FEDERAL ELECTION COMMISSION 

WASHINGTON, D.C. 20463 

November 12,2013 

MEMORANDUM 

TO: Patricia C. Orrock 

Chief Compliance Officer 

Thomas Hintermister 

Assistant Staff Director 

Audit Division 

FROM: Lisa J. Stevenson ! 

Deputy General Counsel - Law 

Lorenzo Holloway —* 

Assistant General Counsel 

For Compliance Advice 

Albert R. VeldhuyzenT?^ 

Attorney 

SUBJECT: Proposed Interim Audit Report on the South Dakota Democratic Party (LRA 885) 

I. INTRODUCTION 

The Office of the General Counsel has reviewed the proposed Interim Audit Report 

("lAR") for the South Dakota Democratic Party ("the Committee"). The lAR contains five 

findings: Misstatement of Financial Activity (Hnding 1), Recordkeeping for Employees 

(Finding 2), Reporting of Coordinated Party Expenditures (Finding 3), Contributions from 

Unregistered Political Organization (Finding 4), and Disclosure of Occupation/Name of 

Employer (Finding 5).' Our comments address Recordkeeping for Employees (Finding 2) and 

Reporting of Coordinated Party Expenditures (Finding 3). We concur with any findings not 

specifically discussed in this memorandum. If you have any questions, please contact Albert R. 

Veldhuyzen, the attorney assigned to this audit. 

We recommend that the Commission consider this document in Executive Session because the Commission 

may eventually decide to pursue an investigation of matters contained in the proposed IAR. 11 C.F.R. §§ 2.4(a) and 

(bX6). 
Comments to the Interim Audit Report 

South Dakota Democratic Party (LRA 885) 

Page 2 

II. RECORDKEEPING FOR EMPLOYEES (Finding 2) 

The proposed lAR finds that the Committee did not maintain monthly payroll logs for the 

percentage of time each employee spent on federal election activity in accordance with 

11 C.F.R. § 106.7(d)(1). The auditors found that the amount of federal and non-federal funds 

paid for employees for whom logs were not maintained totaled $60,143. Of this amount, the 

Committee paid a total of $17,586 exclusively with non-federal fimds. The remainder of 

$42,557 was reported as allocated between federal and non-federal funds, of which $37,286 was 

reported in 2009 and $5,271 in 2010. The audit uncovered one transfer from the non-federal to 

the federal account in the amount of $4,999.99 for 2010. Post-audit notification, the Committee 

asserted that it misreported the $37,286 in 2009 as allocated and amended its reports. The 

proposed lAR recommends that the Committee provide any additional information regarding 

required monthly payroll logs and implement a plan to maintain them to track the percentage of 

time each employee spends on federal election activity. 

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 FEA or activity in connection with 

federal elections. Salaries and benefits for employees who spend more thw 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)( 1 )(ii); see 2 U.S.C. § 441 i(b)(2). Employees who spend 25% or less 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 f\mds that comply with state law. 11 C.F.R. §§106.7(c)(l) and 106.7(dj(l)(iii). 

In a request for consideration of a legal question (LRA 917), the South Dakota 

Democratic Party, along with other state party committees, asked the Commission to consider 

the question of whether the monthly time log requirement applies to employees who are paid 

with 100% federal funds. The Commission concluded that the time log requirement applies even 

if the employees were paid exclusively with federal funds. However, "as an exercise of 

prosecutorial discretion, the Commission will not pursue recordkeeping violations for the failure 

to keep time logs or provide affidavits to account for employee salaries paid for with 100% 

federal funds and reported as such." LRA 917, Certification dated November 30,2012. 

The Commission's determination as applied to the facts of the present situation raises an 

important issue: Since the Committee paid the entire amount ($37,286) for 2009 with federal 

funds, is it appropriate to make a finding in the audit report and require additional information 

and a plan to implement monthly payroll logs because the Committee misreported the activity as 

allocable? 

