• rri\t;.-

hbUhKAL bLbCriON COMMIbblON 7f>l7 -„ 

WASHINGTON, D.C. 20463 " I'J A 'Q: / L/ 

July 9,2012 

MEMORANDUM 

To: The Commission 

Through: Alec Palmer jpP 

Staff Director 

From: Patricia Carmona ^ 

Chief Compliance Officer 

Tom Hintermister""^ 

Assistant Staff Director 

Audit Division 

Alex Boniewicz BpT 

Audit Manager r[J 

By: Jim Miller 

Lead Auditor / 

Subject: Audit Division Recommendation Memorandum on the National Campaign 

Fund (A09-26) 

Pursuant to Commission Directive No. 70 (FEC Directive on Processing Audit Reports), 

the Audit staffs recommendations are presented below and the findings are discussed in the 

attached Draft Final Audit Report. The Office of General Counsel has reviewed this 

memorandum and concurs with the recommendations. 

Finding 1. Misstatement of Financial Activity 

The National Campaign Fund's (NCF) response to the Draft Final Audit Report 

(DFAR) did not address this fmding. The Audit staff recommends that the 

Commission fmd that NCF misstated receipts and disbursements for calendar year 

2008. 

Finding 2. Failure to File Notices and Properly Disclose Independent 

Expenditures 

In response to the DFAR, NCF maintains its position that these were fundraising 

letters not intended to influence a vote. The response raises three points as to why 

the communications at issue are not independent expenditures: 

• First, NCF's response contends that the communications are not 

independent expenditures because the timing of the communications was 
not related to the timing of the 2008 primary elections. The response 

references Internal Revenue Service Ruling 2004-6 (IRS 2004-6) which 

applied a "facts and circumstances" test to determine whether a 

communication by a tax-exempt organization is subject to penalty for 

engaging in political campaigns. The factor cited therein is whether "the 

timing of the communication coincides with an electoral campaign." 

Second, the response argues that the direct mail letters did not target 

voters in a particular election. NCF sought lists of proven donors to 

Republican and conservative causes without regard to whether the listed 

donors had any propensity to vote, or were even registered voters. Again 

the response cites IRS 2004-06 and also points out that one of the factors 

considered was if the communication targeted voters in a particular 

election. 

Finally, NCF's response asserts that the occasional inclusion of express 

advocacy references in the direct mail letters should not mean that the 

letters meet the definition of independent expenditures. 

The Audit staff is not persuaded by NCF's response. The IRS 2004-06 standards 

cited are not applicable because the standards for determining when a 

communication includes express advocacy are set forth in the Commission's 

regulations at 11 C.F.R. §100.22. The Revenue Ruling and the Commission's 

regulations serve different purposes. The Revenue Ruling is focused on whether 

certain organizations can engage in specific kinds of activities and maintain their 

tax exempt status and the Commission's express advocacy regulations serve as one 

of the elements for determining whether a communication will be considered an 

independent expenditure (See 11 C.F.R. § 100.16(a)). In addition, the 

Commission has not incorporated the standards from the Revenue Ruling by 

reference. Therefore, the standards of timing of the communication and targeting 

of voters should not be used in determining whether the communications in this 

case are independent expenditures. 

With respect to NCF's argument about the occasional inclusion of express 

advocacy references in the letters, the Commission's regulations on express 

advocacy do not include a limitation or an exception for only occasional inclusion 

of express advocacy. A communication containing express advocacy of a clearly 

identified candidate that is not coordinated with a candidate or candidate's 

committee or its agents, or a political party committee or its agents, and which is 

not otherwise exempt, is an independent expenditure. 

The Audit staff maintains that NCF did not timely file 24/48-hour notices for 

$1,153,748; did not file 24-hour notices for $33,485 and did not properly disclose 

independent expenditures totaling $528,662 prior to payment as memo entries. 

The Audit staff recommends that the Commission find that NCF failed to file 

notices and properly disclose independent expenditures. 

The Committee did not request an audit hearing. 
If this memorandum is approved, a Proposed Final Audit Report will be prepared within 

30 days of the Commission's vote. 

Should an objection be received. Directive No. 70 states that the Audit Division 

Recommendation Memorandum will be placed on the next regularly scheduled open 

session agenda. 

Documents related to this audit report can be viewed in the Voting Ballot Matters folder. 

Should you have any questions, please contact Jim Miller or Alex Boniewicz at 694-1200. 

