# Labor Organization Annual Financial Reports for Trusts in Which a Labor Organization Is Interested, Form T-1

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## Record

- **Collection:** Federal Register
- **Document type:** Rule
- **Published:** October 2, 2008
- **Citation:** 73 FR 57412

## Text

DEPARTMENT OF LABOR
Office of Labor-Management Standards
29 CFR Part 403
RIN 1215-AB64
Labor Organization Annual Financial Reports for Trusts in Which a Labor Organization Is Interested, Form T-1

AGENCY:

Office of Labor-Management Standards, Employment Standards Administration, Department of Labor.

ACTION:

Final rule.

SUMMARY:

The Employment Standards Administration (ESA) Office of Labor-Management Standards (OLMS) of the Department of Labor publishes this final rule to establish a form to be used by labor organizations to file trust annual financial reports (Form T-1) and to provide appropriate instructions and revise relevant portions of 29 CFR Part 43 relating to such reports. On March 4, 2008, the Department published a notice of proposed rulemaking setting forth the Department's Form T-1 proposal. Under the proposal, certain labor organizations would file annual reports about certain trusts to which they contributed money or otherwise provided financial assistance or over which they exercised managerial control. This document sets forth the Department's review of and response to comments on the proposal. This final rule requires that a labor organization with total annual receipts of $250,000 or more file a Form T-1 for each trust of the type defined by section 3(l) of the Labor-Management Reporting and Disclosure Act (LMRDA) and that meets one of the two following filing triggers: The labor organization, alone or with other labor organizations, either: Appoints or selects a majority of the members of the trust's governing board; or makes contributions to the trust that exceed 50 percent of the trust's receipts during the trust's fiscal year. This final rule provides five exemptions to the Form T-1 filing requirements: A political action committee (PAC) fund, if publicly available reports on the PAC fund are filed with federal or state agencies; any political organization for which reports are filed with the IRS under section 527 of the IRS code; trusts required to file a Form 5500 under the Employee Retirement Income Security Act (ERISA); federal employee health benefit plans that are subject to the provisions of the Federal Employees Health Benefits Act (FEHBA); and any trust for which an independent audit has been conducted, in accordance with the standards set forth in this final rule. This final rule will apply prospectively.

DATES:

Effective Date:
This rule will be effective on December 31, 2008.

FOR FURTHER INFORMATION CONTACT:

Denise Boucher, Director, Office of Policy, Reports, and Disclosure, Office of Labor-Management Standards (OLMS), U.S. Department of Labor, 200 Constitution Avenue, NW., Room N-5609, Washington, DC, (202) 693-1185 (this is not a toll-free number). Individuals with hearing impairments may call 1-800-877-8339 (TTY/TDD).

SUPPLEMENTARY INFORMATION:

I. Statutory Authority

This final 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. This rule implements section 201 of the LMRDA, which requires covered labor organizations to file annual, public reports with the Department, disclosing the labor organization's financial condition and operations during the reporting period. 29 U.S.C. 431(b). As administratively implemented, section 201 requires a labor organization to identify 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. 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

On March 4, 2008, the Department issued a notice of proposed rulemaking (73 FR 11754) proposing 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 has largely gone unreported despite the trusts' significant effect on labor organization financial operations and their members' own interests. As noted in the proposal, the establishment of the Form T-1 is part of the Department's continuing efforts to better effectuate the reporting requirements of the LMRDA, which are designed to empower labor organization members by providing them the means to maintain democratic control over their labor organizations and to ensure 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 proposal noted that the Form T-1 closes a reporting gap under the Department's former rule whereby labor organizations were only required to report on “subsidiary organizations.” As noted in the proposal, labor organizations use section 3(l) trusts,

which by definition have a primary purpose to provide benefits for the members of the labor organization or their beneficiaries, 29 U.S.C. 402(l), for a myriad of purposes. Common examples of section 3(l) trusts include credit unions, strike funds, development or investment groups, training funds, apprenticeship programs, pension and welfare plans, building funds, and educational funds. Such trusts may be administered by trustees appointed by a labor organization(s), either singly or jointly with other labor organizations, or jointly with an employer(s). As discussed below, trusts administered jointly by trustees appointed by labor organization(s) and employer(s) are known as Taft-Hartley trusts. By requiring that labor organizations file the Form T-1 for specific section 3(l) trusts, labor organization members and the public will receive some of the same benefit of transparency regarding the trust that they now receive under the Form LM-2, thereby preventing a labor organization from using the trust to circumvent or evade its reporting obligations.

This final rule takes into account the Department's earlier efforts in 2003 and 2006 to implement a Form T-1. In fashioning this final rule, and as discussed in greater detail in the proposed rule, the Department relies on guidance from the United States Court of Appeals for the District of Columbia Circuit in its review of the 2003 Form T-1 rule (68 FR 58374, Oct. 9, 2003),
American Federation of Labor and Congress of Industrial Organizations
v.
Chao
, 409 F.3d 377 (DC Cir. 2005) and the District Court for the District of Columbia in its review of the 2006 Form T-1 rule (71 FR 57716, Sept. 29, 2006),
American Federation of Labor and Congress of Industrial Organizations
v.
Chao
, 496 F. Supp. 2d 76 (D.DC 2007).
See
73 FR 11757. Thus, this final rule limits the labor organization's reporting requirement to those trusts in which the labor organization has managerial control or financial dominance, as defined in this rule.