The Committee states that allocation transfers were not made and that the original 

reporting of the activity as "allocable" was erroneous. Given the absence of transfers from the 
Comments to the Interim Audit Report 

South Dakota Democratic Party (LRA 883) 

Page 3 

nonfederal account to pay a portion of the salaries and the exclusive use of the federal funds to 

pay employees, the Committee's amendment of its 2009 reports to characterize the activity as 

paid solely with federal funds appears reasonable. In light of the Commission's decision not to 

pursue a failure to maintain logs when the committee pays the salaries with 100% federal funds, 

we do not think that a finding is warranted that requires the Committee to provide additional 

information about the log or implement a plan to maintain the log for salaries paid exclusively 

with federal funds.^ 

III. REPORTING OF COORDINATED PARTY EXPENDITURES (Finding 3) 

The proposed lAR finds that the Committee made an apparent excessive in-kind 

contribution of $16,277 to a House candidate, resulting from coordinated expenditures made in 

excess of the coordinated party spending limitation. During the audit exit conference, however, 

the Committee stated that they had erroneously reported $I9,S29 for two direct mail pieces as 

coordinated party expenditures when they were actually for federal election/exempt activity. 

The Committee argues that the disbursements should not be counted towards its coordinated 

party expenditure limit because the disbursements qualify for the volimteer materials exemption 

but were not properly disclosed on its reports. See 2 U.S.C. §§ 431(8)(B)(ix) and (9)(B)(viii); 

11 C.F.R. §§ 100.87 and 100.147. Consequently, the Committee would like to amend its reports 

accordingly. 

The proposed JAR states that the Committee "provided pictures of the volunteers 

working on the direct mailers," implying that evidence of volunteer activity exists. However, a 

review of the pictures only shows two individuals (one with a badge) alongside campaign 

materials. In response to a question from the Audit Division, the Committee answered that, "we 

believe those are volunteers but the individuals who can provide details on this are no longer 

with the party." Email from Jennifer Rumpca to Douglas Kodish (Aug. 27,2013). No other 

evidence of volunteer activity exists. 

The Commission addressed the applicability of the volunteer materials exemption in the 

Final Audit Reports in the Democratic Executive Committee of Florida (DECF), the Tennessee 

Republican Party Federal Election Account, and the Arizona Republican Party. In the DECF 

FAR, the Commission concluded that there existed a "lack of clarity in recent audits regarding 

the amount of volunteer involvement needed to qualify for the volunteer materials exemption," 

and the Audit staff did not count the expenses toward the coordinated party expenditures. See 

Final Audit Report of the Commission on the DECF (Sep. 24,2012), at 3. Similarly, in the 

earlier Tennessee Republican Party FAR, the Commission noted the "lack of clarity" regarding 

application of the exemption, and failed to approve a finding that certain mail pieces did not 

qualify for the volunteer material exemption. See Final Audit Report of the Commission on the 

Tennessee Republican Party Federal Election Account (Feb. 4,2011), at 3. 

^ There was one transfer from the non-federal to the federal account in the amount of $4,999.99 for 2010. 

However, the Committee is only claiming that 2009 payroll expenses should have been reported as 100% federal. 

The Committee did not amend its 2010 reports. 
Comments to the Interim Audit Report 

South Dakota Democratic Party (LRA 88S) 

Page 4 

Recently, in the audit of the Arizona Republican Party, the Commission approved a 

finding that reported expenditures should not be attributed to a committee's coordinated 

expenditure limit when there was some evidence of volunteer activity. The evidence consisted 

of a written statement and photographs documenting volunteers partiqipating in activities related 

to mailings. On the other hand, the Commission could not reach a consensus regarding a mailing 

with only a written statement and no photographs of volunteer involvement. The discussion of 

this latter mailing containing little evidence of volunteer involvement was placed in an additional 

issues section of the audit report. See Draft Final Audit Report of the Commission on the 

Arizona Republican Party (May 8,2013), IS.^ 

In the matter at issue, the Committee did not submit any affidavits or sworn declarations 

from individuals with direct knowledge of the mailings. The Committee did submit photographs 

and an email stating its belief that the mailing constituted volunteer activity. The uncertainty 

regarding the amount of volunteer involvement needed to qualify for the volunteer materials 

exemption renders it difficult for committees to discern what to provide the Commission. 

Nevertheless, to aid the Commission to draw a distinction between some evidence and no 

evidence of volunteer activity, we agree with the approach taken in the proposed lAR to 

encourage the Committee to provide a more detailed statement and any other evidence it deems 

appropriate to support the volunteer exemption. 

' As of the date of this memorandum, the Commission has not yet approved the Final Audit Report of the 

Arizona Republican Party.