Attachments: 

Draft Final Audit Report of the Audit Division on the National Campaign Fund 

- Draft Final Audit Report on National Campaign Fund (LRA 847) 

- Audit Division Recommendation Memorandum on National Campaign Fund 

(LRA 847) 

cc: Office of General Counsel 
FEDERAL ELECTION COMMISSION 

WASHINGTON. D.C. 20463 

Nay 21 2012 

MEMORANDUM 

TO: Patricia Carmona 

Chief Compliance OfBcer 

Tom Hintermister 

Assistant Staff Director 

Audit Division 

FROM: •P Christopher Hughey 

Deputy General Counsel 

Lawrence L. Calvert, Ji; 

Associate General C 

General Law and A 

Lorenzo Holloway J / U 

Assistant General Counsel Ajwlf '4f>^ 

Public Finance and Audit Advice 

Margaret J. Forman ^vvO^ 

Attomey ^ 

SUBJECT: Draft Final Audit Report on National Campaign Fund (LRA 847) 

I. INTRODUCTION 

The Office of General Counsel ("OGC") has reviewed the Draft Final Audit 

Report ("Proposed Report") on The National Campaign Fund ("NCF"), and we concur 

with Finding 1 (Misstatement of Financial Activity) and Finding 2 (Failure to File 

Notices and Properly Disclose Independent Expenditures). We discuss Finding 2 below. 

If you have any questions, please contact Margaret J. Forman, the attomey assigned to 

this audit. 

II. FINDING 2 (FAILURE TO FILE NOTICES AND PROPERLY 

DISCLOSE INDEPENDENT EXPENDITURES) 

In our analysis of the Draft Interim Audit Report ("lAR"), we concluded 

that fiindraising letters can be independent expenditures as a matter of law, so 

long as the underlying communication meets the definition of express advocacy. 
Memorandum to Patricia Carmona 

LRA 847 - National Campaign Fund - DFAR Legal Comments 

Page 2 of 4 

We reach the same conclusion here. Contrary to NCF's position, the regulation 

defining express advocacy does not permit an examination of the speaker's intent 

when making the communication. We believe a test that incorporates the 

speaker's subjective intent would not be workable. 

A. BACKGROUND 

NCF made expenditures for direct mail and electronic mail communications that 

included fundraising requests. Many of these communications included express 

advocacy. On its April 2008 Quarterly Report, NCF originally reported these types of 

expenditures as operating expenditures. NCF, however, amended that report to disclose 

such communications as independent expenditures, and NCF's subsequent reports also 

disclosed such communications as independent expenditures. NCF ultimately disclosed, 

in aggregate, approximately $1.55 million in communications as independent 

expenditures on Schedule E of its reports, and it filed 24/48-hour notices. 

The Audit Division's review determined that many of the communications 

disclosed as independent expenditures in these reports contained express advocacy, and 

indeed should have been disclosed as independent expenditures on Schedule E of NCF's 

reports. It also determined that many of these independent expenditures required 24/48 

hour notices. The Audit Division also determined, however, that communications on 

which NCF spent approximately $290,000 did not, in fact, contain express advocacy, and 

thus were not independent expenditures. The Audit Division's review also revealed that 

for the communications that were independent expenditures, NCF reported them and 

determined whether 24 or 48 hour notices were required based on when the invoices were 

paid, rather than when the conununications were disseminated. 

The lAR recommended that NCF provide evidence demonstrating that the 

disbursements identified by the Audit Division were not independent expenditures and 

therefore would not require 24/48-hour notices. It also reconunended that NCF submit 

and implement revised procedures for reporting independent expenditures and tracking 

dissemination dates for independent expenditures to ensure timely filing of 24/48-hour 

notices. 

NCF responded to the lAR by acknowledging that some of the communications 

contained express advocacy. NCF asserts, however, that it "never intended to engage in 

any independent expenditures," that these "communications were all just fundraising 

letters sent to proven donors with no consideration at all to whether the recipient was 

even a voter," that the timing of the letters "had absolutely no reference to the timing of 

primary elections during 2008," and the content of the letters "did not urge the recipient 

audience to vote for any particular candidate." NCF Response, February 27,2012. 

The DFAR states that because a number of the communications meet the 

definition of independent expenditure and the regulation does not exclude direct mail 
Memorandum to Patricia Carmona 

LRA 847 - National Campaign Fund - DFAR Legal Comments 

Page 3 of4 

fundraising letters from the definition, the Audit Division believes that NCF's assertion 

that these are not independent expenditures is not supported by the evidence. 

