[Federal Register: March 4, 2008 (Volume 73, Number 43)] [Proposed Rules] [Page 11753-11801] From the Federal Register Online via GPO Access [wais.access.gpo.gov] [DOCID:fr04mr08-32] [[Page 11753]] ----------------------------------------------------------------------- Part III Department of Labor ----------------------------------------------------------------------- Office of Labor-Management Standards ----------------------------------------------------------------------- 29 CFR Part 403 Labor Organization Annual Financial Reports; Proposed Rule [[Page 11754]] ----------------------------------------------------------------------- DEPARTMENT OF LABOR Office of Labor-Management Standards 29 CFR Part 403 RIN 1215-AB64 Labor Organization Annual Financial Reports AGENCY: Office of Labor-Management Standards, Employment Standards Administration, Department of Labor. ACTION: Notice of proposed rulemaking; request for comments. ----------------------------------------------------------------------- SUMMARY: The Department of Labor's Employment Standards Administration (``ESA'') proposes to promulgate a rule that establishes a form to be used by labor organizations to file trust annual financial reports with ESA's Office of Labor-Management Standards (``OLMS''), provides appropriate instructions, and revises relevant sections of 29 CFR Part 403 relating to such reports. The proposed changes are made pursuant to section 208 of the Labor-Management Reporting and Disclosure Act (``LMRDA''), 29 U.S.C. 438. The proposed rule will apply prospectively. DATES: Comments must be received on or before April 18, 2008. ADDRESSES: You may submit comments, identified by RIN 1215-AB64, only by the following methods: Internet--Federal eRulemaking Portal. Electronic comments may be submitted through www.regulations.gov. To locate the proposed rule, use key words such as ``Labor-Management Standards'' or ``Labor Organization Annual Financial Reports'' to search documents accepting comments. Follow the instructions for submitting comments. Please be advised that comments received will be posted without change to www.regulations.gov, including any personal information provided. Mail: Mailed comments should be sent to: Kay H. Oshel, Director of the Office of Policy, Reports and Disclosure, Office of Labor- Management Standards, U.S. Department of Labor, 200 Constitution Avenue, NW., Room N-5609, Washington, DC 20210. Because of security precautions the Department continues to experience delays in U.S. mail delivery. You should take this into consideration when preparing to meet the deadline for submitting comments. OLMS recommends that you confirm receipt of your mailed comments by contacting (202) 693-0123 (this is not a toll-free number). Individuals with hearing impairments may call (800) 877-8339 (TTY/TDD). Only those comments submitted through www.regulations.gov, hand- delivered, or mailed will be accepted. Comments will be available for public inspection during normal business hours at the above address. FOR FURTHER INFORMATION CONTACT: Kay H. Oshel, Director of the Office of Policy, Reports and Disclosure, at: Kay H. Oshel, U.S. Department of Labor, Employment Standards Administration, Office of Labor-Management Standards, 200 Constitution Avenue, NW., Room N-5609, Washington, DC 20210, (202) 693-1233 (this is not a toll-free number), (800) 877-8339 (TTY/TDD). SUPPLEMENTARY INFORMATION: I. Statutory Authority This proposed rule is issued pursuant to section 208 of the LMRDA, 29 U.S.C. 438. Section 208 authorizes the Secretary of Labor to issue, amend, and rescind rules and regulations to implement the LMRDA's reporting provisions. Secretary's Order 4-2007, issued May 2, 2007, and published in the Federal Register on May 8, 2007 (72 FR 26159), contains the delegation of authority and assignment of responsibility for the Secretary's functions under the LMRDA to the Assistant Secretary for Employment Standards and permits re-delegation of such authority. The proposal implements section 201 of the LMRDA, which requires covered labor organizations to file annual, public reports with the Department, detailing the labor organization's cash flow during the reporting period, and identifying its assets and liabilities, receipts, salaries and other direct or indirect disbursements to each officer and all employees receiving $10,000 or more in aggregate from the labor organization, direct or indirect loans (in excess of $250 aggregate) to any officer, employee, or member, loans (of any amount) to any business enterprise, and other disbursements. 29 U.S.C. 431(b). The statute requires that such information shall be filed ``in such detail as may be necessary to disclose [a labor organization's] financial conditions and operations.'' Id. Section 208 directs the Secretary to issue rules ``prescribing reports concerning trusts in which a labor organization is interested'' as she ``may find necessary to prevent the circumvention or evasion of [the LMRDA's] reporting requirements.'' 29 U.S.C. 438. Section 3(l) of the LMRDA provides: ``Trust in which a labor organization is interested'' means a trust or other fund or organization (1) which was created or established by a labor organization, or one or more of the trustees or one or more members of the governing body of which is selected or appointed by a labor organization, and (2) a primary purpose of which is to provide benefits for the members of such labor organization or their beneficiaries. 29 U.S.C. 402(l). II. Background A. Introduction The Department proposes to establish a Form T-1 to capture financial information pertinent to ``trusts in which a labor organization is interested'' (``section 3(l) trusts''), information that historically has largely gone unreported despite the trusts' significant effect on labor organization financial operations and their members' own interests. This proposal is part of the Department's continuing effort to better effectuate the reporting requirements of the LMRDA. The LMRDA's various reporting provisions are designed to empower labor organization members by providing them the means to maintain democratic control over their labor organizations and ensure a proper accounting of labor organization funds. Labor organization members are better able to monitor their labor organization's financial affairs and to make informed choices about the leadership of their labor organization and its direction when labor organizations provide financial information required by the LMRDA. By reviewing the reports, a member may ascertain the labor organization's priorities and whether they are in accord with the member's own priorities and those of fellow members. At the same time, this transparency promotes both the labor organization's own interests as a democratic institution and the interests of the public and the government. Furthermore, the LMRDA's reporting and disclosure provisions, together with the fiduciary duty provision, 29 U.S.C. 501, which directly regulates the primary conduct of labor organization officials, operate to safeguard a labor organization's funds from depletion by improper or illegal means. Timely and complete reporting also helps deter labor organization officers or employees from embezzling or otherwise making improper use of such funds. The proposed rule helps brings the reporting requirements for labor organizations and section 3(l) trusts in line with contemporary expectations for the disclosure of financial information. Today labor organizations are more like [[Page 11755]] modern corporations in their structure, scope, and complexity than the labor organizations of 1959.