FEDERAL ELECTION COMMISSION 

WASHINGTON, D.C. 20463 

September 13/ 2011 

MEMORANDUM 

TO: Thomas Hintermister 

Acting Assistant StaffDirector 

FROM: Christopher Hughey 

Acting General Counsel I 

Lawrence L. Calvert, Jr. 

Associate General Counsel \ 

Lorenzo Holloway WAJII 

Assistant General Counsel 

For Public Finance and Audit Advice 

Danita C. Lee ^ ;»<.^ ^ ^ 

Attomey 

SUBJECT: Interim Audit Report- Califomia Republican Party/V8 

(LRA 829) 

I. INTRODUCTION 

The Office ofthe General Counsel has reviewed the proposed Interim Audit 

Report ("lAR") on die Califomia Republican Party/V8 ("Committee").' Our comments 

address issues in Finding 3 (Extension of Credit by a Commercial Vendor). We concur 

with any findings not specifically discussed in this memorandum. Ifyou have any 

questions, please contact Danita Lee, the attomey 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 lAR. 

11 CF.R. §§ 2.4(a) and (bX6). 
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Interim Audit Report - Califomia Republican PartyA^S 

(LRA 829) 

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II. EXTENSION OF CREDIT BY A COMMERCIAL VENDOR (Finding 3) 

Finding 3 addresses an extension of credit by Strategic Fundraising, Inc. ("SFI"), which 

the auditors conclude may have resulted in a prohibited contribution to the Committee. 

The proposed lAR concludes that SFI did not extend credit to the Conunittee in the 

ordinary course of business and that SFI failed to make a commercially reasonable effort 

to collect the debt. In these comments, we note that the contract between SFI and the 

Committee appears to present issues similar to those in other matters involving "no risk" 

or "limited risk" fimdraising arrangements between direct mail or telemarketing vendors 

and political committees. See, e.g., Memorandum From the Office of General Counsel to 

the Commission, Rightmarch Request for Early Consideration of Legal Question, March 

14.2011. 

III. BACKGROUND 

The proposed lAR indicates that the Committee failed to pay several invoices for 

SDI voter/donor file prospecting, caging, fundraising and mailing services for periods 

ranging from approximately four months to two years. The invoices totaled $1,171,002. 

The auditors contend that SFI failed to make a commercially reasonable effort to collect 

the debt because it did not submit weekly bills to the Committee or charge interest on the 

outstanding debt in accordance with the terms of the contract between SFI and the 

Committee. The Committee submitted a statement from SFI explaining that SFI 

reasonably attempted to collect the debt by negotiating a payment plan after the 

Committee was unable to pay for services consistent wdth the terms of the contract. The 

proposed Report notes that the Committee did not provide evidence of a negotiated 

payment plan and thus concludes that SFI did not engage in commercially reasonable 

efforts to collect the Committee's debt. Neither the proposed Report nor the information 

the Committee submitted regarding its debt to SFI address whether SFI's extension of 

credit was permissible. Therefore, we will discuss the standards the auditors should 

consider in their analysis of whether the extension of credit was permissible. We will 

then address whether SFI's effort to collect the debt was commercially reasonable. 

A. Initial Extension of Credit May Have Lacked Adequate Safeguards 

The terms of the contract between the Conimittee and SFI provide that SFI was to 

provide telephone fundraising services directed at both previous and prospective donors. 

The contract provided for weekly invoices. Prospecting invoices were to be payable 

upon receipt and invoices for proven donor efforts were to be payable within 30 days. 

The prospective donor fundraising included a "Break-Even Guarantee," whereby the 

parties agreed that the Committee would not be expected to pay more for prospecting 

calls than the sum of all actual contributions generated by those calls. The Guarantee 

included a provision in which the parties acknowledged that SFI was "accepting 

significant business risk" by extending the Guarantee to the Committee and provided 

partial mitigation of the risk by granting to SFI the exclusive "right to conduct [the 

Committee's telemarketing] programs over the course of an entire year." The contract 
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Interim Audit Report - Califomia Republican PartyA^S 

(LRA 829) 

PageS 

also required the Committee to collect, deposit, and record all individual contributions 

generated by SFI and to provide SFI with regular reports "identifying ail individuals who 

contributed to the Committee as a result of SFI's efforts, along with the amount and date 

of each contribution." The parties agreed that SFI would be paid for its prospecting 

services at "an amount equal to the gross receipts generated by each prospecting project." 