The Department initially provided for a 45 day comment period ending April 18, 2008. 73 FR at 11754. In response to a number of requests, the Department published a notice extending the comment period to May 5, 2008. 73 FR 16611. The Department received 556 comments on the Form T-1 proposed rule. Of these comments, approximately 88 were unique comments. The remaining comments were form letters endorsing the proposal. Comments were received from labor organizations, employer, trade and public interest groups, Taft-Hartley plans, accounting firms, a Member of Congress and labor organization members.

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.” LMRDA, section 2(a), 29 U.S.C. 401(a). The statute creates a comprehensive scheme 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.

The legislation 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; 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 also were 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. Rep. 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).

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
LMRDA, sections 101-105, 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
LMRDA, sections 201-06, 211, 29 U.S.C. 431-36, 441; detailed procedural, substantive, and reporting requirements relating to labor organization trusteeships,
see
LMRDA, sections 301-06, 29 U.S.C. 461-66; detailed procedural requirements for the conduct of elections of labor organization officers,
see
LMRDA, sections 401-03, 29 U.S.C. 481-83; 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, loans by a labor organization to officers or employees, employment by a labor organization of certain convicted felons, and payments to employees for prohibited purposes by an employer or labor relations consultant,
see
LMRDA, sections 501-05, 29 U.S.C. 501-05; and prohibitions against extortionate picketing and retaliation for exercising protected rights,
see
LMRDA, sections 601-11, 29 U.S.C. 521-31. As explained in the Department's 2002 proposal and 2003 rule (67 FR 79280, 79290; 68 FR at 58374), the reporting regimen had hardly changed in the more than 40 years since the Department issued its first reporting rule under the LMRDA. The original rule was published in 1960.
See
25 FR 433, 434 (1960).

Section 201 of the LMRDA requires labor organizations to file annual, public reports with the Department, detailing the labor organization's financial condition and operations during the reporting period, and, as implemented, 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, any 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.
This information is reported on the Form LM-2 by labor organizations that have $250,000 or more in total annual receipts.

Section 202 of the LMRDA requires all labor organization officials to annually disclose any income or interests, as there identified, they have received that pose an actual or potential conflict of interest.
See
29 U.S.C. 432. A labor organization official must also identify any income paid to, or financial interests held by, the official's spouse or minor children, if such payment is from or interest is held in a business or company under circumstances that could give rise to a conflict of interest.
Id.
The section 202 information is reported on the Form LM-30. Section 203 of the Act also requires an employer, with certain exceptions, to annually file a report showing in detail, the date and amount of any payment, loan, promise, agreement or arrangement to any labor organization or representative of a labor organization and a full explanation of any such transaction.
See
29 U.S.C. 433. The section 203 employer information is reported on the Form LM-10.

With regard to each of these reports, the LMRDA states that the Secretary of Labor shall “prescribe the[ir] form and publication * * * and such other reasonable rules and regulations (including rules prescribing reports concerning trusts in which a labor organization is interested) as [it] finds necessary to prevent the circumvention or evasion of such reporting requirements.” 29 U.S.C. 438. This final rule adopts the Form T-1 to require labor organizations to report on certain section 3(l) trusts so as to provide labor organization members with an accounting of how funds are invested or otherwise expended by the trust. The Form T-1 provides transparency of labor organization finances and effectuates the goals of the LMRDA.

C. Overview of the Form T-1 Final Rule and Reasons for the Rule

This final rule provides that the largest labor organizations, those with total annual receipts of $250,000 or more, must file a Form T-1 for those section 3(l) trusts in which the labor organization, either alone or in combination with other labor organizations, has management control or financial dominance. For purposes of this rule, a labor organization must file a Form T-1 for a trust if 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 receipts during the annual reporting period; contributions made pursuant to a collective bargaining agreement shall be considered contributions by the labor organization.

The Form T-1 requires that the labor organization itemize major transactions of the trust during the annual reporting cycle on two schedules: Schedule 1, which would separately identify any individual or entity from which the trust received “major receipts” of $10,000 or more, individually or in the aggregate during the reporting period; and Schedule 2, which would separately identify any entity or individual that received “major disbursements” of $10,000 or more, individually or in the aggregate, from the trust during the reporting period. The final rule does not require itemization of receipts by a trust made pursuant to a collective bargaining agreement or disbursements made by the trust pursuant to a written agreement that specifies the detailed basis on which the payments are to be made by the trust. The Form T-1 includes a Schedule 3 that requires disclosure of the names of all officers of the trust, all employees of the trust who receive $10,000 or more during a reporting period, and all direct or indirect disbursements to each of these officers and employees.