\1\ The balance between wages/salaries paid to workers and their ``other compensation'' has changed significantly during this time. For example, in 1966, over 80 percent of total compensation consisted of wages and salaries, with less than 20 percent representing benefits. U.S. Department of Labor, Report on the American Workforce (2001) 76, 87. By 2007, wages dropped to 71.8 percent of total compensation and benefits grew to 29.2 percent of the compensation package. U.S. Department of Labor, Bureau of Labor Statistics Chart on Total Benefits, available at http://data.bls.gov/ cgi-bin/surveymost. Moreover, labor organization members today are better educated, more empowered, and more familiar with financial data and transactions than ever before. Labor organization members, no less than consumers, citizens, or creditors, expect access to relevant and useful information in order to make fundamental investment, career, and retirement decisions, evaluate options, and exercise legally guaranteed rights. In August and September of 2007, Department officials met with representatives of the community that would be affected by the proposed Form T-1, including officials of labor organizations and their legal counsel, to hear their views on the need for reform and the likely impact of changes that might be made. The Department developed its proposal with these discussions in mind and it requests comments from this community and other members of the public on any and all aspects of the proposal. --------------------------------------------------------------------------- \1\ There are now more large labor organizations affiliated with a national or international body then ever before. In 2006, 4,452 labor organizations, including 95 national and international labor organizations, reported $250,000 or more in total annual receipts. --------------------------------------------------------------------------- B. The LMRDA's Reporting and Other Requirements In enacting the LMRDA in 1959, a bipartisan Congress made the legislative finding that in the labor and management fields ``there have been a number of instances of breach of trust, corruption, disregard of the rights of individual employees, and other failures to observe high standards of responsibility and ethical conduct which require further and supplementary legislation that will afford necessary protection of the rights and interests of employees and the public generally as they relate to the activities of labor organizations, employers, labor relations consultants, and their officers and representatives.'' 29 U.S.C. 401(a). The statute was designed to remedy these various ills through a set of integrated provisions aimed at labor organization governance and management. These include a ``bill of rights'' for labor organization members, which provides for equal voting rights, freedom of speech and assembly, and other basic safeguards for labor organization democracy, see 29 U.S.C. 411-415; financial reporting and disclosure requirements for labor organizations, their officers and employees, employers, labor relations consultants, and surety companies, see 29 U.S.C. 431-436, 441; detailed procedural, substantive, and reporting requirements relating to labor organization trusteeships, see 29 U.S.C. 461-466; detailed procedural requirements for the conduct of elections of labor organization officers, see 29 U.S.C. 481-483; safeguards for labor organizations, including bonding requirements, the establishment of fiduciary responsibilities for labor organization officials and other representatives, criminal penalties for embezzlement from a labor organization, a prohibition on certain loans by a labor organization to officers or employees, prohibitions on employment by a labor organization of certain convicted felons, and prohibitions on payments to employees, labor organizations, and labor organization officers and employees for prohibited purposes by an employer or labor relations consultant, see 29 U.S.C. 501-505; and prohibitions against extortionate picketing, retaliation for exercising protected rights, and deprivation of LMRDA rights by violence, see 29 U.S.C. 522, 529, 530. The LMRDA was the direct outgrowth of a Congressional investigation conducted by the Select Committee on Improper Activities in the Labor or Management Field, commonly known as the McClellan Committee, chaired by Senator John McClellan of Arkansas. In 1957, the committee began a highly publicized investigation of labor organization racketeering and corruption; and its findings of financial abuse, mismanagement of labor organization funds, and unethical conduct provided much of the impetus for enactment of the LMRDA's remedial provisions. See generally Benjamin Aaron, The Labor-Management Reporting and Disclosure Act of 1959, 73 Harv. L. Rev. 851, 851-55 (1960). During the investigation, the committee uncovered a host of improper financial arrangements between officials of several international and local labor organizations and employers (and labor consultants aligned with the employers) whose employees were represented by the labor organizations in question or might be organized by them. Similar arrangements were also found to exist between labor organization officials and the companies that handled matters relating to the administration of labor organization benefit funds. See generally Interim Report of the Select Committee on Improper Activities in the Labor or Management Field, S. Report No. 85-1417 (1957); see also William J. Isaacson, Employee Welfare and Benefit Plans: Regulation and Protection of Employee Rights, 59 Colum. L. Rev. 96 (1959). Financial reporting and disclosure were conceived as partial remedies for these improper practices. As noted in a key Senate Report on the legislation, disclosure would discourage questionable practices (``The searchlight of publicity is a strong deterrent.''); aid labor organization governance (Labor organizations will be able ``to better regulate their own affairs. The members may vote out of office any individual whose personal financial interests conflict with his duties to members''); facilitate legal action by members against ``officers who violate their duty of loyalty to the members''; and create a record (The reports will furnish a ``sound factual basis for further action in the event that other legislation is required''). S. Rep. No. 187 (1959) 16 reprinted in 1 NLRB Legislative History of the Labor-Management Reporting and Disclosure Act of 1959 412. The Department has developed several forms for implementing the LMRDA's financial reporting requirements. The annual reports required by section 202(b) of the Act, 29 U.S.C. 432(b) (Form LM-2, Form LM-3, and Form LM-4), contain information about a labor organization's assets, liabilities, receipts, disbursements, loans to officers and employees and business enterprises, payments to each officer, and payments to each employee of the labor organization paid more than $10,000 during the fiscal year. The reporting detail required of labor organizations, as the Secretary has established by rule, varies depending on the amount of the labor organization's annual receipts. 29 CFR 403.4. Labor organizations with annual receipts of at least $250,000 and all labor organizations in trusteeship (without regard to the amount of their annual receipts) must file the Form LM-2. 29 CFR 403.2-403.4. This form may be filed voluntarily by any other labor organization. The Form LM-2 now requires receipts and disbursements to [[Page 11756]] be reported by functional categories, such as representational activities; political activities and lobbying; contributions, gifts, and grants; union administration; and benefits. Further, the form requires filers to allocate the time their officers and employees spend according to functional categories, as well as the payments that each of these officers and employees receive, and it compels the itemization of certain transactions totaling $5,000 or more. This form must be electronically signed and filed with the Department.\2\ --------------------------------------------------------------------------- \2\ The Form LM-2 and its instructions are published at 68 FR 58449-523 (Oct. 9, 2003) and are available at http:// www.olms.dol.gov. Copies of the Form LM-3 and Form LM-4 are also available at http://www.olms.dol.gov. --------------------------------------------------------------------------- The labor organization's president and treasurer (or its corresponding officers) are personally responsible for filing the reports and for any statement in the reports known by them to be false. 