B. FUNDRAISING COMMUNICATIONS AS INDEPENDENT 

EXPENDITURES 

The Commission has found that fundraising solicitations containing express 

advocacy should be reported as independent expenditures. In MUR 5809, the Christian 

Voter Project ("CVP") failed to file independent expenditure notices for the costs of 

fundraising letters that expressly advocated the election/defeat of candidates. The 

Commission found reason to believe that CVP's failure to file independent expenditure 

notices violated the Act, and accepted a conciliation agreement with the committee based 

on that violation. In MUR 5518 (Hawaii Democratic Party), a party communication 

contained at least three messages: an invitation to precinct meetings, express advocacy of 

the defeat of a clearly identified Federal candidate, and a fundraising appeal. The OfRce 

of General Counsel concluded the communication should have been reported either as an 

independent expenditure or as federal election activity, and recommended that the 

Commission find reason to believe. The Commission rejected our recommendation, not 

on grounds that solicitations could not be independent expenditures but on grounds that 

invitations to precinct meetings permitted treatment as a federal/non-federal allocated 

administrative expense under the exception to the definition of federal election activity 

for costs of local political conventions, 2 U.S.C. § 431 (20)(B)(iii). In particular. 

Commissioners von Spakovsky and Weintraub stated in their Statement of Reasons that 

"had this invitation been mailed more broadly than it was, and in sufficient numbers to 

raise questions about whether it was a bona fide invitation, or if it was really just a 

fundraising or advocacy piece masquerading as an invitation, this would be a different 

case." MUR 5518 (Hawaii Democratic Party), Statement of Reasons of Commissioners 

Hans A. von Spakovsky and Ellen L. Weintraub, at 3 (Feb. 23,2007); cf MURs 5511 

and 5525 (Swift Boat Veterans for Truth) (fundraising solicitations containing express 

advocacy were expenditures that counted towards organization's threshold for political 

committee status).' 

C. AUDIT DIVISION SHOULD FOLLOW COMMISSION 

APPROACH IN PENDING AUDIT 

We previously have analyzed Finding 2 (Failure to File Notices and Properly 

Disclose Independent Expenditures) in legal comments on the lAR dated June 17,2011, 

and supplemental legal comments on the lAR, dated November 10,2011. The same 

issue is pending in another audit, which is currently before the Commission. NCF here 

has made essentially the same argument as another committee made in response to the 

lAR in that other audit, even using in a number of instances the same phrases. The only 

' Some Commissioners have expressed concerns, in other pending matters, about the extent to 

which fundraising letters necessarily constitute express advocacy. 
Memorandum to Patricia Carmona 

LRA 847 - National Campaign Fund - DFAR Legal Comments 

Page 4 of 4 

substantive difference is that NCF adds that the communications were not independent 

expenditures because the communications "in no way [advocated] the election or defeat 

of a clearly identified candidate." Notwithstanding that argument, we note that a number 

of the communications contained phrases, either in their principal text or on their 

envelopes, that contained phrases such as "Now is the time to elect John McCain 

President of the United States." 

Essentially, NCF's argument as we understand it is this: fundraising 

communications should never be considered independent expenditures, even if the 

communications contain express advocacy under 11 C.F.R. § 100.22(a) (for example, 

"Vote for Jones"), so long as the communicator's subjective intent was not to make an 

independent expenditure. We addressed that argument at greater length in our comments 

to the draft DFAR in the other audit, and we refer you to those comments. The principal 

points we made there were that fundraising communications can be independent 

expenditures if they contain express advocacy, and that express advocacy analysis, for a 

number of reasons, does not provide for consideration of the speaker's subjective intent. 

However, we note that the Audit Division Recommendation Memorandum in that 

other audit is anticipated to be considered by the Commission in the very near future. 

Assuming that the Commission completes action on that audit as soon as we anticipate, 

and assuming that the Commission is able to resolve this issue in that other audit by a 

four-vote majority, we would recommend that the Audit Division then make any 

revisions to tiie DFAR in this audit that might be necessary to be consistent with the 

approach taken by the Commission in that other audit. 
FEDERAL ELECTION COMMISSION 

WASHINGTON, D.C. 20463 

MEMORANDUM 

June 26, 2012 

TO: Patricia Carmona 

Chief Compliance Officer 

Tom Hintermister 

Assistant Staff Director 

Audit Division 

FROM: Lisa J. Stevenson 

Special Counsel to 

the General Counsel 

Lawrence L. Calvert, Jr. 

Associate General Counsel 

General Law and Advice 

SUBJECT: 

Lorenzo Holloway 

Assistant General Counsel 

Public Finance and Audit Advice 

Margaret J. Forman '> H 

Attomey 

Audit Division Recommendation Memorandum on National 

Campaign Fund (LRA 847) 

I. INTRODUCTION 

The Office of General Counsel ("OGC") has reviewed the Audit Division 

Recommendation Memorandum ("ADRM") on the National Campaign Fund ("NCF") 

and NCF's response to the Draft Final Audit Report.' We generally concur with the 

ADRM, but we have specific comments about three points that NCF raises in its response 

to the DFAR as to why the communications at issue are not independent expenditures. 