The Form T-1 provides for a number of exemptions or alternative means of compliance with the reporting requirement. No Form T-1 is required for any trust that meets the statutory definition of a labor organization as such trust would already file a separate Form LM-2, LM-3 or LM-4. An exemption is provided for trusts that are established as a Political Action Committee (PAC) or as a political organization under section 527 of the Internal Revenue Code, 26 I.R.C. section 527, provided timely, complete and publicly available reports are filed with the appropriate federal or state agency. This final rule includes an exemption for trusts that constitute a federal employee health benefit plan subject to the provisions of the Federal Employees Health Benefits Act (FEHBA), 5 U.S.C. 8901
et seq.
, and for trusts where the plan administrator is required to file an annual report under ERISA (Form 5500 exemption). The requirements of the Form 5500 exemption are discussed more fully below. The final rule also includes an alternative means of compliance by filing an audit of the trust, provided the audit is prepared according to standards set forth in the Form T-1 instructions and the audit is filed with a Form T-1 with Items 1-15 and Items 26 and 27 completed.

This final 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. 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.
1

The Form T-1, by disclosing information to labor organization members, among 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”).

1
The fiduciary duty owed by trustees and others 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 or a principal. Although a fiduciary's own duty to a trust's beneficiaries, like the duty owed by an agent to a principal, include disclosure and accounting components (
See Restatement (Third) of Trusts
§ 2;
Restatement (Third) of Agency
§ 8.01 (T.D. No. 6, 2005)
et seq.
;
see also
1 American Law Institute,
Principles of Corporate Governance
§ 1.14 (1994)), public disclosure requirements, government regulation, and the availability of civil and criminal process, complement 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 (
see
29 U.S.C. 432), 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 Form T-1 reporting 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 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.

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). 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, administration, and enforcement of ERISA has ameliorated much abuse, but many section 3(l) trusts are not covered by ERISA and the annual reporting under ERISA serves a different purpose than the reporting under the LMRDA. 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 final 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 trust officers and to employees of the trust who received more than $10,000 from the trust.

The need for the Form T-1 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, which was to be used to fund kickbacks to the labor organization officers, while 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 (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. 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 might have deterred the wrongdoers from engaging in the offending conduct in the first place.

As the foregoing discussion makes clear, the Form T-1 rule, as set forth in this final rule, will add necessary safeguards to deter circumvention and evasion of the LMRDA's reporting

requirements. 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.
2

2
The instructions to the Form LM-2 were published as part of the 2003 final rule. The instructions contain some information relating to the Form T-1. The Department will revise the relevant portions of the Form LM-2 instructions to conform with today's final rule.

III. Comments on the Proposal and the Department's Response to the Comments

A. Determining Management Control and Financial Dominance

The final rule adopts a modified management control and financial dominance test for determining those trusts for which a labor organization is required to file the Form T-1.

The Department has clarified the test to better identify how to determine whether a labor organization's contributions to the section 3(l) trust during a reporting period trigger a reporting obligation. As a general rule, a labor organization must file a report only if 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 receipts during the annual reporting period; contributions made pursuant to a collective bargaining agreement shall be considered contributions by the labor organization. The Department has also modified two terms used in the proposed rule in determining whether a labor organization must file a Form T-1 for a section 3(l) trust by:

• Substituting “receipts” in place of “revenues,” the term used in the proposal; the change addresses accounting concerns raised by some commenters; and

• Substituting the phrase “contributions made pursuant to a collective bargaining agreement shall be considered the labor organization's contributions” in place of “contributions made on behalf of the labor organization or its members shall be considered the labor organization's contribution”; this change clarifies that only contributions by employers that are required under an agreement negotiated by labor organizations should be counted as labor organization contributions and that other contributions, including contributions made by employees themselves should not be counted as labor organization contributions.

The Department received numerous comments on the proposed management control and financial dominance test. Most commenters opposed the proposed test, focusing on its application to Taft-Hartley trusts.
3

Commenters asserted that the proposal was contrary to the decisions in court challenges to the Department's earlier efforts to establish a Form T-1:
AFL-CIO
v.
Chao
, 409 F.3d 377 (DC Cir. 2005) (2003 final rule);
AFL-CIO
v.
Chao
, 496 F. Supp. 2d 76, 90 (D.DC 2007) (2006 final rule); violated ERISA or at least created unnecessary burden for section 3(l) trusts subject to ERISA; ignored the legal status of trusts and the fiduciary duty that trust officials owe to the trust exclusively, not to the labor organizations or employers participating in the trust; and mistakenly characterized contributions by employers on behalf of employees to the trusts as contributions by or on behalf of the participating labor organizations. Some commenters expressed concern about practical difficulties associated with the proposal, including how to differentiate between labor organization members and others as beneficiaries under the trust and how to measure the trust's revenues during a reporting period to determine whether labor organization contributions constitute a majority of such revenues.

