c;.'i..- : ••-' 

FEDERAL ELECTFON COMMISSION 

WASHINGTON. D.C. 20463 

MEMORANDUM 

To: The Commission 

2CnFEBZ0 PK2'-1<3 

February 28,2017 

SENSITIVE 

Through: 

From: 

Subject:. 

Alec Palmer 

Staff Director 

Patricia C. Orrock 

Chief Compliance Officer 

Thomas E. Hintermistef~vs\ 

Assistant Staff Director 

Audit Division 

Douglas A. Kodi^^^. 

Audit Manager 

Withdrawal and Resubmission - Draft Final Audit Report (DFAR) - Ted Cruz for 

Senate (A 13-05) 

This memorandum recommends that the Commission approve the revised Draft Final 

Audit Report for Ted Cruz for Senate (TCFS) on a 72- hour no objectipn basis (see attached). 

Please note that changes to the processing of this report were necessary due to the 

circumstances outlined below. 

The original DFAR issued to TCFS on December 8,201S, contained a finding for the 

Reporting and Disclosure of Candidate Loans. After the issuance of the DFAR, new 

information was provided by TCFS on January 14,2016, via a miscellaneous report (Form 99) 

filed with the Commission, concerning the involvement of commercial lending. As a result, the 

DFAR finding was modified to include a recommendation for TCFS to disclose the necessary . 

information concerning the commercial loans on Schedule C-1. 

Upon its review of the revised DFAR and new information provided by TCFS, the 

Office of General Counsel issued a new legal analysis (LRA 976) and in response, the Audit 

Division reyiewed the permissibility of commercial loans to TCFS under 11 CFR 100.83 and 

potentially excessive contributions from the Candidate's spouse under the joint account 

exception rule. The Audit Division staff has concluded that neither of these issues resulted 

from these loans. 
Normally, under Directive 70, the Audit Division sends the DFAR to the Committee 

without Commission approval.' However, given the changes within the revised DFAR, the 

Audit Division recommends that the Commission approve the revised DFAR prior to it being 

sent to TCFS. Upon Commission approval, the Audit Division will send the revised DFAR to 

TCFS and proceed in accordance with Directive 70 (specifically, within 15 days of receiving 

the DFAR, TCFS may respond directly to the Commission with respect to any legal or factual 

issues raised in the revised DFAR and/or request an audit hearing). 

Thereafter, the Audit Division will proceed with the Audit Division Recommendation 

Memorandum, Proposed Final Audit Report, and Final Audit Report of the Commission, as per 

Directive 70. 

Recommendation: 

The Audit Division recommends the Commission approve the revised DFAR of TCFS on a 72-

hour no objection basis. Should an objection be received, it is recommended that the report be 

considered at the next regularly scheduled Executive Session, as TCFS will not have had an 

opportunity to respond to the additional finding outlined within the DFAR. 

Attachments: 

Revised Draft Final Audit Report of the Audit Division on Ted Cruz for Senate 

Office of General Counsel, Legal Analysis, # 976 

Office of General Counsel, Supplemental Comments on Legal Analysis #976 

The DFAR is circulated to the Commission on an informational basis. 
Draft Final Audit Report of the 

Audit Division on Ted Cruz for 

Senate 

(January 18, 2011 - December 31, 2012) 

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 met 

the threshold 

requirements for 

substantial compliance 

with the Act. The audit 

determines whether the 

committee complied with 

the limitations, 

prohibitions and 

disclosure requirements 

of the Act. 

Future Action 

The Commission may 

initiate an enforcement 

action, at a later time, 

with respect to the matter 

discussed in this report. 

About the Committee (p. 2) 

Ted Cruz for Senate is the principal campaign committee for Ted 

Cruz, Republican candidate for the United States Senate from the 

state of Texas, and is headquartered in Austin, Texas. For more 

information, see the Campaign Organization Chart, p. 2. 

Financial Activity (p-2) 

Receipts 

o Contributions from Individuals $ 12,044,368 

o Contributions from Political 

Committees 1,407,608 

o Transfers from Other Authorized 

Committees • 175,347 

o Candidate Loans . 1,430,000 

o Other Receipts 40,960 

Total Receipts S 15,098,283 

Disbursements 

o Operating Disbursements $ 13,814,542 

o Candidate Loan Repayments 587,000 

o Contribution Refunds 192,327 

o Other Disbursements 25,000 

Total Disbursements S 14,618,869 

Finding and Recommendation (p. 3) 

• Reporting and Disclosure of Candidate Loans 

' .S2U.S.C.§30lll(b). 
Draft Final Audit Report of the 

Audit Divi^on on 

Ted Cruz for (Senate 

(January 18, 2011 - December 31, 2012) 
Table of Contents 

Page 

Part I. Background 

Authority for Audit 1 

Scope of Audit 1 

Part 11. Overview of Campaign 

Campaign Organization 2 

Overview of Financial Activity 2 

Part III. Summary 

Finding and Recommendation 3 

Part IV. Finding and Recommendatioil 

Reporting and Disclosure of Candidate Loans 4 
Part I 

Background 

Authority for Audit 

This report is based on an audit of Ted Cruz for Senate (TCFS), 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 52 U.S.C. §30111(b), which permits the Commission to 

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

report under 52 U.S.C. §30104. Prior to conducting any audit under this subsection, the 

Commission must perform an internal review of reports filed by selected committees to 

determine if the reports filed by a paiticular committee meet the threshold requirements 

for substantial compliance with the Act. 52 U.S.C. §30111(b). 