The contract also indicated that if the "cumulative gross proceeds from all Prospecting 

campaigns performed in a calendar year exceeded die total of all prospecting calls... the 

positive difference [would] be credited to the Committee." These terms raise a question 

of whether SFI's extension of credit to the Committee was in the ordinary course of 

business. 

The Act defines a contribution as "any gift, subscription, loan, advance, or deposit 

of money or anything of value made by any person for the purpose of influencing any 

election for Federal office." 2 U.S.C. § 431(8)(A)(i). Commission regulations further 

provide that an extension of credit to a political committee by a commercial vendor is a 

contribution unless the credit is extended in the ordinary course of business and on the 

same terms as extensions of credit to non-political debtors of similar risk and for an 

obligation of similar size. 11 C.F.R. §§ 100.55,116.3(b). In determining whether an 

extension of credit was in the ordinary course of business, the Commission considers 

whether the vendor followed established procedures and past practices, whether the 

vendor received prompt payment in full for previous extensions of credit, and whether the 

extension of credit conformed to the usual and normal practice in the industry. 11 C.F.R. 

§ 116.3(c). If a vendor extends credit and fails to make a commercially reasonable 

attempt to obtain repayment, a contribution will result. 11 C.F.R. §§ 100.55, 116.4(b)(2). 

The Commission has addressed "no risk" or "limited risk" fundraising agreements 

like the one at issue here in enforcement matters and advisory opinions throughout the 

years. In at least one enforcement matter and in two advisory opinions the Commission 

has applied 11 C.F.R. §§ 100.55 and 116.3 (or their regulatory predecessors) to determine 

whether such arrangements were extensions of credit that resulted in in-kind 

contributions. See, e.g., MUR 5635 (Conservative Leadership PAC) (addressing a "no 

risk" fundraising contract where the committee was not riesponsible for the costs of 

fundraising in excess of the money raised); AO 1991-18 (New York State Democratic 

Committee) (addressing a "limited risk" ^draising contract where the committee's full 

payment of the vendor's commissions was tied to the prospect that the fundraising would 

pay for itself over several years); AO 1979-36 (Committee for Fauntroy) (addressing a 

"limited risk" fundraising contract where the committee was only required to pay threefourths of the total amount of contributions received irrespective of the actual amount of 

fees and expenses).^ In these matters, the Comniission has required committees to have 

^ The Commission also has addressed contracts and dealings in contexts other than fundraising in 

which committees assumed no risk or limited risk. See, e.g., MURs 5069 and 5132 (Comite Acevedo Vila 

Comisionado 2000) (determining that no contribution resulted when a Puerto Rico advertising agency 

bought television time on behalf of a candidate without first receiving payment based on evidence of 

common industry practice in Puerto Rico); MUR 4742 (Juan Vargas for Congress) (fmding a reportable 

extension of credit, but no contribution, resulting from a "deferred compensation" contract with a 
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safeguards in place to ensure that committees in fact pay for all of the costs of the 

fimdraising programs. See MUR 5635 (Conservative Leadership PAC); AO 1991-18 

(New York State Democratic Committee); AO 1979-36 (Committee for Fauntroy). 

Specifically, the Commission has focused on whether a committee would receive 

anything of value without timely and proper compensation first being paid to the 

fundraising firm and any third-party vendors. See id. Safeguards proposed by the 

Commission have included requiring advance deposits by a committee to reimburse 

vendors for potential shortfalls, limiting the term of the contract, or allowing vendors to 

terminate the contract early and demand full payment as a result of poor fundraising 

performance. See id. More recentiy, however, in the Commission's audit of the 

Rightmarch committee, which presented similar issues, the Commission considered a 

memorandum from the committee requesting legal guidance, but was unable to provide 

guidance by the necessary four votes. See Memorandum From the Of&ce of General 

Counsel to the Commission, Rightmarch Request for Early Consideration of Legal 

Question, March 14,2011. 

The "Break Even Guarantee" in the contract between the Committee and SFI 

appears very similar to the type of "no-risk" or "limited-risk" provisions that the 

Commission has found in previous matters could constitute in-kind contributions in the 

absence of safeguards ensuring that the Committee would pay for all of the costs of the 

fundraising programs and that the vendor would bear all of the financial risk of programs 

not paying for themselves. Moreover, in an arrangement not seen before in the prior 

cases, the vendor, SFI, does not even do the "caging" of contributions resulting from the 

fundraising activity. Contributions were to be sent directly to the Committee, which was 

supposed to deposit them in its own account and then pay the invoiced amounts to SFI. 