29 CFR 403.6. These officers are also responsible for maintaining records in sufficient detail to verify, explain, or clarify the accuracy and completeness of the reports for not less than five years after the filing of the forms. 29 CFR 403.7. A labor organization ``shall make available to all its members the information required to be contained in such reports'' and ``shall * * * permit such member[s] for just cause to examine any books, records, and accounts necessary to verify such report[s].'' 29 CFR 403.8(a). The reports are public information. 29 U.S.C. 435(a). The Secretary is charged with providing for the inspection and examination of the financial reports, 29 U.S.C. 435(b); for this purpose, OLMS maintains: (1) A public disclosure room where copies of such reports filed with OLMS may be reviewed and; (2) an online public disclosure site, where copies of such reports filed since the year 2000 are available for the public's review. III. Proposal A. Introduction Labor organization members need to be provided with information about the finances and operation of section 3(l) trusts, which, by statutory definition are established and maintained primarily to provide benefits to the members and/or their beneficiaries. 29 U.S.C. 402(l). Section 3(l) trusts are created for a myriad of purposes; common examples include credit unions, strike funds, redevelopment or investment groups, training funds, apprenticeship programs, pension and welfare plans, building funds, and educational funds. These trusts are funded in a number of different ways. Some may be funded with employer contributions and jointly administered by trustees appointed by labor organizations and employers. By requiring that labor organizations file the Form T-1, labor organization members and the public will receive the same benefit of transparency they now receive under the Form LM-2. Under this proposal, any labor organization or trust official who places their own personal financial interests above their duty to the labor organization and the trust--and third parties complicit with these officials--will find it more difficult to circumvent and evade their legal obligations. The Department proposes to require a labor organization with total annual receipts of $250,000 or more to file a Form T-1 for each trust of the type defined by section 3(l) of the LMRDA, 29 U.S.C. 402(l) (defining ``trust in which a labor organization is interested'') where the labor organization during the reporting period, either alone or in combination with other labor organizations, (1) selects or appoints the majority of the members of the trust's governing board, or (2) contributes more than 50 percent of the trust's revenue; contributions made on behalf of the labor organization or its members shall be considered the labor organization's contribution. The proposed Form T-1 uses the same basic template as prescribed for the Form LM-2. Both forms require the labor organization to provide specified aggregated and disaggregated information relating to the financial operations of the labor organization and the trust. Typically, a labor organization will be required to provide information on the Form T-1 explaining certain transactions by the trust (such as disposition of property by other than market sale, liquidation of debts, loans or credit extended on favorable terms to officers and employees of the trust); and identifying major receipts and disbursements by the trust during the reporting period. The proposed Form T-1, however, is shorter and requires less information than the Form LM-2. As proposed, the Form T-1, unlike the Form LM-2, does not require that receipts and disbursements be identified by functional category. The proposed Form T-1 includes: 14 questions that identify the trust, six yes/no questions covering issues such as whether any loss or shortage of funds was discovered during the reporting year and whether the trust had made any loans to officers or employees of the labor organizations at terms below market rates, statements regarding the total amount of assets, liabilities, receipts and disbursements of the trust; a schedule that separately identifies any individual or entity from which the trust receives $10,000 or more, individually or in the aggregate, during the reporting period; a schedule that separately identifies any entity or individual that received disbursements that aggregate to $10,000 or more, individually or in the aggregate, from the trust during the reporting period and the purpose of disbursement; and a schedule of disbursements of $10,000 or more to officers and employees of the trust. Under the proposal, exceptions are provided for labor organizations with section 3(l) trusts where the trust, as a political action committee (``PAC'') or a political organization (the latter within the meaning of 26 U.S.C. 527), submits timely, complete and publicly available reports required of them by federal or state law with government agencies. A partial exception is provided for a trust for which an audit was conducted in accordance with prescribed standards and the audit is made publicly available. As proposed, a labor organization choosing to use this option must complete and file the first page of the Form T-1 and a copy of the audit. The Department specifically invites comments on whether the trust's ``employer identification number'' (``EIN'') should be reported on the first page of the Form T-1. This number could be used by members of labor organizations to cross-check the information on the Form T-1 with other reports submitted by the trust, such as its filings with the Internal Revenue Service (``IRS''). This proposal contains many of the same features proposed by the Department in 2002 and incorporates some changes in the 2003 and 2006 final rules, which are discussed below. The proposal limits the reporting obligation to those labor organizations that alone or in combination with other labor organizations maintain management control or financial domination over a section 3(l) trust. For purposes of measuring a labor organization's financial dominance, as discussed below, funds paid into the trust by an employer on behalf of the labor organization or its members are treated the same as contributions made from the labor organization's own funds. Two threshold requirements that were contained in the 2003 and 2006 rules relating to the amount of a labor organization's contributions to a trust ($10,000 per annum) and the amount of the contributions received by a trust ($250,000 per annum) are not included in the proposal. The Department believes that the labor organization's [[Page 11757]] control over the trust either alone or with other labor organizations, measured by its selection of a majority of the trust's governing body or its majority share of receipts during the reporting period, provides the appropriate gauge for determining whether a Form T-1 must be filed by the participating labor organization. In contrast to the 2003 and 2006 rules, the Department's proposal does not include an exemption for section 3(l) trusts that are part of employee benefit plans that file a Form 5500 Annual Return/Report under the Employee Retirement Income Security Act (``ERISA''). B. Judicial Review of Earlier Form T-1 Rulemaking This proposal follows the Department's earlier efforts to implement a Form T-1 reporting obligation. The proposal is an outgrowth of these earlier efforts and takes into account the guidance provided by the United States Court of Appeals for the District of Columbia Circuit in its 2005 review of the 2003 Form T-1 rule, 68 FR 58374 (American Federation of Labor and Congress of Industrial Organizations v. Chao, 409 F.3d 377 (2005)). In November 2003, the American Federation of Labor and Congress of Industrial Organizations (``AFL-CIO'') filed a complaint against the Department, challenging the combined Form LM-2 and Form T-1 rule. The suit was filed with the U.S. District Court for the District of Columbia; through this action, the AFL-CIO asked the court to order temporary, preliminary, and permanent relief to enjoin and vacate the Department's rule. The rule was upheld on its merits by the district court (AFL-CIO v. Chao, 298 F.Supp.2d 104 (D.D.C. 2004). On appeal, the D.C. Circuit in its 2005 opinion unanimously upheld the Form LM-2 rule as a reasonable exercise of the Department of Labor's LMRDA rulemaking authority. In a divided decision, however, the court vacated the Form T-1 rule because, in its view, the Department exceeded its authority by ``requiring general trust reporting.'' 