Scope of Audit 

Following Commission-approved procedures, the Audit staff evaluated various risk 

factors and as a result, this audit examined: 

1. the receipt of excessive contributions and loans; 

2. the receipt of contributions from prohibited sources; 

3. the disclosure of contributions received; 

4. the disclosure of individual contributors' occupation and name of employer; 

5. the consistency between reported figures and bank records; 

6. the completeness of records; and 

7. other committee operations necessary to the review. 
Part II 

Overview of Campaign 

Campaign Organization 

Impurtant Dates 

• Date of Registration February 2,2011 

• Audit Coverage January 18^ 2011 - December 31,2012 

Fleadquarters Austin, Texas 

Bank Information 

• Bank Depositories Three 

• Bank Accounts Seven Checking 

Treasurer 

• Treasurer When Audit Was Conducted Bradley S. Knippa 

• Treasurer During Period Covered by Audit Bradley S. Knippa 

Maniigcmcnt Information 

" Attended Commission Campaign Finance 

Seminar 

Yes 

• Who Handled Accounting and 

Recordkeeping Tasks 

Paid Staff 

Overview of Financial Activity 

(Audited Amounts) 

Cash-on-hand ® January 18,2011 SO 

Receipts 

o Contributions from Individuals 12,044,368 

o Contributions from Political Committees 1,407:608 

o Transfers from Other Authorized 175,347 ' 

Committees 

o Candidate Loans l;430,000 

o Other Receipts 40;960 

Total Receipts $15,098,283 

Disbursements 

o Operating Disbursements 13,814.542 

o Candidate Loan Repayments 587,000 

o Contribution Refunds I92i327 

o Other Disbursements 25,000 

Total Disbursements I4;6:1:8,8i69 

Cash-on-hand @ December 31,2012 $ 479,414 
Part III 

Summary 

Finding and Recommendation 

Reporting and Disclosure of Candidate Loans 

During audit fieidwork, the Audit staff reviewed loans from the Candidate to TCFS for 

calendar years 20H and.2012. The Candidate made five loans in the amount of 

$1,430,000 to TCFS. Two loans, totaling $400,000, were made to TCFS for the runoff 

election and were repaid in full prior to the start of the audit. The remaining three loans, 

totaling $1,030,000, were for the primary election; TCFS repaid the Candidate $485,000 

for these loans. However, the remaining outstanding balance of $545,000 was reported 

as a loan payable to the Candidate and was not converted to a personal candidate 

contribution, as required. Subsequent to the e.xit conference (in April 2015), TCFS 

converted the $545,000 to a personal candidate contribution. In response to the Interim 

Audit Heport recommendation. Counsel for TCFS provided no additional comments 

regarding this matter. 

After the Interim Audit Report, the Audit staff was made aware that TCFS failed to 

disclose that a $1,064,000 of $1,430,000 in Candidate loans previously reported were 

from commercial lenders, and it did not file the required Schedules C-1. The loans 

originated from a Citibank revolving line of credit for $264,000, and from three Goldman 

Sachs margin loans totaling $800,000. The remainders of the loan amount come from the 

Candidate's personal funds, totaling $366,000. The Audit staff recommends TCFS 

amend the necessary reports to include corrected Schedules C and the appropriate 

Schedules C-l to correctly disclose the source of funds loaned. (For more detail, sec p. 4) 
Part IV 

Finding and Recommendation 

Findiiig 1. Reporting and Disclosure of Candidate Loans 

Summary 

During audit fieidwork, the Audit staff reviewed loans from the Candidate to TCFS for 

calendar years 2011 and 2012. I'he Candidate made five loans in the amount of 

$ 1,430,000 to TCFS. Two loans, totaling S400,000, were made to TCFS for the runoff 

election and were repaid in full prior to the start of the audit. The remaining three loans, 

totaling 1,030,000, were for the primary election; TCFS repaid the Candidate $485,000 

for these loans. However, the remaining outstanding balance of $545,000 was reported 

as a loan payable to the Candidate and was not converted to a personal candidate 

contribution, as required. Subsequent to the exit conference (in April 2015), TCFS 

converted the $545,000 to a personal candidate contribution. In response to the interim 

Audit Report recommendation, Counsel for TCFS provided no additional comments 

regarding this matter. 

After the Interim Audit Report, the Audit staff was made aware that TCFS failed to 

disclose that a $1,064,000 of $1,430,000 in Candidate loans previously reported were 

from commercial lenders, and it did not file the required Schedules C-l. The loans 

originated from a Citibank revolving line of credit tor $264,000, and from three Goldman 

Sachs margin loans totaling $800,000. The remainders of the loan amount come from the 

Candidate's personal funds, totaling $366,000. The Audit staff recommends TCFS 

amend the necessary reports to include corrected Schedules C and the appropriate 

Schedules C-1 to correctly disclose the source of funds loaned. 

Legal Standard 

A. Personal Funds. Personal funds of a candidate consist of assets, income, or jointly. 

owned spousal assets. Assets are amounts derived from any asset that, under applicable 

state law, at the time the individual became a candidate, the candidate had legal right of 

access to or control over, and with respect to which the candidate had legal and rightful 

title or an equitable interest. Personal funds may also be income received during the 

current election cycle of the candidate, including salary and other earned income from 

bona fide employment and income from stocks or investments, including interest, 

dividends or proceeds from the sale of such stocks or investments. 11 CFR § 100.33. 

B. Restriction on an Authorized Committee's Repayment of Personal Loans 

Exceeding $250,000 Made by the Candidate to the Authorized Committee. Personal 

loans mean a loan or loans, including advance, made by a candidate, using personal 

funds, as defined in 11 CFR §100.33, to his or her authorized committee where the 
proceeds of the loan were used in connection with the candidate's campaign for election. 

For personal loans that, in the aggregate, exceed $250,000 in connection with an election, 

the authorized committee may: 

• Repay the entire amount of the personal loans using contributions to the candidate 

or the candidate's authorized committee provided that those contributions were 

. made on the day of election or before; 

• May repay up to $250,000 of the personal loans from contributions made to the 

candidate or the candidate's authorized committee after the date of the election; 

and 

• Must not repay, directly or indirectly, the aggregate amount of the personal loans 

that exceeds $250,000 from contributions to the candidate or the candidate's 

authorized committee if those contributions were made after the date of the 

election. 