' While this memorandum provides comments on the ADRM and NCF's response to the DFAR, we 

reconunend that you attach this memorandum and our memorandum conunenting on the DFAR to the 

ADRM. This will assist the Conunission in understanding the legal issues raised in the ADRM and NCF's 

response to the DFAR. 
Memorandum to Patricia Carmona 

LRA 847 ~ National Campaign Fund - ADRM Legal Comments 

Page 2 of2 

First, NCF contends that the communications are not independent 

expenditures because the timing of the communications - direct mail letters in this 

case - were not related to the timing of the 2008 primary elections. Second, NCF 

argues that the direct mail letters did not target voters in a particular election. 

NCF pulls the standards of timing of the communication and targeting of voters 

firom an Internal Revenue Service Ruling that addresses whether certain 

organizations may maintain their exemption from Federal taxes when they 

advocate on public policy issues for which public officials, who are also 

candidates, have taken a stance. Rev. Rul. 2004-6. Finally, NCF asserts that the 

occasional inclusion of express advocacy references in the direct mail letters 

should not mean that the letters meet the definition of independent expenditures. 

The Revenue Ruling's standards are inapposite because the standards for 

determining when a communication includes express advocacy are set forth in the 

Commission's regulations at 11 C.F.R. §§ 100.22(a) and (b). The Revenue 

Ruling and the Commission's regulations serve different purposes. The Revenue 

Ruling is focused on whether certain organizations can engage in specific kinds of 

activities and maintain their tax exempt status, Rev. Rul. 2004-6, and the 

Commission's express advocacy regulations serve as one of the elements for 

determining whether a communication will be considered an independent 

expenditure. 11 C.F.R. § 100.16(a). In addition, the Commission has not 

incorporated the standards from the Revenue Ruling by reference. We believe, 

therefore, that the standards of timing of the communication and targeting of 

voters should not be used in determining whether the communications in this case 

are independent expenditures. 

With respect to NCF's argument about the occasional inclusion of express 

advocacy references in the letters, the Commission's regulations on express 

advocacy do not include a limitation or an exception for only occasional inclusion 

of express advocacy. See 11 C.F.R. §§ 100.22(a) and (b). A communication 

containing express advocacy of a cleariy identified candidate that is not 

coordinated with a candidate or candidate's committee or its agents, or a political 

party committee or its agents, and which is not otherwise exempt, is an 

independent expenditure. 2 U.S.C. § 431(17); 11 C.F.R. § 100.16. 
Draft Final Audit Report of the 

Audit Division on the 

National Campaign Fund 

February 4, 2008 - December 31, 2008 

Why the Audit 

Was Done 

Federal law permits the 

Commission to conduct 

audits and field 

investigations of any 

political committee that is 

required to file reports 

under the Federal 

Election Campaign Act 

(the Act). The 

Commission generally 

conducts such audits 

when a committee 

appears not to have mej 

the threshold 

requirements for 

substantial compliance^ 

with the Act^ii^j&dudit 

determim 

comnni|Ke complied'' 

the Iffi^^ns, 

prohibitiS|^id 

disclosure r^^ements 

of the Act. 

Future Actioi 

The Commission miy 

initiate an enforcement 

action, at a later time, 

with respect to any of the 

matters discussed in this 

report. 

About the Committee^ 

The National Campaign Fund^ 

headquartered in Laguna 

information, see the chart#i Co! 

non-connected committee, 

alifomia. For more 

tee Organization, p. 2. 

Financi 

• Receipts 

o Contributions 

^ans Received 

o "^^l^feceipts 

Toti 

• DisburSlnMgits 

o IndepKdent Exp^ditures 

o Operatmg Expenditures 

o Refund^^iContributions 

in Repayments 

. omFWDursements 

$ 1,927,095 

5,000 

3,489 

$ 1,935,584 

$ 1.186,972 

679,546 

26,143 

5,000 

$ 1,897,661 

Findings and Recommendations (p. 3) 

• Misstatement of Financial Activity (Finding 1) 

• Failure to File Notices and Properly Disclose Independent 

Expenditures (Finding 2) 

2 U.S.C. §438(b). 
Draft Final Audit Report of the 

Audit Division on the 

National Campaign Fund 

February 4, 2008 - December 31, 2008 
Table of Contents 

Part I. Background 

Authority for Audit 

Scope of Audit 

Part II. Overview of Committee 

Committee Organization 

Overview of Financial Activity 

Part III. Summaries 

Findings and Recommendations 

Part IV. Findings and Recomine 

Finding 1. Misstatement of Financial Activity 

Finding 2. Failure to File Notices^f|gd Properly 

Expenditures 

Page 
Parti 

Background 

Authority for Audit 

This report is based on an audit of the National Campaign Fund (NCF) undertaken by the 