409 F.3d at 378-79, 391. The court framed the issue before it as ``whether Form T-1 comports with the statutory requirements that the Department `find [such rule is] necessary to prevent' evasion of LMRDA Title II reporting requirements.'' Id. at 386 (quoting section 208 of the LMRDA, 29 U.S.C. 438). Given what it viewed as the ambiguity inherent in the word ``necessary'' as used in section 208 (authorizing reports ``necessary to prevent circumvention or evasion of * * * reporting requirements''), the court examined the Form T-1 portion of the rule to determine whether the Department's interpretation of the statute was permissible. Id. at 386-87; see also Chevron U.S.A., Inc. v. Natural Resources Defense Council, Inc., 467 U.S. 837, 843 (1984). The AFL-CIO argued that the Department's Form T-1 rule was impermissible, in part, because it encompassed joint trusts, which by operation of statute were independent of a labor organization's control. 409 F.3d at 388; see 29 U.S.C. 186(c). In rejecting this argument, the court noted that the statutory definition of ``trust in which a union is interested,'' 29 U.S.C. 402(l), included joint trusts, such as Taft-Hartley employer- funded benefit plans, and agreed with the Department's interpretation that such trusts could be used to evade the reporting requirements. 409 F.3d at 387-88. The court agreed with the Department's reasoning that ``[s]ince the money an employer contributes to such a `trust' * * * might otherwise have been paid directly to the workers in the form of increased wages and benefits, the members * * * have a right to know what funds were contributed, how the money is managed and how it is being spent.'' Id. at 387. The court held that ``[s]ection 208 does not limit the [Department] to requiring reporting only in order to disclose transactions involving the misuse of labor organization members' funds because leaving the decision about disclosure to such trusts * * * would allow unions to circumvent or evade reporting on the use of members' funds diverted to the trust.'' Id. at 388-89. The court recognized that reports on trusts that reflect a labor organization's financial condition and operations are within the Department's rulemaking authority, including trusts ``established by one or more unions or through collective bargaining agreements calling for employer contributions, [where] the union has retained a controlling management role in the organization,'' and also those ``established by one or more unions with union members' funds because such establishment is a reasonable indicium of union control of that trust.'' Id. The court acknowledged that the Department's findings in support of its rule were based on particular situations where reporting about trusts would be necessary to prevent evasion of the related labor organizations' own reporting obligations. Id. at 387-88. One example included a situation where ``trusts [are] funded by union members' funds from one or more unions and employers, and although the unions retain a controlling management role, no individual union wholly owns or dominates the trust, and therefore the use of the funds is not reported by the related union.'' Id. at 389 (emphasis added). In citing these examples, the court explained that ``absent circumstances involving dominant control over the trust's use of union members' funds or union members' funds constituting the trust's predominant revenues, a report on the trust's financial condition and operations would not reflect on the related union's financial condition and operations.'' Id. at 390. For this reason, while acknowledging that there are circumstances under which the Secretary may require a report, the court disapproved of a broader application of the rule to require reports by any labor organization simply because the labor organization satisfied a reporting threshold (a labor organization with annual receipts of at least $250,000 that contributes at least $10,000 to a section 3(l) trust with annual receipts of at least $250,000). Id. In reaching its conclusion, the court rejected an underlying premise of the rule that a labor organization's appointment of a single member to a trust's governing board could trigger a reporting obligation, even though the labor organization's contribution to the trust constituted a fraction of the trust's total revenues. Id. The court explained that ``[w]here a union has minimal control over trust fund spending and a union's contribution is so small a part of the trust's revenues, and the trust is not otherwise controlled by unions or dominated by union members' funds, the trust lacks the characteristics of the unreported transactions in the examples on which the [Department] based the final rule.'' Id. at 391. In these circumstances, in contrast to the examples relied upon by the Department, the element of management control or financial dominance is missing. Id. In light of the decision by the D.C. Circuit and guided by its opinion, the Department again reviewed the proposal as it related to the Form T-1 and the comments received on the proposal. The Department then issued a final rule on September 29, 2006, but the rule was vacated on procedural grounds by the U.S. District Court for the District of Columbia in AFL-CIO v. Chao, 496 F.Supp.2d 76 (D.D.C. 2007). In light of this court decision, the Department provides this new proposal for notice and comment. [[Page 11758]] C. Reasons for the Form T-1 The proposed Form T-1 closes a reporting gap under the Department's former rule whereby labor organizations were only required to report on ``subsidiary organizations.'' This proposal is designed to provide labor organization members a proper accounting of how their labor organization's funds are invested or otherwise expended by the trust. Labor organization members have an interest in obtaining information about funds provided to a trust for the member's particular or collective benefit whether solely administered by the labor organization or a separate, jointly administered governing board. Because the money an employer contributes to such a trust for the labor organization members' benefit might otherwise have been paid directly to a labor organization's members in the form of increased wages and benefits, the members on whose behalf the financial transaction was negotiated have a right to know what funds were contributed, how the money is managed, and how it is being spent. By reviewing the Form T-1, labor organization members will receive information on funds that would be accounted for on Form LM-2 but for their management through the section 3(l) trust. The proposed rule will make it more difficult for a labor organization, its officials, or other parties with influence over the labor organization to avoid, simply by transferring money from the labor organization's books to the trust's books, the basic reporting obligation that would apply if the funds had been retained by the labor organization. Although the proposal will not require a Form T-1 to be filed for all section 3(l) trusts in which a labor organization participates, it will be required where a labor organization, alone or in combination with other labor organizations, appoints or selects a majority of the members of the trust's governing board or where contributions by or on behalf of labor organizations or their members represent greater than 50 percent of the revenue of the trust. Thus, the rule follows the instruction in AFL-CIO v. Chao, where the D.C. Circuit concluded that the Secretary had shown that trust reporting was necessary to prevent evasion or circumvention where ``trusts [are] established by one or more unions with union members' funds because such establishment is a reasonable indicium of union control of the trust,'' as well as where there are characteristics of ``dominant union control over the trust's use of union members' funds or union members' funds constituting the trust's predominant revenues.'' 