3
Labor organizations hold financial interests in various types of section 3(l) trusts, some of which they jointly administer with employers and others that are wholly administered by labor organizations or a trustee or trustees selected by labor organizations. Although the Department received numerous comments about its proposal, none suggested that the test was inappropriate for trusts other than those operated jointly with employers. The comments instead focused on the application of the test to “Taft-Hartley” trusts,
i.e.
, joint labor organization and employer trusts established pursuant to section 302 of the Taft-Hartley Act. 29 U.S.C. 186(c)

It deserves emphasis that the managerial control test will not trigger a Form T-1 filing requirement for Taft-Hartley funds because they have boards whose directors are divided equally between employers and labor organizations. (The managerial control test requires labor organizations to appoint a majority of the board.) Thus, only where the labor organization or a combination of labor organizations are responsible for a majority of the receipts of the trust (financial dominance test) will a Form T-1 be required for the trust, and, as discussed later in the text of this preamble, this will apply in the relatively small number of instances where a Taft-Hartley fund does not fall within the exemption for entities filing the Form 5500. Although many commenters asserted, in effect, that labor organizations should not have to file a Form T-1 for any Taft-Hartley trust, they fail to acknowledge, as further discussed in the text of the preamble, that the DC Circuit recognized the Department's ability to fashion a reporting obligation based
either
on managerial control or financial dominance.

Whether the Management Control and Financial Dominance Test Is Justified and Consistent With Form T-1 Court Decisions

A Member of Congress expressed a concern—which is representative of several other comments—that the Department's proposal failed to heed the instructions provided by the court of appeals and the district court in the above cited cases. With respect to the 2006 rule, the same commenter stated:

Without any explanation or justification * * * the 2006 final rule stated that in order to determine whether unions have financial domination over a trust, “contributions by an employer on behalf of the union members as required by a collective bargaining agreement are considered to be contributions of the union as are any contributions otherwise made on the union's behalf.”
Id.
at 57,746. By counting employers' contributions to trusts as union contributions, the rule continued to require disclosure from the vast majority of trusts in which unions are interested, since employers routinely make the majority of contributions to thousands of multi-employer Taft-Hartley funds that provide pension, health, and other benefits to union workers.

Another commenter asserted that the Department's proposal “is based on a basic misunderstanding of collective bargaining.” A third commenter described the Department's proposal as based on the mistaken basis that “employers have no interest in how a trust invests and spends its money.” The Department disagrees with the assertion that the determination that a labor organization has financial dominance based on employer contributions pursuant to a collective bargaining agreement is either unexplained or unjustified. The “financial dominance” test was developed in response to the DC Circuit's opinion in
AFL-CIO
v.
Chao
. In that case, the court vacated the Department's 2003 Form T-1 final rule (68 FR at 58374) on the ground that the Department exceeded its authority by “requiring general trust reporting.”
Id.
at 378-79, 391. As explained in the NPRM, the court held 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.” 73 FR 11757.

The NPRM further explained:

[T]he 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. * * * [T]he 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.

* * *

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 DC 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.

73 FR at 11761. The NPRM also explained:

[T]ypically 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.

Id
.

With respect to the Department's current proposal, a Member of Congress expressed the following opinion:

The Department * * * does not explain how an employer's contributions to an employee benefit fund (which is jointly administered by labor and management trustees) on behalf of its employees could cause a union to exercise such financial domination. The Department's failure to explain the legal and empirical justifications for this controversial policy [has] deprive[d] interested parties of the opportunity to provide meaningful comments on the proposal and test the Department's analysis. In addition, because the District Court noted that the question of whether an employer's trust contributions cause union financial domination of trusts is an “empirical” question, the Department's failure to present any empirical information makes it very likely that the District Court will vacate the rule for a third time.

Another commenter stated that the Department relied heavily on a presumption that employer contributions to jointly-trusteed funds are tantamount to union contributions for the purposes of establishing “union domination” of the trusts, adding that unions cannot unilaterally compel employers to make contributions.

The NPRM explained the Department's rationale for establishing employer contributions as indicia of financial control over a trust by labor organizations. The NPRM sketched the contemporary and historical instances of the diversion of trust funds to labor organization officials and third parties working with them, including instances of trusts funded with employer contributions and theoretically subject to the control of trustees appointed by labor organizations and employers and subject to strict fiduciary duties. Trusts that are set up pursuant to collective bargaining agreements between a labor organization and the employer, the terms of which, and level of contributions to, are established in those agreements are subject to considerable influence by the labor organization.
4

At the same time, the Department fully recognizes that labor organizations do not have a free hand in setting contribution amounts. As several commenters recognized, the amount of an employer's contributions to such a trust is part of the employer's total labor costs. How the employer's “labor outlay” is allocated is of relatively greater concern to the labor organization than the employer, a factor that directly affects the amount of a trust's funding, especially to the extent that money is allocated on some basis, such as training, that does not serve equally each particular individual's interests, such as where there is an across the board increase in health benefits or in the hourly rate of pay. As such, contributions paid into the trust by employers provide an effective gauge of the labor organizations influence over a trust's financial operations.