Audit Division of the Federal Election Commission (the Commission) in accordance with 

the Federal Election Campaign Act of 1971, as amended (the Act). The Audit Division 

conducted the audit pursuant to 2 U.S.C. §438(b), which permits the Commission to 

conduct audits and field investigations of any political committee^t is required to file a 

report under 2 U.S.C. §434. Prior to conducting any audit und^tms^ubsection, the 

Commission must perform an internal review of reports fil^^^selected committees to 

determine if the reports filed by a particular committee i^jy^tl^l^shold requirements 

for substantial compliance with the Act. 2 U.S.C. §4: 

Scope of Audit 

Following Commission-approved procedures 

factors and, as a result, this audit examined: 

1. the consistency between reported figures and bai 

2. the disclosure of individual contri^tors' occupatio' 

3. the disclosure of independent 6xp^Sbil^> 

4. other committee operations necessaW^RraHgyiew 
Part II 

Overview of Committee 

Committee Organization 

Important Dates 

Date of Registration August 20, 2007 

Audit Coverage February 4.2008^ - December 31,2008 

Headquarters Laguna Nifij^i. Cahfomia 

Bank Information 

Bank Depositories 

Bank Accounts 

Treasurer 

Treasurer When Audit Was Conducted 

Treasurer During Period Covered by Audit 

Management Information 

Attended Commission Campaign Finam 

Seminar 

• Who Handled Account: 

Tasks 

Ove lemoi Finmcial Activity 

(Au^^lHunounts) 

Cash-on-^mid ^ Febru^ ^ ^^^^^tu^ $ 0 

Receipt^'^^k 1 ^ 

o ContributioS^lpm Individi^ ^ 1,927,095 

o Loans Receiv^^^ W 5,000 

o Other Receipts ^'^B^ W 3,489 

Total Receipts ^%^i«ir $ 1,935,584 

Disbursements ^ 

o Independent Expenditures 1.186.972 

o Operating Expenditures 679,546 

o Refunds of Contributions 26,143 

o Loan Repayments 5.000 

Total Disbursements $ 1,897,661 

Cash-on-hand @ December 31,2008 $ 37,923 

^ Although NCF registered with the Commission on August 20,2007, the initial bank activity occurred on February 

4.2008. 
Part III 

Summaries 

Findings and Recommendations 

Finding 1. Misstatement of Financial Activity 

During audit fieldwork, a comparison of NCF's reported financial activity with its bank 

records revealed that, for 2008, NCF understated reported receipt|^d disbursements by 

$69,339 and $100,887, respectively, and overstated ending ca^^fnhmd by S31,448. In 

response to the Interim Audit Report recommendation, NCF^j^^nded its reports to 

materially correct the misstatements. (For more detail, sc 

Finding 2. Failure to File Notice|^B4. ^rope^^^isclose 

Independent Expenditures 

During audit fieldwork, the Audit staff ascertit^l^khat NC^^disclosed ind^|p£lent 

expenditures, totaling $1,548,622, on Schedule El^m|i^^^nBependent Ex^nditures). 

The Audit staff noted that only $1,261,206 of these eS^ffigitures appeared to meet the 

definition of independent expenditur^^dcontained lan^ ^ expressly advocating the 

election or defeat of a clearly identifielS|^^§te. Of thesl^j^gg^ndent expenditures 

NCF: 

• did not file 24/48-

any 48-hour n 

did not prdpe 

publicly dissemf 

a dj^bf^H^^dule 

In re§] 

sup 

not requiri 

recommenda 

independent ex 

lely manner and did not file 

dependent e%ffifiditures totaling $528,662 made (i.e., 

menf^ "memo" entries on Schedule E and as 

ebtslSlfrai^ations). 

^uditl^^^pf recommendation, NCF provided information 

le pur^^e of its direct-mail letters was fundraising and did 

|endent expenditures. Regarding the Audit staffs 

)mit and implement revised procedures for reporting 

iC¥ indicated that they plan to terminate afler the audit is 

completed. (For inl^|^ail, see p. 5) 
Part IV 

Findings and Recommendations 

I Finding 1. Misstatement of Financial Activity 

Summary 

During audit fieldwork, a comparison of NCF's reported financial activity with its bank 

records revealed that, for 2008, NCF understated reported receipts and disbursements by 

$69,339 and $100,887, respectively, and overstated ending cash^j^and by $31,448. In 

response to the Interim Audit Report recommendation, NCF sj^nideaits reports to 

materially correct the misstatements. 