If the aggregate outstanding balance of the personal loans exceeds $250,000 after the 

elections, the authorized political committees must comply with the following conditions: 

• If the authorized committee uses the amount of cash-on-hand as of the day after 

the election to repay all or part of the personal loans, it must do so within 20 days 

of the election. 

• Within 20 days of the election date, the authorized committee miist treat the 

portion of the aggregate outstanding balance of the personal loans that exceeds 

$250,000 minus the amount of cash-on-hand as of the day after the election used 

to repay the loan as a contribution by the candidate. 

• The candidate's principal campaign committee must report the transactions in 

paragraphs (c) (I) and (c) (2) of this section in the first report scheduled to be 

filed after the election pursuant to 11 CFR § 104.5(a) or (b). 

• This section applies separately to each election. 11 CFR §116.11(a), (b), (c) and 

(d). 

C. Candidate as an Agent. Any candidate who receives a contribution, obtains a loan 

or makes any disbursement, in connection with his or her campaign shall be considered 

as having received such contribution, obtained such loan or made such disbursement as 

an agent of his or authorized committeefs). 11 CFR §101.2. 

D. Reporting Loans. All loans received by a committee must be itemized and 

continuously reported until repaid. All repayments made on a loan must also be 

itemized. 11 CFR §l04.3(a)(4)(iv) and (b)(4)(iii). 11 CFR §104.11. 

E. Schedule C. Both the original loan and payments to reduce principal must be 

reported each reporting period until the loan is repaid. The committee must report the 

following: 

• The source of the loan; and 

• The type of loan the candidate received (i.e. bank loan, brokerage account, credit 
o card, or home equity line of credit) either in the first box for endorsers and 

o' guarantors with a notation for loan type or in the box for "Loan Source" after the 

candidate's name. 11 CFR § 104.3(d) and § 104.11. 

F. Schedule C-1. 

1. Loans to Candidates. When a candidate obtains a loan from an advance on the 

candidate's brokerage account, credit card, home equity line of credit or other 

line of credit for use in connection with the candidate's campaign, the candidate's 

principal campaign committee must disclose in the report, covering the period 

when the loan was obtained, the following information on Schedule C-l or C-P-1; 

• The date, amount, and interest rate of the loan, advance, or line of credit; 

• The name and address of the lending institution; and 

• The type and value of collateral or other sources of repayment that secure the 

loan, advance, or line of credit, if any. 11 CFR § 104.3(d)(4). 

2. Loans to Committees. When a committee obtains a loan from a bank or other 

permissible lending institution it must also file Schedule C-l with the first report 

due after a new loan or line of credit has been established. The committee must 

disclose the following information on Schedule C-l: • 

• The date and amount of the loan; 

• The interest rate and repayment schedule of the loan, or on each draw of line 

of credit; 

• The type and value of collateral or other sources of repayment that secure the 

loan or the line of credit, and whether that security interest was perfected; and 

• An explanation of the basis upon which the loan was made, if not made on the 

•basis of either collateral or other sources of repayment. 

3. Loan Agreement/Line of Credit- The committee must also attach a copy of the 

loan agreement. In the case of a committee that has obtained a line of credit, a 

new Schedule C-l must be filed with the next report whenever the committee 

draws on the line of credit. An authorized representative of tlie lending institution 

must sign the statement on Line I. 11 CFR §104.3(d)(1) and (3). 

Facts and Analysis 

A. Reporting of Candidate Loans 

1. Facts 

During audit fleldwork, the Audit staff reviewed five loans from the Candidate to TCFS 

totaling $ 1,430,000. Two of these loans totaling $400,000 were for the runoff election 

and were repaid to the Candidate before the audit commenced, leaving three loans to 

TCFS for the primary election totaling $1,030,000. The following chart outlines the 

amounts and dates of these primary election loans and the repayments that TCFS has 
made to the Candidate within 20 days of the primary election on May 29, 2012: 

Date Amount Transaction Running Balance 

3/31/2012 $70,000 Primary Loan $70,000 

5/18/2012 $400,000 Primary Loan $470,000 

5/22/2012 $560,000 Primaiy Loan $1,030,000 

6/16/2012^ .$( 235.000) L.,oan Repayment $795,000 

Repayment Limit 

Primary Loan Balance to Report as Candidate 

Contribution 

($250,000)-' 

$545,000 

As noted above, the balances of the Candidate's loans for the primary election totaled 

$795,000 on the twentieth day following the election. TCFS may repay up to $250,000 

of the personal loans for the primary election from contributions made to the Candidate 

after the date of the election. Also, TCFS was required to treat as a contribution the 

amount of $545,000 ($795,000 - $250,000) which is equal to the outstanding balance of 

the Candidate primary loans less the repayment limit. '1'CFS was required to report the 

contribution of $545,000 on the first report scheduled to be filed after the election (2012 

July Quarterly). TCFS, however, continued to report the remaining balance as an 

outstanding primary loan from the Candidate on Schedule C (Loans) instead of 

converting the loan to a personal contribution from the Candidate on Schedule A, Line 

11 (d) (Contributions from the Candidate). 

2. Interim Audit Report & Audit Division Recommendation 

The Audit staff discussed the loans with TCFS at the exit conference and subsequently 

provided a detailed schedule outlining amounts loaned to TCFS, its repayments to the 

Candidate, and the loan balance outstanding. Counsel commented that TCFS should be 

allowed to pay off the balance of the loan and questioned the necessity of the loan 

conversion. However, in response to the exit conference. Counsel .stated that TCFS 

reviewed the Audit staff's schedule of loans, compared it to its accounting records, and 

concluded that the schedule of loans was correct. 

