisfactory explanation for its action, 

demonstrating a "rational connection between the facts found and the choice made." Burlington 

Truck Lines v. United Slates, 371 U.S. 156,168 (1962). Here, there is no such connection. 

There is no rational connection between 106.7(d)'s recordkeeping requirement, and the need to 

ensure compliance with the soft money spending limitations, when the employees are paid 100% 

federally in the first place. 

Courts have already corrected the Conunission over its rules on paying state party employees, 

and their logic is instructive here. In Shcys v. FEC, 414 F.3d 76 (D.C. Cir. 2005) ("Shays I"), the 

United States Court of Appeals for the District of Columbia Circuit held that the Commission 

acted arbitrarily and capriciously when it failed to explain the state party employee allocation 

rules. See id. at 110-12. The court looked to the "statutory context" behind the rules, and asked 

how the FEC could justify allowing employees who spent up to 25 percent of their time on 

federal election activities to be paid entirely nonfederally. /of at 111. The Commission replied 

that its policy was a necessary "implication" of the requirement that parties pay more federally 

active employees entirely with federal funds. Id. at 110. The court found that this implication 

"makes no sense," that "the Commission gave no other justification for" its rule, and that the rule 

was arbitrary and capricious as a result. Id. at 112. 

By the court's logic, the auditors' position suffers from the same defect. Here, the "statutory 

context" is allocation. The law is intended to ensure that state parties do not impermissibly 

subsidize their Federal election activity with soft money. /</. at 111. Because section 

106.7(d)(1) says simply that state parties "must keep a monthly log of the percentage of time 

39920-0a0l/LEGAi.24(IS631.l 

ARachment I.Page2 
Ms. Shawn Woodhead Werth 

October 4,2012 

Pages 

each employee spends in connection with a Federal election", the auditors draw the "implication" 

that the recordkeeping requirement extends to federally paid employees, as well. 414 F.3d at 

110. Yet there is no logical connection between the statutory objective of avoiding 

circumvention of the soA money restrictions, and the auditors' position. Requiring state parties 

to keep time logs to support paying their employees 100% federally "makes no sense." Id. at 

112. 

Finally, the auditors' position adds insult to injury. In a world where corporations and unions 

may make independent expenditures, see Citizens United v. FEC, SS8 U.S. 310 (2010); where 

nonconnected PACs may raise unlimited, unrestricted contributions to make independent 

expenditures, see SpeechNow.org v. FEC, S99 F.3d 686 (D.C. Cir. 2010) (en banc); and where 

national parties may raise federal funds in larger amounts indexed to inflation, see 2 U.S.C. § 

441a(a), state parties are among the most disfavored actors. The auditors' position would 

compound the heavy compliance burdens that are already laid upon the state parties' shoulders, 

adding an arbitrary, unsupported recordkeeping requirement. The Commission can fully enforce 

BCRA, and avoid worsening the gaping imbalance between state parties and other actors, by 

rejecting the auditors' position. 

We appreciate the Commission's consideration of this matter. 

Very truly yours, 

Brian G. Svoboda 

Counsel to the Democratic Party of Illinois 

cc (by electronic mail); Chair .Hunter 

Vice Chair Weintraub 

Commissioner Bauerly 

Commissioner McGahn 

Commissioner Petersen 

Commissioner Walther 

Anthony Herman, General Counsel 

Thomas Hintermister, Assistant Staff Director, Audit Division 

Marty Favin, Audit Division 

Bill Antosz, Audit Division 

39920-O00l/LE:CAL24815631.1 

Attachment I, Page 3