Legal Standard 

Contents of Reports. Each report must disclose 

• the amount of cash-on-hand at the beginnii^ 

• the total amount of receipts for the reporti 

• the total amount of disbursements for the 

and 

• certain transactions that require itl|^^ion on Sche 

Schedule B (Itemized Disbursemei^^HijuS-C 

Facts and Analysis 

A. Facts 

During audit fieldy^i^he Au 

records for calendar ye^!^08. 

receipts, disbj^g|£|ents, ai 

why the 

reporting 

the calendaF^jear; 

ind for the cdendar year; 

(Itemized Receipts) or 

,(3), (4) and (5). 

ported financial activity with bank 

outlines the discrepancies for the 

ance. The succeeding paragraphs explain 

Reported Bank Records Discrepancy 

Opening Casffialanc^ 

@ Febmary 4,1!^ ^ 

$0 $0 $0 

Receipts $1,866,245 $1,935,584 $69,339 

Understated 

Disbursements $1,796,773 $1,897,661 $100,887 

Understated 

Ending Cash Balance 

@ December 31,2008 

$69,372^ $37,923 $31,448 

Overstated 

^ This column and the discrepancy column do not total correctly. The reported ending cash balance at 

December 31,2008 is $100 less than the reported receipts minus the reported disbursements for the period 

due to a $100 discrepancy between the reported ending cash on one report and beginning cash on the 

succeeding report. 
The understatement of receipts resulted from unidentified differences that occurred 

primarily during the 2008 year-end report period. Based on a limited review of available 

records, it appeared that all conn-ibutor information received by the vendor that processed 

deposits of contributions may not have been forwarded to the vendor responsible for the 

data entry. 

The understatement of disbursements resulted from the following: 

• Disbursements not reported 

• Reported disbursements not supported by a check or 

• Contribution refunds not reported 

• Amounts incorrectly reported 

• American Express charges not reported 

• Unexplained difference 

Net Understatement of Disbursemen 

The $31,448 overstatement of the ending cash-on 

described above. 

B. Interim Audit Report & Audit Di 

At the exit conference, the Audit staff e) 

schedules to NCF's Treasurer and Assists 

reports as necessary. 

tea from the misstatements 

Lecommeni 

lainen^^^nisstatei^its and provided 

Treidffl^iiibi^ agreed to amend their 

The Interim Audi^^i^EaiEffi reco 

• Amend its repOFBHo o 

• Amejdjii||UDOst ri 

ej^lM^i^g|l|.the 

irther, NC 

itify any sub 

ended that 

he misstatpRents noted above; and 

correct the cash-on-hand balance with an 

e resulteSTfrom a prior period audit adjustment, 

d ha^^g^opciled the cash balance of its most recent report to 

ent diSipancies that may affect the adjustment 

lended by Audifstaff. 

C. CommltteftKMponse ff Interim Audit Report 

In response to thl^|terin^udit Report recommendation, NCF filed amended reports for 

2008 that materially^^rected the misstatements. 

Finding 2. Failure to File Notices and Properly Disclose 

Independent Expenditures 

Summary 

During audit fieldwork, the Audit staff ascertained that NCF disclosed independent 

expenditures, totaling $1,548,622, on Schedule E (Itemized Independent Expenditures). 

The Audit staff noted that only $ 1,261,206 of these expenditures appeared to meet the 
definition of independent expenditure and contained language expressly advocating the 

election or defeat of a clearly identified candidate. Of these independent expenditures 

NCF: 

• did not file 24/48-hour notices for $ 1,153,748 in a timely manner and did not file 

any 48-hour notices for $33,485; and 

• did not properly disclose independent expenditures totaling $528,662 made (i.e., 

publicly disseminated) prior to payment as "memo" entries on Schedule E and as 

a debt on Schedule D (Debts and Obligations). 

In response to the Interim Audit Report recommendation, NCj^rovided information 

supporting its position that the purpose of its direct-mail lemrl^as fundraising and did 

not require reporting as independent expenditures. Regamng tn^sudit staffs 

recommendation that they submit and implement re^|dpTOcedur^|^eporting 

independent expenditures, NCF indicated that thp^plan to terminate alffi^e audit is 

completed. 

Legal Standard 

A. Definition oflndependentExpimditures. The tef^Undependentexpenditure' 

means an expenditure by a persoii^^|g|^communicatio^Kpressly advocating the 

election or defeat of a clearly ident]^iffi|^idate that is^tenSde in coordination 

with any candidate or authorized coiminittlMll^e.nt of a Jmdidate. 11 CFR 

§100.16. 