4
In its proposal, the Department noted that in other contexts, effective, de facto, or practical control is an appropriate measure of control, explaining that such a standard would also be consistent with the DC Circuit's opinion. In the proposal, the Department observed that some legal commenters had expressed the view that practical control over many Taft-Hartley trusts had been ceded to labor organizations. 73 FR at 11762. The Department invited comment on whether this observation was accurate and, if so, for this reason or other independent reasons, whether the Department should establish a reporting threshold that is based on less than predominant labor organization control over a section 3(l) trust. No commenter supports this observation as accurate and several stated that it was contrary to their experience. As such the Department has retained the filing thresholds contained in the NPRM instead of adopting lower thresholds.

In order to prevent circumvention or evasion for purposes of reporting, it is necessary to equate employer payments to the trust on behalf of employees as contributions by the labor organization, not in the sense that the contributions are the property of the labor organization, but rather that the amount of those contributions serves as a proxy for measuring the labor organization's influence over the trust. As the D.C. Circuit explained, notwithstanding a trust's funding by an employer, such trusts are properly regulated by the Department under 29 U.S.C. 208, because “[f]or such trusts, the union has used its bargaining power to establish the trust, to define the purposes for which funds may be used, to appoint union representatives to the governing board * * * and to obligate the employer to direct funds to the trust's account.”
AFL-CIO
v.
Chao
, 409 F.3d 387. Under the proposed and final rule, in contrast to the 2003 rule, a labor organization is required to file a Form T-1 only where the labor organization has predominant managerial control over the trust or the trust's revenues are “dominated by union member funds,”
i.e.
, funds contributed on their behalf by an employer.
See
403 F.3d at 391.

Inasmuch as Taft-Hartley trusts by definition are funded by employer payments under these agreements, the commenters' assertion, in essence, is reduced to the proposition that Taft-Hartley trusts cannot be subject to the Form T-1 reporting obligation given the source of their funding. This position, however, ignores the D.C. Circuit's rejection of this theory. 409 F.3d at 387 (“[Section 3(l)'s] terms do not dictate a narrow conception of union financial operations such that as the AFL-CIO maintains, Taft Hartley * * * plans funded by employer rather than union contributions * * * would be beyond the reach of [the Department's] authority under section 208”). Moreover, this position also lacks support under the district court's decision in
AFL-CIO
v.
Chao
, 496 F. Supp. 2d 76 (D.D.C. 2007) (vacating the 2006 Form T-1 Final Rule on procedural grounds). That decision simply noted that the AFL-CIO had asserted that the Department's determination to include employer contributions as part of a labor organization's financial stake in a trust lacked an “empirical basis.”
See
496 F.

Supp. 2d at 90. The court did not suggest that it agreed with the assertion.
Id
. This result is consistent with D.C. Circuit's recognition of the Department's authority to require labor organizations to report on the financial operations of Taft-Hartley trusts and the Court's acknowledgment of the Department's finding that a joint training fund (Taft-Hartley trust) could be required to file a Form T-1.
See
409 F.3d at 387. As observed by the district court, “[t]he DC Circuit's 2005 decision * * * left the Secretary ample discretion in fashioning a new rule” and that “included within the bounds of that discretion * * * was the decision to equate employer contributions made pursuant to a collective bargaining agreement with contributions from the unions themselves.” 496 F. Supp. 2d at 87. Additionally, as discussed above, the Department's position fully recognizes that the funding of section 3(l) trusts is dependent upon collective bargaining. Because the amount of the contributions to a trust is tied directly to the collective bargaining agreement, it is entirely appropriate to use the payments made by an employer pursuant to that agreement as a proxy for measuring the influence of the labor organization over the trust. Where those contributions comprise a majority of the trust's receipts, it is also entirely appropriate to require labor organizations to file a Form T-1.

Under the final rule, management control or financial dominance is determined by looking at the involvement of all the labor organizations contributing to or managing the trust. As noted by the D.C. Circuit, the Department's experience 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 several labor organizations with common affiliation, industry, or location, participate in a trust, but none alone holds predominant management control over or dominates the trust financially. 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, thereby denying members of the participating labor organizations 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.

Whether the Management Control and Financial Dominance Test Is Necessary in Light of, and Can Be Reconciled With, Other Regulatory Regimes

Commenters asserted that the proposal exceeds the Department's authority under the LMRDA and ignored ERISA's effectively exclusive regulation of Taft-Hartley trusts.

Some commenters stated that Congress did not intend the Department to regulate employee benefit trusts under the LMRDA, and instead sought to regulate these trusts, mandate disclosure, and prevent misconduct through ERISA and the Welfare and Pension Plans Disclosure Act of 1958 (WPPDA), the pension law that preceded ERISA.
5

Accordingly, the commenters assert that the Department should withdraw its proposed financial dominance test, which has the primary effect of imposing LMRDA reporting requirements on ERISA plans.