Counsel further stated that TCFS will report the loan balance of $545,000 as a contribution 

from the Candidate per 11 CFR §116.11 (c). Counsel also noted that the Candidate may 

wish to note on the report his belief that the statute establishing limits on the amount of 

personal debt that may be repaid to a candidate, is unconstitutional. 

Subsequent to the exit conference, TCFS disclosed the conversion of the loan to a 

contribution by the Candidate on Schedule A of its 2015 April Quarterly report. TCFS 

also informed the audit staff that it reserves the right to challenge the constitutionality of 

this provision of the law. Per 11 CFR §116.11 (c)(3), the Audit staff considered the 

disclosure of the Candidate contribution to the 2012 primary election as untimely. 

^ Single payment made within the 20 day period after the primary election. 

^ In accordance with II CFR §I 16.11(b)(2), the Candidate was repaid a total orS2S0,000 for the primary 

election loans with contributions made to the TCFS after the May 29,2012 primary date. 
The Interim Audit Report recommended that TCFS provide any comments it deemed 

relevant with respect to this matter. 

3. Committee Response to Interim Audit Report (Report) 

In response to the interim Audit Report recommendation, Counsel for TCFS provided no 

additional comments regarding this matter. In response to the initial Draft Final Audit 

Repoit, Counsel reiterated that it had no comments and stated that no hearing was being 

requested"'. 

B. Disclosure of Candidate Loans 

1. Facts 

During audit fieldwork, the disclosure of loans from the Candidate were reviewed, and 

based upon documentation available at that time, the Audit staff found no reasonable 

basis to believe there was a material loan disclosure problem (all loans were disclosed 

as personal, none were disclosed as commercial loans). However, subsequent to the 

issuance of the Interim Audit Report to TCFS, the Audit staff became aware that most 

of the money loaned by the Candidate to TCFS came from borrowed funds. 

Specifically, of the $1,430,000 disclosed on TCFS's Schedule C, $1,064,000 was 

obtained from the commercial lenders. One of the loans in the amount of $264,000 

came from a Citibank revolving line of credit and $800,000 came from three Goldman 

Sachs margin loans. Only $366,000 appears to have come from the Candidate's 

personal funds. Moreover, Schedules C-l should have been filed which would have 

disclosed the terms of the loans and other loan details. 

As the facts concerning the disclosure of loans became known, TCFS filed a 

. Miscellaneous Text Report, Form 99, and disclosed some but not all of the required loan 

information. After reviewing this filing, the Commission's Reports Analysis Division 

requested TCFS file the necessary Schedules C and C-l To date, TCFS has not 

amended their reports to disclose the additional information. Accordingly, the Audit staff 

recommends that I'CFS correctly file the necessary information on Schedules C and C-1. 

* A Drah Final Audit Report was issued to TCFS in December 2015, prior to the Audit StafTbeing made 

aware of commercial loans to TOPS originated by the Candidate. 

^ These schedules are defined under the Legal Standards section of this report beginning on page S. 
FEDERAL ELECTION COMMISSION 

WASi IINC;T()N, I).C:. 

MEMORANDUM 

TO: Patricia C. Orrock JA8 1 0 2017 

Chief Compliance Officer 

Tiiomas E. Hintcrmister 

' Assistant Staff Director 

FROM; Adav Noti ^ 

Associate General Counsel 

Policy Division 

Lorenzo Holloway 

Assistant General CoiiitSef 

for Compliance Advice 

Joshua Blume •t)B 

Attorney 

SUBJECT: Resubmitted Draft Final Audit Report - Ted Cruz for Senate (LRA # 976) 

I. INTRODUCTION 

The Office of General Counsel has reviewed this resubmitted Draft Final AXidit Report 

("DFAR"). on the Ted Cruz for Senate committee (the "Committee"). The DFAR contains one 

finding, Reporting and Disclo.sure of Candidate Loans, upon which we comment. We also 

.comment upon the Audit Division's decision to revise and resubmit the DFAR, with which we 

agree. If you have any questions, please contact Joshua Blume, the attorney assigned to this 

audit. 

II. RESUBMISSION OF DFAR 

Before addressing the substantive legal issues presented by the DFAR, we address a 

procedural issue raised by the submission of this DFAR, which is actually a revised version of a 

previous DFAR. The Audit Division revised the DFAR to include new infomiation received at 

the Audit Division Recommendation Memorandum ("ADRM") stage of the audit. The ADRM 

is specifically designed, pursuant to Directive 70, as a vehicle for the Audit Division to make 

recommendations regarding any new legal or factual issues that are raised after the DFAR has 
Comments on the Draf) Final Audit Report 

Ted Cruz for Senate (LRA 976) 

Page 2 

been prepared and served upon the audited committee. Here, however, new factual issues were 

raised by the Committee following its receipt or the original DFAR, and, as discussed below, 

these factual issues in turn raise new legal questions. In light of this unusual posture, the 

procedural issue we address is whether the next step of the audit should be to proceed 

immediately to the ADRM stage of the audit, or whether, given the number and complexity of 

the issues raised, the Committee ought to be provided with a copy of the revised DFAR and an 

opportunity to respond to it. We believe that the appropriate course of action is to revise the 

DFAR and allow the Committee to respond to it. 

The prior version of the DFAR, whieh the Committee received, concluded that Senator 

Cruz (the "Candidate") failed to convert the balance of certain outstanding loans exceeding 

$250,000 that he made to his authorized committee to contributions in accordance with 11 C.F.R. 

§ 116.11 (c). The Audit Division has now revised this version and expanded the finding to 

include a failure-to-report aspect because the Committee revealed for the first time that a portion 

of the Candidate's loans that had been reported as loans from personal funds were not in fact 

derived from personal funds, but instead derived from borrowing from financial institutions. 