B. Disclosure Requ^emeni 

be reported on^^g^^^hiile E i1 

the same payee du^^^he si 

expenditi^^jmde (il 

as "ni^l^^^^^l^n Scl 

exn^ditures offSSlilQr lesl 

5^ the total ofthl 

)(3)(vii), 10^ 

reneral Gi^elines. An independent expenditure shall 

^hcn added%other independent expenditures made to 

^lendar yS^t exceeds $200. Independent 

ted) prior to payment should be disclosed 

Lie E an^^fa debt on Schedule D. Independent 

lot need to be itemized, though the committee must 

;s on line (b) on Schedule E. 11 CFR 

^04.11. 

C. Last-MiniF^ndepenjpht Expenditure Reports (24-Hour Notices). Any 

independent^^jdi^res aggregating $1,000 or more, with respect to any given 

election, and ma!^^er the 20*'' day but more than 24 hours before the day of an 

election must be^ported and the report must be received by the Commission within 

24 hours af%er the expendimre is made. A 24-hour notice is required each time 

additional independent expenditures aggregate $1,000 or more. The date that a 

communication is publicly disseminated serves as the date that the committee must 

use to determine whether the total amount of independent expenditures has, in the 

aggregate, reached or exceeded the threshold reporting amount of $ 1,000. 11 CFR 

§§104.4(0 and 104.5(g)(2). 

D. Independent Expenditure Reports (48-Hour Notices). Any independent 

expendimres aggregating $10,000 or more with respect to any given election, at any 
time during a calendar year, up to and including the 20th day before an election, must 

be disclosed within 48 hours each time the expenditures aggregate $10,000 or more. 

The notices must be filed with the Commission within 48 hours after the expenditure 

is made. 11 CFR §§104.4(f) and 104.5(g)(1). 

Facts and Analysis 

A. Facts 

During audit fieldwork, it was noted that NCF's initial filing for 2008 (the April 15*^ 

Quarterly Report) disclosed all expenditures as operating expenditures on Schedule B, 

Line 21(b). On July 11,2008, NCF amended that report and d^^^l ^ most of the former 

operating expenditures as independent expenditures on Sche^^E and Line 24 of the 

report. During the remainder of 2008, NCF filed reports ]gpc^ji^losed the majority of 

its disbursements as independent expenditures. 

NCF disclosed independent expenditures, totalin^ 

these disbursements were for the printing and 

letters that were disclosed as either in suppo: 

President or in opposition to Hillary Clinton or 

staff reviewed these expenditures to ^ess whether 

Schedule E and if 24/48-hour notices^^|&required to be 

only $1,261,206 of these expenditures ^^wlli o meet 

expenditure and contained language expresslv^j^|^ing 

clearly identified candidate. A review of t^ di^t 

expenditures ($l,261,2Qg||^»Jed the foll^^ g 

,622, on Sche 

for direct maH 

John Mc( 

President 

Most of 

tion 

h for 

The Audit 

reported them on 

The review indicated that 

on of an independent 

ctionor defeat of a 

s and invoices for those 

• NCF did ncf 

expenditures for 

for$: 

manner 241^8-jbour notices of its independent 

Ln additiolrNCF did not file any 48-hour notices 

[CF reported 

lents were 

mai;^|l. For expel 

inde^Sjtot expeni 

coverin^m^dates 

correspon( 

idepdl^^tfixpenditures when the invoices were paid; some 

or nicS^s after the dissemination date of the printed 

ituresf^taling $528,662, NCF should have disclosed 

ires as memo entries on Schedule E, filed with reports 

len the materials were disseminated, and included a 

'on Schedule D. 

B. Interim Audit Report & Audit Division Recommendation 

At the exit conference, the Audit staff addressed these matters and provided schedules 

detailing these expenditures to NCF representatives. NCF representatives stated that they 

would comply with the recommendation. 

The Treasurer later emailed the Audit staff NCF's position regarding independent 

expenditures. The email stated: 

"Politicalfundraising letters that are not intended to influence a vote, not timed 

to a particular election, but which are intended solely to motivate a donation for 
the group (and which have words of express advocacy in them) should be 

excluded from the definition of independent expenditure for your extraordinary 

reporting purposes, as I stated to you. I have previously written to the FEC on 

these views and spoken to reporters about them as well. When the FEC pushes 

administrative overhead activities like general fundraising into IE status, it creates 

a costly regulatory burden for small donor committees like ours that do not have 

the financial backing, permanent staff, and infrastructure to keep up with the 

filings. Hardly any public purpose is served by the extraordinary reporting 

requirements imposed on just a fundraising letter; and the public is indeed mislead 