5
A commenter asserted, without elaboration, that the Department's proposal violates section 302(c) of the LMRA. The Department disagrees with this statement. As evinced by section 208 of the LMRDA, Congress expressly recognized the Department's authority to require labor organizations to report on the financial interests of section 3(1) trusts. Moreover, there is a clear distinction between the reporting requirements of the LMRDA and the substantive requirements of section 302(c); that section strictly limits payments by employers to trusts in which labor organization have an interest without indicating that these requirements would “preempt” reporting requirements of the LMRDA or ERISA.

Most of the commenters objected to the financial dominance test on the ground that the trustees of a Taft-Hartley trust owe an absolute duty of loyalty to the trust—to the exclusion of any duties to either the labor organization or the employer. They explained that the funding of the trust by agreement between the labor organization and the employer does not evince labor organization (or management) control over the trust.

There is no merit to the claim that ERISA was intended to supplant the LMRDA insofar as requiring labor organizations to report on the financial interests of trusts in which they hold management control or financial dominance. Section 514(d) of ERISA states: “Nothing in this subchapter shall be construed to alter, amend, modify, invalidate, impair, or supersede any law of the United States [with exceptions not here pertinent] or any rule or regulation issued under any such law.” 29 U.S.C. 1144(d). The WPPDA contained a similar provision, casting doubt on the assertion that these Acts constrain the Department's authority under the LMRDA.
See
WPPDA section 10(b) (72 Stat. at 1003 (1958) (WPPDA does not exempt any person from any duty under any present or future federal law affecting the administration of employee welfare or pension benefit plans)). In the Department's view, the LMRDA and ERISA serve complementary purposes. There also is an evident similarity between the duty labor organizations officials owe to their labor organization and the duty trust officials owe to their trust.

Contrary to an implicit premise underlying many of the comments that ERISA and the LMRDA are co-extensive insofar as labor organization-related trusts are concerned, ERISA applies to only a subset of the section 3(l) trusts. Some section 3(l) trusts are not covered at all by ERISA. Title I of ERISA covers only pension and “employee welfare benefit plans” established or maintained (1) by any employer engaged in commerce or in any industry or activity affecting commerce; or (2) by any employee organization or organizations representing employees engaged in commerce or in any industry or activity affecting commerce; or (3) both. 29 U.S.C. 1003(a). While there is considerable overlap between section 3(l) trusts and ERISA “employee welfare benefit plans,” some funds in which labor organizations participate fall outside ERISA coverage, including strike funds, recreation plans, hiring hall arrangements, and unfunded scholarship programs. 29 CFR 2510.3-1. Other section 3(l) trusts that are subject to ERISA are not required to file the Form 5500 or file only abbreviated annual reports.
See, e.g.
, 29 CFR 2520.104-20 (welfare plans with fewer than 100 participants); 29 CFR 2520.104-26 (unfunded dues financed welfare plans); 29 CFR 2520.104-27 (unfunded dues financed pension plans).
See also
Reporting and Disclosure Guide for Employee Benefit Plans, U.S. Department of Labor (2004 ed.),
available at http://www.dol.gov/ebsa/pdf/rdguide.pdf
.

Several commenters stated that section 302 of the Labor Management Relations Act (Taft-Hartley Act) contains structural requirements designed to avoid any possibility of labor organization dominance, including a requirement that payments must be held in trust for the sole and exclusive benefit of employees and their dependents, and a requirement of an annual audit. They assert that section 302 was enacted precisely “to ensure that the funds in such a trust are not used as a labor organization `war chest'.”
NLRB
v.
Amax Coal Co.
, 453

U.S. 322 (1981). By definition, therefore, they argue that trusts that are subject to section 302 cannot be subject to labor organization dominance and therefore pose no risk of “circumvention or evasion” of the LMRDA's reporting requirements. In the NPRM, the Department explicitly recognized the fiduciary duties that apply to trustees under ERISA. Nothing in the proposal suggested that trustees routinely ignore these duties and put the interests of their labor organizations or their own interests ahead of their obligation to the trust. The Department recognizes that most trustees faithfully observe their duties. Nonetheless, it cannot be doubted that there are also instances where those duties are ignored with the attendant loss of funds held in trust for the labor organization and its members.

This rule is prophylactic; as such, of necessity it must require reporting even where trustees faithfully observe their duties. At the same time, its reach is necessary to empower labor organization members to determine whether transactions between the trust and other individuals and entities are proper. In many instances, the rule also allows labor organization members and this Department to determine whether transactions by or with the trust created a reciprocal reporting obligation on labor organization officials and employers who have separate reporting obligations under the LMRDA. As stated in the NPRM, “[b]ecause a labor organization's obligation to submit a Form T-1 overlaps with the responsibility of the labor organization officials [pursuant to 29 U.S.C. 432] 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.”

As an additional benefit, the transparency provided by the rule may have the salutary benefit of deterring individuals from engaging in improper or illegal transactions. Neither as proposed nor modified in this final rule does the reporting obligation interfere with ERISA. Indeed, given that labor organizations now have no obligation to file Form T-1 for many if not most trusts subject to ERISA, the arguments against the proposal on this basis lose much of their force.