While Directive 70 is silent on the issue of whether the Committee should be given an 

opportunity to respond to the revised DFAR, allowing the Committee to respond is consistent 

with the directive's underlying principle of providing full and fair notice to audited committees 

of potential findings.' Furthermore, because Directive 70 contemplates that any significant 

factual or legal issues that arise from the DFAR will be addressed at the subsequent ADRM stage 

-- in which the audited committee does not participate — the DFAR represents the final 

opportunity for the Commission to obtain the Committee's views on the new information prior to 

considering the ADRM. See Commission Directive No. 70, Apr. 26, 2011, at 3. 

' In two previous audits, ihose of ihe Los Angeles Couniy Democratic Central Committee C'LACDCC") and 

of Che Canseco for Congress ("Canseco") committee, the Audit Division, either at the Commission's behest, in the 

former case, or upon its own initiative, in the latter case, revised its audit report in the light of new information. In 

thecaseoftheLACDCQ^^BI^H^^^^^H^^H^B^B^H^H|B|H|^^|^||H 

LACDCC also submitted comments in response to the Proposed Final 

Audit Report ("PFAR"). See Comments in Response to [PFAR] on [LACDCC] (A09/07) from Stephen J. Kaufman, 

dated Oct. 17,2012. In the Canseco matter, the Audit Division resubmitted the DFAR aRer correcting certain 

factual errors and revising its calculations but, again, did not alter the substance of the' findings or present any new 
f ^ ? 1 ^ 

V 

t -. • 3 # • •r •iTf Comments on «!; the Draft Finaj Audit Report 

Ted Cruz for Senate (LRA 976y;.; 

Page 3 

III. REPORTING AND DISCLOSURE OF CANDIDATE LOA^S . | « 

This rinding pertain's to loans totaling $1,430,000 that Candidatemade to t^e ^mmittee. 

Although at an earlier stag^ of this audit, the Candidate averred that allSaf the loanldctSvedfrom 

his personal funds as that term is defined in 11 C.F.R. § 100.33, in fact $1,064,000 of the 

$1,430,000 in loans derived instead from the proceeds of funds that the Candidate borrowed 

from two financial institutions. Specifically, to finance his campaign the Candidate borrowed 

approximately $800,000 from Goldman Sachs in. the form of a "margin ioan"^ and approximately 

$264,000 from Citibank in the form of revolving credit. The remaining $366,000 came from the 

Candidate's personal funds. 

The Audit Division concludes that the Candidate and the Committee breached two 

regulations connected with the Candidate's loans. First, the Candidate and the Committee failed 

to convert the amount of the loans exceeding $250,000 that remained unpaid more than twenty 

days after the general election to contributions and to report them as such. See 11 C.F.R. 

§ 116.11(c). Second, the Audit Division concludes that the Candidate and the Committee failed 

to report properly that portion of the loans derived from the aforementioned borrowing from, 

financial institutions, which, based on the Candidate's prior representation, had previously been . 

disclosed as personal. See 11 C.F.R. § 104.3(d) (prescribing rules for reporting loans Irom 

financial institutions). 

Our comments below addre.ss three issues: (1) whether the new loan information affects 

the Audit Division's previous conclusion that the Candidate should have converted his personal 

loans to contributions and disclosed them as such; (2) whether the loans from Goldman Sachs 

and Citibank were impermissible contributions; and (3) whether the Candidate's spouse made a 

contribution because the assets used to secure one of the loans were jointly held by the Candidate 

and his spouse. 

A. The New Loan Information Does Not Affect the Prior Finding Made Under 

n C.F.R. § 116.11 

First, the requirement that a Candidate convert outstanding loan balances exceeding 

$250,000 to contributions applies only to the Candidate's "personal loans," which are defined in 

the applicable regulation to include loans made by candidates to their committees with personal 

funds as that term is defined in 11 C.F.R. § 100.33, as well as loans made by other entities to a 

candidate's authorized committee that are endorsed or guaranteed by the candidate, or are 

otherwise secured by the candidate's personal funds. 11 C.F.R. § 116.1.1(a). .Given that the 

' See Office of Investor Education and Advocacy, U.S. Securities Exchange Commission, SEC Pub. No. 156, 

Investor Bulletin: Understanding Margin Accounts 1,3 ("A "margin account" is a type of brokerage account in 

which the broker-dealer lends the investor cash, using the account as collateral, to purchase securities..; In addition 

to purchasing securiries, some brokers may allow you to use margin loans for a variety of personal or business 

financial purposes, .such as buying real estate, paying off personal credit, or providing capital. Using margin loans 

for non-securities purposes DOES NOT change the way these loans work. These loans are still secured by the 

securities in your margin account and thus subject to the same risks associated with purchasing securities on margin 

described above.") (emphasis in original). 
Comments on the Draf\ Final Audit Report 

Ted Cruz for Senate (LRA 976) 

Page 4 

candidate borrowed some of the funds that he loaned to the Committee; this raises a question as 

to whether these portions of the Candidate's loans to the Committee may still be deemed the 

"personal loans" of the Candidate and therefore subject to the rule. 

We conclude that the Candidate's loans to the Committee were "personal loans" of the 

Candidate for the purpose of applying section 116.11(c). The relevant part of the definition of 

"personal loans" in section 116.11(a) includes two elements: (1) loans made by other entities to 

a candidate's authorized committee; (2) that are either endorsed or guaranteed by the candidate 

or are secured with or by the candidate's personal funds. 

The Candidate's loan from Goldman Sachs satisfied these two elements. First, the 

Committee received the loan. Although Goldman Sachs loaned funds directly to the (Candidate 

rather than to the Committee, the Federal Election Campaign Act of 1971, as amended ("FECA") 

and Commission regulations provide that candidates who accept loans of funds from third parlies 

for use in connection with their elections accept such loans as agents of their authorized 

committees. See 52 U.S.C. § 30102(e)(2); 11 C.F.R. § 102.7(d). See also Advisory Opinion 

1985-33 (Collins) (receipt by candidate of loans from third party for use in campaign reportable 

by authorized committee and itemized as loans from lender to committee rather than from 

candidate to committee). Second, the Goldman Sachs loan was secured by the Candidate's 

personal property in the form of his investment assets, for this is the nature of the margin loan. 