(sic) by the artificial inflation in dollars spent on lEs the current requirements 

cause. In the last election, I fielded questions about the N^^mn^ampaign Fund 

from reporters of the Huffington Post and the New York^mes who relied on the 

IE expense compilations as indications of actual IE actifit^mdirect mail. I told 

both that the FEC requirements mislead the publicjri^e trueffll^e of the 

expenditures, and both the reporters agreed witl 

Subsequent to the exit conference, the Audit 

documentation and explanations to clarify wl 

in independent expenditures. NCF was asked to 

were distributed and to provide the extent of hyperlinl 

communications. In addition, NCF ^T^HQuested to expl 

[tional reques!l§^{CF for 

communica^Sis resulted 

some of the communications 

It were contained in those 

^hy some of the 

communications did not appear to corr^PS^^^yhe mailing'^QSr NCF responded by 

stating that the communications in quest]^ w^!^fa^ings'.^d provided the content 

for one of the e-mailings. NCF also expla^d^ti^^|ptf the communication multiple 

times for each mailingfa^j!lii^^ot keep prc'^us versiori^f the communication, and 

therefore was unabl^^rovicvme previous^rsions. NCF's responses have been 

considered in the cmlP^i&of in jfiendent exp^^j^res presented above. 

The InterimJi)jadits£.eportll^^rnS!^^|^^ take the following action: 

men^fcgevidence that would demonstrate that these 

sbursements^^^^ not l^^giident expenditures and therefore did not require 

d 

t revised procedures for reporting independent expenditures, 

as wet^^or trackip dissemination dates for such expendimres to allow for 

timely t^^l^pf 24^^-hour reporting notices. 

C. Committee Resj^se to Interim Audit Report 

In response to the Interim Audit Report recommendation, NCF offered background 

information for why it was created and the purpose of its direct-mail fundraising letters.. 

NCF explained that it was formed in 2008 as a non-connected, political action committee 

(PAC) that was not supported by any sponsoring organization such as a labor union or 

corporation. There was no permanent staff, office or office equipment. It was formed 

with the intention of raising funds to allow it to participate in the 2008 General Election 

by making direct contributions to candidates for Federal office. NCF indicated that the 

committee was the epitome of a "grass roots" attempt to participate in the 2008 Federal 

elections. 
NCF explained that its direct-mail advisors obtained lists of proven donors to Republican 

and conservative causes and tested various content appeals in the letters to these donors. 

The various tests included content with references to elected officials and Presidential 

candidates to clue the recipient audience that NCF was a conservative Republican PAC 

worthy of their support. NCF stated that the purpose of these mailings was not to 

intervene in any election. NCF indicated that the facts demonstrated that: the timing of 

all of its mailings had no reference to the timing of primary elections during 2008; the 

content of the letters, other than sometimes including some words considered "express 

advocacy" by the Commission, did not urge the recipient audienceJo vote for any 

particular candidate; and the audience was selected for its funch^i^xj^alue, with no 

consideration for its electoral value. Thus the expenditures'^ffient, timing and 

distribution, and audience served a fiindraising purpose bwrfSSWfttelectoral purpose. 

NCF disagreed that any of its direct-mail fundraisi 

expenditures. NCF noted that the Commission 

CFR §100.16 as a communication expressly 

identified candidate. NCF acknowledged tha'l so 

express advocacy. However, NCF thought that 

facts, it should agree that NCF's fun(kaising letters 

and that the special reporting rules ^P^^^^to indepen 

24/48-hour notices or memo entries) sn^re^|||{ggply 

constitij^^ndependent 

es an independent^mnditure at 11 

election or d^8|0f a clearly 

did incline words of 

fnission considered all of the 

independent expenditures 

penditures (such as the 

that they believe that 

direct-mail fundraising letters should be %clud!^9|mtiie dejniition of independent 

expendimres, and that the intent of the re^haU^^Vaf^npsi'lnclude direct mail 

fundraising expenditur^mll^^endent exp^ditures. urged the Commission to 

reform its reporting^^^iren^^Mor grass-r^s organizations that engage in direct-mail 

fundraising since tlfifS^eve tffl these letters^^^ot independent expenditures. NCF 

indicated that a decisioS^sbdb^^e^at th^rne requirements, coordination and 

record kee^j|^^|ggQgt wo^ftfc eSSj^^j^gnnuing to participate and as such, plan to 

terminateidrecMWTM is completed. 

The^j^mi^aff does norBroute thBRcF's intention was to raise funds. However, NCF 

acknowl^^and the AuRstaff^rees, that some of these letters included express 

advocacy lai^^|ge such asg^ote for John McCain". Since these expenditures meet the 

definition of ainS^endemr expenditure and the regulation does not exclude direct-mail 

fiindraising letter^^^^re definition, the Audit staff believes that the documentary 

evidence provided d^^not support NCF's assertion that none of these expendimres are 

independent expenditures.