Where trusts are not subject to ERISA or not required to file the annual reports required of most ERISA-regulated trusts, the Form T-1 reporting obligation provides labor organization members their first opportunity, in most instances, to receive an annual report on the financial operations of their labor organization's section 3(l) trusts.

Whether the Management Control and Financial Dominance Test Creates Unwarranted Compliance Difficulties

Some commenters expressed concern about the practical difficulty of determining whether a trust beneficiary was a labor organization member or not. Some commenters noted that although the trusts have records distinguishing between contributions submitted pursuant to collective bargaining agreements—as distinct from contributions submitted on behalf of non-bargaining unit groups, the trusts do not have records permitting them to differentiate employer contributions made on behalf of labor organization members from contributions made on behalf of non-labor organization employees. These commenters stated that in order to provide such data labor organizations would be required to ask participating employers to take on an additional reporting obligation to the plans. A commenter explained that in order to determine whether the 50% revenue threshold was met, the trust and the labor organization would have to exchange records to identify trust participants who are members of the labor organization, a task that would require significant time.

These concerns are based upon a simple misunderstanding of the proposal and are easily resolved. As discussed in the NPRM, 73 FR 11758-61, the labor organization exercises effective control over a trust if it directly contributes the trust's funds or if it negotiates with an employer for employer funding of the trust. Whether the individuals on whose behalf contributions are made pursuant to a collective bargaining agreement are themselves members of the labor organization is irrelevant. Thus, it is not necessary to determine how many beneficiaries of the trust are members or non-members of the labor organization to determine whether the threshold has been met; instead the relevant factor for making this determination is the amount of receipts contributed pursuant to the collective bargaining agreement, whether made on behalf of members or non-members.

Contributions made pursuant to a collective bargaining agreement by an employer will be considered contributions of the labor organization (as, of course, would contributions by the labor organization itself). The instructions and regulation have been revised accordingly. Consequently, the phrase “contributions made on behalf of the labor organization or its members shall be considered the labor organization's contribution” has been revised to read “contributions made pursuant to a collective bargaining agreement shall be considered the labor organization's contributions.”

Contributions received by the trust on behalf of persons represented by the labor organization but who are not members of the labor organization (such as agency fee payers) would thus be included within the definition of “receipts.” The test is whether the contributions are made pursuant to a collective bargaining agreement. The test is not whether the beneficiaries of the trust are labor organization members.

Whether Financial Dominance Should Be Measured by “Receipts” or by “Revenue”

Several commenters asked the Department to clarify how to determine whether the labor organization's contributions comprised a majority of the trust's revenues during the reporting period. In the NPRM, the Department, as noted above, framed its financial dominance test in terms of a labor organization's contributions (more than 50%) of the trust's
revenues
during the annual reporting period. The term “revenue” was used by the D.C. Circuit in discussing how the Department could properly fashion a reporting obligation where a labor organization or labor organizations financially dominated a trust.
See AFL-CIO
v.
Chao
, 409 F.3d at 390. The court did not define this term, nor suggest that its usage was to limit the Department to an approach constrained by the technical meaning ascribed to the term by accountants.

Some commenters noted that the term “revenue” has a different meaning than “receipts.” One commenter, noting that accounting professionals use slightly different interpretations of what constitutes “revenue,” proposed the following as included within its reach—contributions, interest and liquidated damages charged for delinquent contributions, all investment income, realized gains, grants, rents, reimbursements and other income, grants and employee elective deferrals to 401(k) and cafeteria plans. Some commenters asserted that if “revenue” is defined in such a way as to include income such as capital gains, interest, dividends and the like, then many trusts will fall in and out of Form T-1 coverage depending on market returns. They explained that this could result in a lack of disclosure in good financial years, and conversely, could require reporting in poor financial years. The resulting shifting reporting requirements

would lead to a lack of consistent reporting on these trusts and create confusion for labor organization members. Thus, for example, if “revenue” includes all amounts received from the sale of securities, even when promptly reinvested or “rolled over,” the amount of “revenue” attributable to the trust could easily dwarf any other source of income or receipts, reducing the number of Form T-1 reports filed.

The Department agrees that the rule should be clarified. To address these concerns, the Department has adopted for this purpose the “receipts” test used in the Form LM-2. Thus, the instructions to the Form T-1 now provide that “receipts” means anything actually received by the labor organization within that fiscal year, with the one exception being sales of investments that are promptly reinvested. In that situation, only the capital gain is counted toward the gross receipts figure.

For purposes of the Form T-1, the term “receipts” will include cash, interest, dividends, realized short and long term capital gains, rent, royalties and other receipts of any kind.

It will exclude investment proceeds that are promptly reinvested. Generally, “promptly reinvested” means reinvesting (or “rolling over”) the funds in a week or less without using the funds for any other purpose during the period between the sale of the investment and the reinvestment. This change lessens the likelihood that market fluctuations will move the trust in and out of coverage in a given fiscal year. Market performance volatility will be less likely to affect reporting requirements because receipts will not be registered until gains from the sale of securities are realized.