The Citibank loan, unlike the Goldman Sachs loan, does not appear to have been secured 

by the Candidate's personal property. Nevertheless, the candidate as the borrower is, according 

to his contract with Citibank, personally liable for the loan. As a matter of law, he promised to 

repay the loan in exchange for the hank's promise to pay him the loan proceeds. The 

Commission's intent in promulgating section 116.11 (a) was to ensure that loans for which the 

candidate is personally liable are subject to the regulation.^ Thus neither the new information 

about the true nature of the Goldman Sachs loan nor that about the Citibank loan requires the 

Audit Division to revise its conclusion regarding the Committee's compliance with the terms of 

11 C.F.R. § 116.11. 

B. The Audit Division Should Apply 11 C.F.R. § 100.83 to Determine Whether 

Goldman Sachs and Citibank Made Impermissible Contributions 

Since Goldman Sachs and Citibank were the actual sources for a portion of the loans, the 

second question raised is whether the loans were impermissible contributions from. Goldman 

' See Explanation and Justiricaiion Tor Interim Final Rules on lncrea.sed Contribution and Coordinated Party 

Expenditure Limits Tor Candidates Opposing Scir-Financed Candidates, 68 Fed. Reg. 3970,3973 (Jan. 27,2003) 

("This dellnilion [of"pcrsonal funds" in section 116.11(a)] ensures that loans to authorized committees that are used 

ill connection with the candidate's campaign for election, for which the candidate is personally liable, are subject to 

the provisions of 11 C.F.R. 116.11."). See also E&J, discussion at 3974 (stating "(t]he definition of "personal loans' 

in new 11 CFR 116.11 (a) is based on a broad interpretation of the opening phrase "[^ny candidate who incurs 

personal loans" in [52 U.S.C. 30116G)] to mean loans made by candidates to their authorized committees" and 

rejecting alternative interpretation of definition to mean loans made to eandidates.). 
Coinmenis on ihc Draft Final Audit Repon 

Ted Cruz for Senate (LRA 976) 

Page 5 

Sachs and Citibank. The FECA and Commission regulations define the term ''contribution" to 

include loans to candidates or committees. See 52 U.S.C. § 30101(8)(A)(i); 11 C.F.R. 

§ 100.S2(b). As the FECA and Commission regulations also prohibit corporations from m^ing 

contribuiions, 52 U.S.C. § 30118(a); 11 C.F.R. § 114.2(b), the loans to the Candidate would 

therefore be impermissible, unless an exception were to apply. Here, FECA and Commission 

regulations exempt from the definition of "contribution" loans by banks and certain other types 

of financial institutions to candidates or their authorized committees when the loans meet certain 

criteria. See 52 U.S.C. § 30101(8)(B)(vii); 11 C.F.R. §§ 100.82, 100.83. 

The exemption criteria that apply to traditional bank loans differ from, and are more 

stringent than, the criteria that apply to brokerage loans and lines of credit to candidates. 

Compare 11 C.F.R. § 100.82(a), wiih § 100.83(a); see also Brokerage Loans and Lines of Credit, 

67 Fed. Reg. 38353 (June 4,2002) (noting that "conventional bank loans" are subject to § 100.82 

and lines of credit are .subject to § 100.83).^ Accordingly, it is necessary to determine which 

regulation applies to each loan. Based upon our review of the terms of the loan agreements in 

each case, we conclude that both the Goldman Sachs margin loan and the Citibank revolving 

credit loan are best viewed as lines of credit. That a margin loan appears to function in this 

manner is indicated by the definition of "margin account," a type of account u.sed in connection 

with margin loans. The margin account is "[a] brokerage account that allows an investor to buy 

or sell securities on credit, with the securities usu[a]ly] serving as collateral for the broker's 

loan."^ Account - margin accounly Black's Law Dict ionary (10''" cd. 2014). The terms of the 

Account Agreement indicate that when a margin loan is used to pay for securities,'' the securities 

lurchased serve as the collateral. 

Vnd the Ciiibanlc revolving line ot cr 

credit" because it allowed the Candidate to borrow amounts needed at any time. 

Imeof 

maxir I amour 

lAccordingly, the Audit Division 

: criteria set torth m 11 C.F.R. § H)U.83(a) to determine whether the loans were 

Impermissible contributions. See 11 C.F.R. § 100.82(0 (providing that § 100.82 does not apply 

to loan.s governed by § 100.83). 

* Specifically, whereas traditional bank loans must bear the asual and customary intere.st rate of the lending 

institution for the category of loan involved; be made on a basis that assures repayment; be evidenced by a written 

instrument; and be subject to a due date or amortization schedule, 11 C.F.R. § 100.82(a), a brokerage loan or line of 

credit need only be made in accordance with applicable law and under commercially reasonable terms by a person 

who makes such loans in the normal course of that person's business, 11 C.F.R. § 100.83(a). 

* See also 13 L'.S.C. § 78g(a) (requiring Board of Governors of Federal Reserve System to promulgate rules 

and regulations governing the extension of credit in connection with margin accounts). 

* As noted in footnote 2, supra, some brokerage firms may permit borrowers to borrow on margin for a 

purpose not related to the purchasing of securities. This appears to have been the case here. While the language of 

the agreement speaks of using the margin loan to purchase securities, we arc assumiiig, in this abs^ijce of 

information indicating otherwise, that the securities in the investment account servedHis the-boilat^al even if die 

loan was not used to purchase additional securiiies. i.' • '• .-y .'J 

?• ^ 
Commenis on llic Draft Final Audit Report 

Ted Cruz for Senate (LRA 976) 

Page 6 

C. We Lack Sufflcient Information at This Time to Determine Whether the 

Candidate's Spouse Made a Contribution Through the Use of the Goldman 

Sachs Account ;, • 

The final issue is whether the Candidate's spouse contributed to'.the campaign because 

the spouse jointly held the securities that were used as collateral for the margin loan. 