409 F.3d at 389, 390. Labor organization officials and trustees both owe a fiduciary duty to their labor organization and the trust, respectively, but the Department's case files reveal numerous examples of embezzlement of funds held by both labor organizations and their section 3(l) trusts.\3\ The Form T-1, by disclosing information to labor organization members, the true beneficiaries of such trusts, will increase the likelihood that wrongdoing is detected and may deter individuals who might otherwise be tempted to divert funds from the trusts. See Archibald Cox, Internal Affairs of Labor Organizations Under the Labor Reform Act of 1959, 58 Mich. L. Rev. 819, 827 (1960) (``The official whose fingers itch for a `fast buck' but who is not a criminal will be deterred by the fear of prosecution if he files no report and by fear of reprisal from the members if he does''). --------------------------------------------------------------------------- \3\ The fiduciary duty of the trustees to refrain from taking a proscribed action has never been thought to be sufficient by itself to protect the interests of a trust's beneficiaries. Although a fiduciary's own duty to the trust's grantors and beneficiaries include disclosure and accounting components (see Restatement (Third) of Agency Sec. 8.01 (T.D. No. 6, 2005) et seq.; see also 1 American Law Institute, Principles of Corporate Governance Sec. 1.14 (1994)), public disclosure requirements, government regulation, and the availability of civil and criminal process, complement these obligations and help ensure a trustee's observance of his or her fiduciary duty. --------------------------------------------------------------------------- Because the labor organization's obligation to submit a Form T-1 overlaps with the responsibility of labor organization officials to disclose payments received from the trust, the prospect that one party may report the payment increases the likelihood that a failure by the other party to report the payment will be detected. Moreover, given the increased transparency that results from the Form T-1 reporting, in some instances the proposed rule may cause the parties to reconsider the primary conduct that would trigger the reporting requirement. As discussed above, the LMRDA's primary reporting obligation (Forms LM-2, LM-3, and LM-4) applies to labor organizations as institutions; other important reporting obligations under the LMRDA apply to officers and employees of labor organizations (Form LM-30), requiring them to report any conflicts between their personal financial interests (and the duty they owe to the labor organization they serve) and to employers and labor relations consultants who must report payments to labor organizations and their representatives (Form LM-10). See 29 U.S.C. 432; 29 U.S.C. 433. Thus, requiring labor organizations to report the information requested by the Form T-1 rule provides an essential check for labor organization members and the Department to ensure that labor organizations, their officials, and employers are accurately and completely fulfilling their reporting duties under the Act, obligations that can easily be ignored without fear of detection if reports related to trusts are not required. As an illustration of how this check will work, consider an instance in which a trust identifies a $15,000 payment to a company for duplicating services. Under the proposal, the labor organization must identify the company and the purpose of the payment. With this information, coupled with information about a labor organization official's ``personal business'' interests in the company, a labor organization member or the Department may discover whether the official has reported this payment on a Form LM-30. Additional information from the labor organization's Form LM-2 might allow a labor organization member to ascertain whether the trust and the labor organization have used the same printing company and whether there was a pattern of payments by the trust and the labor organization from which an inference could be drawn that duplicate payments were being made for the same services. Upon further inquiry into the details of the transactions, a member or the government might be able to determine whether the payments masked a kickback or other conflict-of-interest payment, and, as such, reveal an instance where the labor organization, a labor organization official, or an employer may have failed to comply with their reporting obligations under the Act. Furthermore, the proposal will provide a missing piece to one part of the Department's crosscheck system that correlates reported holdings and transactions by party, description, and reporting period and thereby helps identify any deviations in the reported details, including instances where the reporting obligation appears reciprocal, but one or more parties have not reported the matter. Under the instructions in effect prior to the 2003 rule, a labor organization was obliged to provide financial information about a section 3(l) trust only if the trust was a ``subsidiary'' of the reporting labor organization, i.e., an entity, as defined by the Department, that is wholly owned, wholly controlled, and wholly financed by the labor organization. Thus, the former rule, which was crafted shortly after the [[Page 11759]] LMRDA's enactment, required reporting by only a portion of the labor organizations that contributed to section 3(l) trusts, and, in many cases, no reporting at all. Currently, there is no enforceable form for trust reporting and the largest labor organizations, Form LM-2 filers, report only very limited and opaque information concerning trusts. This proposal will better effectuate the full disclosure intended under the LMRDA. Many labor organizations now manage benefit plans for their members, maintain close business relationships with financial service providers such as insurance companies and investment firms, operate revenue-producing subsidiaries, and participate in foundations and charitable activities. As more labor organizations conduct their financial activities through sophisticated trusts, increased numbers of businesses have commercial relationships with such trusts, creating financial opportunities for labor organization officers and employees who may operate, receive income from, or hold an interest in, such businesses. The labor organizations' business relationships with outside firms and vendors that provide benefits and financial services to the labor organization and its members also increase the possibility that labor organization officers and employees may have financial interests in these businesses that might conflict with fiduciary obligations they owe to the labor organization and its members. In addition, employers also have fostered multi-faceted business interests, creating further opportunities for financial relationships between labor organizations, labor organization officials, employers, and other entities, including section 3(l) trusts. Both historical and recent examples demonstrate the vulnerability of trust funds to misuse and misappropriation by labor organization officials and others. The McClellan Committee, as discussed above, provided several examples of labor organization officials using funds held in trust for their own purposes rather than for their labor organization and its members. Additional examples of the misuse of labor organization benefit funds and trust funds for personal gain may be found in the 1956 report of the Senate's investigation of welfare and pension plans, completed as the McClellan Committee was beginning its investigation. See Welfare and Pension Plans Investigation, Final Report of the Comm. of Labor and Public Welfare, S. Rep. No. 1734 (1956); see also Note: Protection of Beneficiaries Under Employee Benefit Plans, 58 Colum. L. Rev. 78, 85-89, 96, 107-08 (1958). Such problems continued, even after the passage of the LMRDA and ERISA. In the most comprehensive report concerning the influence of organized crime in some labor organizations, a presidential commission concluded that ``the plunder of labor organization resources remains an attractive end in itself.