This provision, in combination vsdth the "Break Even Guarantee," raises questions as to 

whether the arrangement between the Committee and SFI was one in which "the 

committee retain[ed] contribution proceeds while giving up little, or assum[ing] litde to 

no risk with the vendor bearing all, or nearly all the risk." See AO 1991-18 (New York 

State Democratic Party). 

On the other hand, while the contract provided that the Committee would not have 

to bear any risk that prospecting calls would not generate contributions sufficient to cover 

SFI's costs in making them, the contract also contains a provision purporting to grant SFI, 

in consideration of that risk, an exclusive one-year right to conduct all telemarketing 

programs for the Committee. This raises a question regarding whether the exclusivity 

clause provided sufficient financial value to SFI such that it negated SFI's assumption of 

the risk that it woidd lose money on the prospecting calls. However, absent additional 

information showing that the value of the exclusivity clause was comparable to SFI's 

financial risk or information showdng that "no-risk" or "limited-risk" agreements such as 

the Guarantee between the Committee and SFI conform to the usual and normal practice 

in the telemarketing industry, we conclude that SFI did not extend credit to the 

candidate's general consultant where the consultant's retainer was only to be paid ifthe vendor and the 

committee agreed that the committee could afford to pay it without harm to campaign's viability). 
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Committee in the ordinary course of business. We recommend that the auditors revise 

the proposed Report to fully address and analyze whether the SFI's extension of credit 

was permissible. We also recommend that the auditors give the Committee an 

opportunity to submit information regarding the value of the exclusivity clause and usual 

and nonnal practices within the telemarketing industry to show that it extended credit to 

the Committee in the ordinary course of business. 

B. Committee May Not have Undertaken Commercially Reasonable Debt 

Collection or Settlement Efforts 

Even where an extension of credit by a commercial vendor is legally permissible 

when made, it may ripen into a contribution over time through a lack of commercially 

reasonable attempts on the part of the vendor to collect the resulting debt. The 

Commission determines that these attempts are commercially reasonable if the vendor 

has pursued its remedies as vigorously as it would pursue its remedies against a nonpolitical debtor in similar circumstances. 11 C.F.R. § 116.4(d)(3). The proposed report 

indicates that far from meeting this standard, there is no indication that SFI even billed 

the Committee according to the terms of the contract, much less that it made oral or 

written requests for payment beyond the initial invoices, withheld additional services 

from the Committee, imposed additional charges or penalties for late payment, referred 

the overdue debt to a commercial debt collection service or pursued litigation. 

11 CF.R. § 116.4(d)(3). 

However, the letter that SFI submitted to the Audit Division provides some 

insight into actions that SFI may have taken to collect the Committee's debt. SFI's letter 

acknowledges that the Committee "maintained substantial accounts receivable." The 

letter also suggests that SFI may have renegotiated the payment terms of the original 

contract to ensure that it would be paid. In particular, the letter states that SFI "worked 

with [the Committee] in its mutual interests by allowing flexible payment plans." 

Although not explicitiy stated, we believe that SFI presents the fact that it renegotiated 

the original contract terms as evidence that it inade a commercially reasonable effort to 

collect firom the Committee. The Commission determines whether settlement or 

renegotiation ofa debt with an ongoing committee is or is not a contribution by the same 

standard of commercial reasonableness described above. 

Notably, though, SFI indicates that its renegotiation was consistent with its 

treatment of political rather than nonpolitical clients; the regulatory standard is 

nonpolitical clients. See 11 C.F.R. § 116.4(d)(3). More significantiy, however, neither 

the letter nor any other information provided by SFI contain any detailed information 

about the renegotiated terms of the extension of credit. Absent this information, there is 

no indication that SFI acted with commercial reasonableness. Thus, we concur with the 

proposed lAR that SFI did not imdertake commercially reasonable efforts to collect the 

debt. The Committee should be given the opportimity in response to the lAR to provide 

details about the renegotiated terms of its debt to SFI and whether those terms are 
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(LRA 829) 

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consistent with SFI's treatment of nonpolitical debtors of similar size and risk of 

obligation.