See 11 C.F.R. § 100.52(b)(4) (spouse not considered contributor to campaign if value of 

candidate's share of jointly owned property equals or exceeds amount of loan used for 

campaign). The candidate's share of assets that a candidate jointly owns with his pr her spouse 

is normally determined by the instrument of conveyance or ownership of the asset; however, if 

the instrument or conveyance or ownership does not allocate a specific share of the asset to the 

candidate, then a value equivalent to one-half of the value of the asset is imputed to the candidate 

as his or her share.' See 11 C.F.R. § 100.33(c). In the context of a joint bank account, however, 

the Commission deems all of the funds in an account held jointly with a spouse to be the 

candidate's personal funds if the state law governing such accounts provides that both spouses 

owning the account have equal and complete access to its funds." See Addendum to Legal 

Analysis on Proposed Interim Audit Report on Friends for Menor (LRA 732) - Contributions 

from Personal Funds in Jointly Held Bank Accounts (July 2,2008) ("joint bank account 

exception"). See also OGC Comments on Bauer for President 2000, Inc. - Proposed Audit 

Report (LRA #543), May 6,2002, at 5-6. 

This issue presents a number of legal and factual issues that we are not able to resolve at 

this time.' Having said this, wc are also aware of the time-sensitivity of this audit. Given its age 

^ We asked the Audit Division whether the Candidate in fact used more than SO percent of the value of the 

margin account as collateral for the margin loan. Our understanding from the auditors is that fur most of the time 

the Candidate's use of the margin account for this purpose did not exceed SO percent, but that it did exceed SO 

percent once for a period of two to three days. On this occasion, the Candidate used 76 percem. if the general rule 

imputing one-haif of the value of the joint asset to each spouse were to be applied to these facts, then the spouse 

would have made a contribution on this one occasion. 11 C.F.R. § 100.33(c)(2). Tbis.result would obtain regardless 

of the fact that Texas is a community property jurisdiction. See Candidate's Use of Property in which Spouse has an 

Interest. 48 Fed. Reg. 19019, 19020 (Apr. 27, 1983) ("This S0% ruic wouid apply in community property states, as 

weil as in non-community property states."). Bui see infra, n.9. 

' I'he distinction between joint bank accounts and other assets Jointly held has-been made for many years. 

See OGC Memorandum to Commission on Revision of Regulations Pertaining to Candidate's Use of Property in 

Which Spou.se Has an Interest, Agenda Doc. // 81-181, Oct. 30, 1981, at 7 n.3. The Commission has continued to 

apply this distinction in enforcement and audit matters. See MURs 2292 and 3S0S. See also OGC Comments'on 

Bauer for President 2000, Inc. - Proposed Audit Report (LRA #543), May 6,2002, at 6 (discussing history of joint 

bank account exception). 

' One legal issue involves whether the joint bank account exception, which appears to have been applied in 

the past to traditional checking or savings accounts, also would apply to the funds in the margin account. Based 

upon our review, we are inclined toward the conclusion that the exception could apply because the funds in the 

account are held by the spouses in a simiiar manner to the manner in which spouses hold funds in a traditional joint 

bank account - here, as joint tenants with right of survivorship. See OGC Comments pn Bauer for President 2000, 

Inc. - Proposed Audit Report (LRA II 543), May 6,2002, at 6. Further, Texas law defines a "joint account" as an 

account payable on request to one or more of two or more parties - a factor deemed relevant in the Menor matter. 

See Vernon's Texas Statutes and Codes Annotated ("V.T.C.A."),' Estates Code, § 113.004(2); Addendum to Legal 
Coinmcnls on (he Drall Final Audit Kcpon 

Ted Cruz for Senate (LRA 976) 

Page? 

and its current procedural posture, we invite the Audit Division to decide, at its discretion, 

wiiether it wishes to seek the additional information described in footnote 8 from the Committee 

or from other sources to determine whether the Candidate's spouse made a contribution. 

Analysis on Proposed Interim Audit Report on Friends for Menor (LRA 732), at 2. Nevenhele.ss, even if the joint 

bank ac(X)unt exception could theoretically apply to the funds in the margin account, we lack sufficient (actual 

information to resolve the ultimate question, 'fhis is because the .state of Texas treats property acquired during the 

life of a marriage as community property, and, further, provides for subtypes of community property, namely, "sole 

management" and "joint management" community property. See, V.T.C.A.. Family Code, §§ 3.001-3.003 (defining 

"separate property" specifically; defining "community property" as all property other than separate property 

acquired by either spouse during marriage, and announcing rcburtable presumption that property acquired during 

marriage is community properly); j«re rz/jr; V.T.C.A., Family Code, §§ 3.101- 3.102 (providing for sole management 

of separate property, and classifying community property as sole or joint management). At this juncture, we lack 

sufficient information about the specific sources of the funds that compose the margin account that would enable us 

to classify it definitively as sole inanagcincnt or joint management, or some other type of community properly, or 

indeed as separate property. Wc do not know, for example, whether the funds representing investments in the 

margin account were founds generated solely by one spouse before or during the marriage, or whether they were 

acquired by the spouses during the marriage. Further complicating the matter is that under Texas law, parties to 

joint accounts do not own the accounts equally, but only in proportion to the net contributions by each party to the 

sums on deposit unless there is clear and convincing evidence otherwise. V.T.C.A., Estates Code, § 113.102. We 

do not know whether the spouses had a difTcrenl intent, or whether they purported to alter any putative joint 

community property regime governing the margin account, and, if so, whether such an alteration would have been 

legally cITcctivc. See V.T.C.A, Family Code, § 3..102(c). That the spouses designated the account in the Account 

Agreement as a joint tenancy account with right of survivorship even though a "community property" designation 

was also available may indicate such an intent, however wc are uncertain whether, under TeJMsJaWjjhanvo^ 

sufficed to nullify any applicable presumption that the account was communit; ' 
FEDERAL ELECTION COMMISSION 

WASIIIN(.i'IY)N,l).C.2l)'163 

A-

• ? 