* * * The most successful devices are the payment of excessive salaries and benefits to organized crime-connected labor organization officials and the plunder of workers' health and pension funds.'' President's Commission on Organized Crime, Report to the President and Attorney General, The Edge: Organized Crime, Business, and Labor Unions 12 (1986). The enactment of ERISA has ameliorated many of the historical problems, but many section 3(l) trusts are not covered by ERISA and even those that are covered do not file financial reports that provide transparency for LMRDA disclosures comparable to what will be provided by the proposed Form T-1. The Department has discovered numerous situations, as illustrated by the following examples, where funds held in section 3(l) trusts have been used in a manner that, if reported, would have been scrutinized by the members of the labor organization and this Department: A case in which no information was publicly disclosed about the disposition of tens of thousands of dollars (over $60,000 on average per month) by participating locals into a trust established to provide statewide strike benefits. No information was disclosed because the trust was established by a group of labor organization locals and not wholly controlled by any single labor organization. A case in which a credit union trust largely financed by a local labor organization had made large loans to labor organization officials but had not been required to report them because the trust was not wholly owned by any single local. (One local accounted for 97 percent of the credit union's funds on deposit). Membership in the credit union was limited to members of three locals; all of the credit union directors were local officials and employees. Four loan officers, three of whom were officers of the Local, received 61 percent of the credit union's loans. Under the proposed rule, each labor organization in these examples would have been required to file a Form T-1 because each of these funds is a 3(l) trust. In each instance, the labor organization's contribution to the trust, including contributions made on behalf of the organization or its members, made alone or in combination with other labor organizations, represented greater than 50 percent of the trust's revenue in the one-year reporting period. The labor organizations would have been required to annually disclose for each trust the total value of its assets, liabilities, receipts, and disbursements. For each receipt or disbursement of $10,000 or more (whether singly or in the aggregate), the labor organization would have been required to provide: the name and business address of the individual or entity involved in the transaction(s), the type of business or job classification of the individual or entity; the purpose of the receipt or disbursement; its date, and amount. Further, the labor organization would have been required to provide additional information concerning any trust losses or shortages, the acquisition or disposition of any goods or property other than by purchase or sale; the liquidation, reduction, or write off of any liabilities without full payment of principal and interest, and the extension of any loans or credit to any employee or officer of the labor organization at terms below market rates, and any disbursements to officers and employees of the trust. In developing this proposal, the Department also relies, in part, on information it received from the public on the 2002 proposal. In its comments on that proposal, a labor policy group identified multiple instances where labor organization officials were charged, convicted, or both, for embezzling or otherwise improperly diverting labor organization trust funds for their own gain, including the following: (1) Five individuals were charged with conspiring to steal over $70,000 from a local's severance fund; (2) two local labor organization officials confessed to stealing about $120,000 from the local's job training funds; (3) an administrator of a local's retirement plan was convicted of embezzling about $300,000 from the fund; (4) a local labor organization president embezzled an undisclosed amount from the local's disaster relief fund; (5) an employee of an international labor organization embezzled over $350,000 from a job training fund; (6) a former international officer, who had also been a director and trustee of a labor organization benefit fund, was convicted of embezzling about $100,000 from the labor organization's apprenticeship and training fund; (7) a former officer of a national labor organization was convicted of embezzling about $15,000 from the labor organization and about [[Page 11760]] $20,000 from the labor organization's welfare benefit fund; and (8) a former training director of a labor organization's pension and welfare fund was charged and convicted of receiving gifts and kickbacks from a vendor that provided training for labor organization members. The comments received from labor organizations and their members on the 2002 proposal generally opposed any reporting obligation concerning trusts (beyond the requirement then applicable to the ``wholly-owned'' subset of section 3(l) trusts). Labor organization members, however, recommended generally greater scrutiny of labor organization trust funds. These commenters included several members of a single international labor organization. They explained that under the labor organization's collective bargaining agreements, the employer sets aside at least $.20 for each hour worked by a member and that this amount was paid into a benefit fund known as a ``joint committee.'' The commenters asserted that some of the funds were ``lavished on junkets and parties'' and that the labor organization used the joint committees to reward political supporters of the labor organization's officials. They stated that the labor organization refused to provide information about the funds, including amounts paid to ``union staff.'' From the perspective of one member, the labor organization did not want ``this conflict of interest'' to be exposed. The need for this proposal is also demonstrated by additional examples of improper administration and diversion of funds from section 3(l) trusts. Labor organization officials in New York were convicted in a ``pension-fund fraud/kickback scheme'' where labor organization officials were bribed by members of organized crime to invest pension fund assets in corrupt investment vehicles. The majority of the funds were to be invested in legitimate securities, but millions of dollars were placed into a sham investment, the body of which was to be used to fund kickbacks to the labor organization officers with the hope that the return on investment from the majority of the legitimately invested assets would cover the amounts lost as kickbacks. U.S. v. Reifler, 446 F.3d 65 (2d Cir. 2006); see The Final Report of the New York State Organized Crime Task Force: Corruption and Racketeering in the New York City Construction Industry (1990) 27-29, 91-92, 182-84 (describing devices typically used by labor organization officials and third parties to divert trust funds for their own enrichment). In another case, nepotism and no-bid contracts depleted a labor organization's health and welfare funds of several million dollars. The problems associated with the fund included, among others, paying the son-in-law of a board member, a local labor organization official, a salary of $119,000 to manage a scholarship program that gave out $28,000 per year; paying a daughter of this board member $111,799 a year as a receptionist; and paying $123,000 for claims review work that required only a few hours of effort a week. See Steven Greenhouse, Laborers' Union Tries to Oust Officials of Benefits Funds, N.Y. Times, June 13, 2005, at B5.\4\ If the Department's proposed rule had been in place, the members of the affected labor organizations, aided by the information disclosed in the labor organizations' Form T-1s, would have been in a much better position to discover the improper use of the trust funds and thereby minimize the injury to their stake in the trust. Further, the fear of discovery may have deterred the wrongdoers from engaging in the offending conduct in the first place. --------------------------------------------------------------------------- \4\ Various concerns about the administration of joint trusts are addressed in legal periodicals such as Note: Conflict of Interest Problems Arising from Union Pension Fund Loans, 67 Colum. L. Rev. 162 (1967), 162-63; and Stephen Fogdall, Exclusive Union Control of Pension Funds: Taft-Hartley's Ill-considered Prohibition, 4 U. Pa. J. Lab. & Emp. L. 215 (2001-2002), 228-31 (providing examples of misuse and exemplary use of trust funds). See also Stephen Brill, The Teamsters, 151, 201-16, 221-60 (discussing problems with administration of Teamster funds, especially the Central States Pension Fund); James B. Jacobs, Mobsters, Unions, and Feds (2006) 181 (describing the looting of Teamster Local 560's benefit funds); Robert Fitch, Solidarity for Sale (2006), 149-52 (misuse of New York Mason Tenders pension fund). --------------------------------------------------------------------------- As the foregoing discussion makes clear, the proposed Form T-1 rule will add necessary safeguards to deter circumvention and evasion of the LMRDA's reporting requirements. Under the proposal, it will be more difficult for labor organizations and complicit trusts to avoid the disclosure required by the LMRDA. Labor organization members will be able to review financial information they may not otherwise have had, empowering them to better oversee their labor organization's officials and finances as contemplated by Congress. D. Specific Aspects of the Proposed Form T-1 1. Determining Management Control or Financial Domination In 2002, the Department proposed to require that any labor organization, regardless of its size or the proportion of the trust's receipts represented by its payments, file a Form T-1 if, among other conditions, it contributed $10,000 or more to a section 3(l) trust during the reporting period. The proposal, however, invited comment on whether adequate disclosure could be achieved instead by expanding the definition of ``subsidiary'' to include trusts that were closely related to the labor organization but not ``100% owned, controlled and financed by the [union].'' 67 FR 79285. The Department suggested that this alternative would borrow from the test, used in other contexts, to determine whether multiple companies constitute a ``single entity.'' The Department explained that this approach would be based on various factors, including an assessment as to the integration of the companies' operations and their common management. In the 2003 rule, the Department explained that it had received only a few comments on the ``single entity'' test. After considering the comments, the Department determined that the test would be less effective than other approaches, because it could be easily evaded by labor organizations seeking to conceal their relationship with a trust. The Department further explained that even if information concerning the relationship between the trust and the labor organization was readily available, the test could prove difficult to apply and thus was a poor substitute for a ``bright line'' standard pegged to a specified dollar threshold. Several comments received by the Department suggested that the labor organization's control over, not merely its participation in, a trust should fix any reporting obligation, and thus objected to the Department's proposal imposing a general reporting obligation on all large labor organizations. The AFL-CIO's objection to the proposal was twofold: ``If the union does not control the trust, the trust cannot be used to circumvent the reporting requirements; and if the union does not control the trust it cannot compel the trust to divulge the detailed financial information [required].'' It explained: ``[T]he Department's proposal does not require that the union have effective control over the trust. Without de facto, or actual, control over a trust's financial management, a labor organization has no mechanism by which it can circumvent or evade the Act's reporting requirements.'' Further, even though the AFL-CIO did not embrace the ``single entity'' approach, it viewed this approach as ``a helpful starting point.'' While disagreeing with the mechanisms suggested by the Department, it acknowledged that the Department [[Page 11761]] possessed the authority ``for developing an analytical framework for identifying 'significant trusts'' as to which financial disclosure should be required.'' A local labor organization, while generally opposed to the Form T-1, stated that ``it seems reasonable that ownership or control can only be attributed to parties holding over 50% ownership of an organization.'' The ``single entity'' alternative was mentioned in the D.C. Circuit's opinion in AFL-CIO v. Chao, but the court did not approve or disapprove of this approach. 409 F.3d at 390-91. Instead, the court focused its inquiry on the extent of the labor organizations' relationship with section 3(l) trusts and indicia of their management control or financial domination of the trusts. Id. at 388-89. As discussed previously, the appeals court found that the Secretary had not demonstrated how a labor organization's contribution of $10,000, an amount that could be infinitesimal given the trust's other contributions, could be indicative of the labor organization's ability to exercise any effective control over the trust. The court indicated that the Secretary could require a labor organizations to file a Form T-1 where labor organizations exercise management control or financial domination over a trust. The court did not establish a control test, leaving the Department to fashion a test consistent with the LMRDA and its policy preferences. After considering various alternatives, including a case-by-case determination, or one based on whether a labor organization or labor organizations hold the largest but not predominant share of the trust's interests (or the contributions to the trust during a reporting period), the Department is proposing a bright line approach. Under the proposal, a labor organization is required to file a report only where it alone or in combination with other labor organizations (1) selects or appoints the majority of the members of the trust's governing board, or (2) contributes more than 50 percent of the trust's revenue during the annual reporting period; contributions made on behalf of the organization or its members shall be considered contributions by the labor organization.\5\ The test is responsive to the concerns expressed by the D.C. Circuit in that the test looks to the relationship between the labor organization or labor organizations and the trust and relies on principles of management control and financial domination. --------------------------------------------------------------------------- \5\ As a result, multiple unions may be required to report on a single trust. This aspect of the rule is discussed in detail below in section II D.7. --------------------------------------------------------------------------- Under this proposal, Form T-1 reports would be required on Taft- Hartley trusts where the contributions by or on behalf of the labor organization or its members comprise a majority of the trust's receipts.