February 24, 2017 

MEMORANDUM 

TO: 

FROM: 

SUBJECT: 

Patricia C. Orrock 

Chief Compliance Officer 

Thomas E. Hinlermister 

Assistant Staff Director 

Adav Noti 

Associate General Counsel 

Policy Division 

Lorenzo Holloway ^^ 

Assistant General 

for Compliance Advice 

Joshua Blume^ 

Attorney ^ 

Supplemental Comments on Resubmitted Draft Final Audit Report - Ted Cruz for 

Senate (LRA # 976) 

1. INTRODUCTION 

The Office of General Counsel issued comments on a resubmitted Draft Final Audit 

Report ("DFAR") on the Ted Cruz for Senate committee (the "Committee"). Following the 

submission of those comments, the Audit Division performed an additional analysis relating to 

one issue addressed in our comments and, as a result of this analysis, we are submitting these 

supplemental comments for the Audit Division's consideration. The additional analysis and 

these ensuing supplemental comments relate to the issue of whether the Candidate's spouse 

m'ade a contribution to the Committee when the Candidate utilized part of the value of a 
Supplemental Comments on the Resubmitted Draft Final Audit Report 

Ted Cruz for Senate (LRA 976) 

Page 2 

Goldman Sachs margin account jointly owned by the Candidate and his. spouse as the basis for a 

loan to the Committee. 

n. NO FINDING THAT THE SPOUSE MADE A CONTRIBUTION WOULD BE 

MADE EVEN IF 50 PERCENT RULE WERE TO APPLY 

The Candidate borrowed approximately $800,000 from Goldman Sachs using the value 

of a margin account that he owned Jointly with his spouse. This raises the question whether the 

Candidate's spouse contributed to the campaign because the spouse jointly held the securities 

that were used as collateral for the margin loan. See 11 C.F.R. § 100.S2(b)(4) (spouse not 

considered contributor to campaign if value of candidate's share of jointly owned property 

equals or exceeds amount of loan used for campaign). The candidate's'share of assets that a 

candidate jointly owns with his or her spouse is normally determined by the instrument of 

conveyance or ownership of the asset; however, if the instrument or conveyance or ownership 

docs not allocate a specific share of the asset to the candidate, then a value equivalent to one-half 

of the value of the asset is imputed to the candidate as his or her share. See 11 C.F.R. 

§ 100.33(c). In the context of a joint bank account, however, the Commission deems all of the 

funds in an account held jointly with a spouse to be the candidate's personal funds if the state 

law governing such accounts.provides that both spouses owning the account have equal and 

complete access to its funds.' See Addendum to Legal Analysis on Proposed Interim Audit 

Report on Friends for Menor (LRA 732) - Contributions from Personal Funds in Jointly Held 

Bank Accounts (July 2,2008) C'joint bank account exception"). See ahso OGC Comments on 

Bauer for President 2000, Inc. - Proposed Audit Report (LRA #543), May 6,2002, at 5-6. 

In our previous comments, we raised a question with the Audit Division concerning 

whether it should obtain additional information from the Committee to resolve the question of 

whether a spousal contribution was made based upon an analysis that assumed that the joint bank 

account exception would apply. Following receipt of our comments, we met with the auditors, at 

which time the auditors advised us of the results of an analysis we had requested that it perform 

under 11 C.F.R. § 100.33(c). This analysis imputed half the value of the account to the candidate 

and to the spouse respectively and compared the candidate's hypothesized 50 percent share of 

the account to the values of the loans obtained using the rnargin account as collateral. 

11 C.F.R. § 100.52(b)(4). The auditors indicated that there was one occasion during which an 

amount exceeding 50 percent of the value of the account was utilized in this manner, thereby 

potentially resulting in an excessive contribution by the spouse under this analysisi On this 

occasion, however, the Committee apparently repaid the loan amount that might, under the 50 

percent analysis, have included an excessive spousal contribution to the candidate in fewer than 

' The distinction between Joint bank accounts and other assets Jointiy held has been made for many years. 

See OGC Memorandum to Commission on Revision of Regulations Pertaining to Candidate's Use ofProperty in 

Which Spouse Has an Interest, Agenda Doc. # 81-18i, Oct. 30,1981, at 7 n.3. The Commission has continued to 

apply this distinction in enforcement and audit matters. See MURs 2292 and 3S05. See also OGC Comments on 

Bauer for President 2000, Inc. - Proposed Audit Report (LRA #543), May 6,2002, at 6 (discussing history of joint 

bank account exception). 
Supplemental Comments on the Resubmitted Draft Final Audit Report 

Ted Cruz for Senate (LRA 976) 

Page 3 • 

60 days. As a result, the Audit Division would not include a finding on this issue in the DFAR 

based on the SO percent analysis. 

We concur with this approach, because the return of the potentially excessive • 

contribution included in the loan occurred within a period of time that, by analogy, is allotted to 

treasurers in receipt of facially excessive contributions to refund contributions pursuant to 

11 C.F.R. § 103.3(b)(3): that is, a period of fewer than 60 days. Thus, any excessive contribution 

that would have resulted from an application of the SO percent rule would not have resulted in a 

finding that the spouse made a contribution. Because no finding would result even using the 

application of section 100.33 that would be least advantageous to the Committee, we do not 

deem it necessary to consider this issue further.