\6\ Taft-Hartley trusts are statutorily defined trusts, established by a labor organization for the sole and exclusive benefit of the contributing employer's employees, their families, and dependents that meet several prescribed conditions, including a written agreement with the employer(s) concerning the basis on which such payments are to be made and joint administration by an equal number of employee and employer representatives. See section 302(c) of the Labor Management Relations Act, 29 U.S.C. 186(c); see Steven J. Sacher, James S. Singer, et al., editors, Employee Benefits Law (2d ed. BNA 2001) 179-83, 642-43, 1177-03. Typically the establishment of such trusts and their funding is set through collective bargaining. Such payments comprise a portion of the employer's labor expenses, along with salaries, wages, and employer administered benefits. Thus, the money paid into the trusts reflects payments that otherwise could be made directly to employees as wages, benefits, or both, but for their assignment to the trusts. --------------------------------------------------------------------------- \6\ A labor organization's obligation to report on section 3(l) trusts is based on the majority control and financial domination tests embodied in the proposed rule. Thus, the designation of a trust as a ``Taft-Hartley Trust,'' a ``welfare benefit trust,'' or other designation will not control the coverage question. Examples of trusts for which a Form T-1 may be required include training or educational funds, strike funds, and redevelopment or investment funds. Other examples, depending upon their particular characteristics, would include trusts such as Multiple Employer Welfare Arrangements, Multi-Employer Plans, Voluntary Employees' Beneficiary Associations, or other similar plans. This is not an exhaustive list. At the same time, a labor organization should also be mindful that a designation of an entity as something other than a trust or its description as a particular kind of trust does not except the labor organization from filing a Form T-1 for the entity if it meets the filing standards. Again, the coverage question is to be based on the majority control and financial domination tests embodied in the proposed rule. --------------------------------------------------------------------------- The administration of a Taft-Hartley fund is under the control of the labor organization and employer trustees, not the employees or their beneficiaries. While the disbursements from the funds often represent individual payments to employees or their beneficiaries by reason of health or other claims, payments also often reflect more collective interests of employees such as developing apprenticeship or vocational training programs or operating job targeting programs, payments that serve the interests of the labor organization. In such instances, the funds cover expenses that otherwise would be paid from the labor organization's general treasury and reported on the Form LM- 2. Under this proposal, management domination or financial control is determined by looking at the involvement of all labor organizations contributing to or managing the trust. As discussed above, the Department's experience, as noted by the D.C. Circuit in its 2005 opinion, demonstrates that participating labor organizations may ``retain a controlling management role, [even though] no individual union wholly owns or dominates the trust.'' 409 F.3d at 389. This occurs, for example, where a trust is created from the participation of several labor organizations with common affiliation, industry, or location, but none alone holds predominant management control over or financial stake in the trust. Absent the Form T-1, the contributing labor organizations, if so inclined, would be able to use the trust as a vehicle to expend pooled labor organization funds without the disclosure required by Form LM-2 and the members of these labor organizations would continue to be denied information vital to their interests. If a single labor organization may circumvent its reporting obligations when it retains a controlling management role or financially dominates a trust, then a group of labor organizations may also be capable of doing so. A rule directed to preventing a single labor organization from circumventing the law must, in all logic, be similarly directed to preventing multiple labor organizations from also evading their legal obligations. Because labor organizations filing the Form LM-2 already are required to identify section 3(l) trusts on the Form LM-2, the proposed rule will not add any significant reporting burden with respect to identifying the section 3(l) trusts. The Form LM-2 requires labor organizations to provide the full name, address, and purpose of each section 3(l) trust in which it participates. The Form T-1 will be filed for only a subset of the labor organization's section 3(l) trusts. No Form T-1 will be required for any trust not required to be listed on the Form LM-2. In most cases labor organizations already possess information to determine whether a Form T-1 is required for a particular section 3(l) trust. If a labor organization selects or appoints a member of the trust's governing board, it will know how the other members are selected and whether [[Page 11762]] the majority control prong of the reporting test is satisfied. In other situations, the section 3(l) trust in question will consist entirely of units of the same national or international labor organization. Here too, each labor organization participating in the trust will know whether the majority control prong of the test is satisfied and likely will possess information to determine whether the alternative financial domination prong of the test is met. In some situations, the Department expects that labor organizations will have to contact the trusts to obtain information about whether the trust's ``pooled receipts'' from labor organizations constitute a majority of the trust's receipts during a reporting period. The trust can easily determine whether labor organizations have financial dominance by examining their accounting records. Finally, no specific information as to voting or contributions need be disclosed by the trust at this phase. Therefore, the trust will not be required to release any confidential information pertaining to financial contributions or control. The Department expects that labor organizations that do not already possess the information to determine whether they need to file a Form T-1 will be able to obtain this information simply by calling the trust. The Department invites comments on its assumptions concerning the information already possessed by labor organizations that will enable them to readily determine whether they must file a Form T-1 for their section 3(l) trusts and the relative ease by which they may obtain additional information from the section 3(l) trusts. By tying the proposed reporting obligation to instances in which a labor organization (or labor organizations) selects (or select) a majority of the members on the trust's governing board or contributes a majority of its receipts during the reporting period, the Department has stayed well within the bounds established by the appeals court. At the same time, the Department recognizes that in other contexts, effective, de facto, or practical control is an appropriate measure of control and one that also would be consistent with the court's opinion. The Department is aware that some legal writers have suggested that labor organizations exercise effective control over many Taft-Hartley trusts notwithstanding the legal requirement that there be equal representation by labor organizations and employers on their governing boards. See Ronald H. Malone, Criminal Abuses in the Administration of Private Welfare and Pension Plans: A Proposal for a Nationa