A commenter pointed out that labor organization members have an interest in the governance of the trusts that extends beyond the fiscal year in which particular contributions were made, suggesting that the financial dominance test should look to a multi-year period to determine Form T-1 coverage. While the Department believes there is some merit to the suggestion, the Department believes that a multi-year approach is unworkable. The key factor to showing financial dominance is the position of the labor organization as an entity that bargains with employers and is thus in a position to exert control over the contributions to the trust. If there are no contributions made in a particular fiscal year it is difficult to show that a labor organization is in a position to financially dominate these trusts. Furthermore, outside the Taft-Hartley trust context, a labor organization is more likely to be required to file a Form T-1 because it has managerial control over a trust and not because of financial dominance.

Two commenters stated that the Department's test would require reports from single employer trusts (whose contributions are not established pursuant to a collective bargaining agreement) that have equal (labor organization and employer) representation on their governing boards. One of these commenters also stated that some single employer plans, established pursuant to a collective bargaining agreement, are administered without any labor organization involvement. The Department has determined that these plans, and other such trusts that are employer created and employer administered, do not fall within the scope of section 3(l).

Whether Elective Deferrals Are Considered in Determining Financial Dominance

One commenter, a 401(k) plan multiemployer defined contribution pension plan, receives payments from employees who have the option to defer a portion of their wages to the plan. Employees have the opportunity, in addition, to control how their funds are invested. The commenter expressed uncertainty over whether these elective deferrals made by the employees themselves are considered labor organization-derived payments that establish financial dominance, arguing that they should not be so treated. The Department agrees that employee-directed payments to the trust should not be treated as labor organization contributions.

Managerial Control and Taft-Hartley Funds

The Department received few comments on the managerial control test it proposed. These comments were in the context of trustees appointed to the board of directors of a Taft-Hartley fund. The boards of these funds are allocated half to employer representatives and half to labor organization representatives. As such no Taft-Hartley fund would ever meet the managerial control trigger for filing the Form T-1 as the trigger requires the labor organization to appoint or select a majority of the board before filing is required. However, as discussed above, Taft-Hartley funds could be subject to the financial dominance test.

B. Applicability of the Form T-1 Reporting Requirement to Smaller Labor Organizations

The Department proposed a reporting threshold based solely on the size of the labor organization; labor organizations with total annual receipts of at least $250,000 must file a Form T-1 for a section 3(l) trust, if the labor organization alone or with other labor organizations exercises management control or financial dominance over the trust. The Department received no comments regarding this aspect of its proposal. This final rule maintains this reporting threshold and the Form T-1 reporting requirement only applies to those labor organizations with total annual receipts of at least $250,000. The Department believes that limiting the Form T-1 reporting requirement to the largest labor organizations responds to concerns that the Form T-1 would impose a substantial burden on smaller labor organizations. By requiring a Form T-1 to be filed only by a labor organization with annual receipts of at least $250,000, the proposed rule is consistent with the reporting threshold for Form LM-2. The $250,000 reporting threshold ensures that labor organizations required to file Form T-1 will be better prepared to meet the recordkeeping burden, having already had experience with the recordkeeping and reporting software utilized for the filing of Form LM-2.

C. Elimination of Threshold Requirements in Prior Rules

In addition to limiting reporting to labor organizations with at least $250,000 in annual receipts, the 2003 and 2006 final rules conditioned reporting on a two-part threshold ($10,000 or greater contribution threshold for the reporting labor organization and a $250,000 or greater receipts threshold for the trust). In the NPRM, the Department proposed eliminating these thresholds and this final rule does not include a contribution threshold for the reporting labor organization or a receipt threshold requirement for the trust.

Several commenters objected to the removal of the $10,000 contribution threshold for reporting labor organizations and stated that the threshold should be maintained. Commenters stated that the $10,000 contribution threshold represented a reasonable determination by the Secretary of the appropriate balance of benefit and burden, i.e. the burden of filing the Form T-1 on labor organizations contributing less than $10,000 outweighed the marginal

increase in transparency. Commenters asserted that it would be hugely disproportionate to impose the burdensome cost of Form T-1 compliance when a small amount of labor organization funds are at stake. A commenter questioned whether the management control and financial dominance requirements for filing a Form T-1 would alleviate the difficulty in obtaining information from the trusts. Two commenters asserted that the proposed rule did not offer a reasoned basis for the removal of the $10,000 labor organization contribution threshold. The commenters further noted that there has been no evidence of changed facts or circumstances that would warrant the departure from the threshold requirements of previous proposed Form T-1 rules.

As noted in the NPRM the $10,000 contribution threshold was included in the 2003 and 2006 final rules in response to concerns about a labor organization's ability to obtain the required information from trusts in which they did not have a substantial stake. The Department believes that limiting the trust reporting requirement to trusts in which a labor organization exercises management control or financial dominance, as discussed above in section A, addresses this concern. Moreover, the Department believes that under the LMRDA labor organization members have an interest in financial transparency related to trusts to which their labor organizations contribute regardless of the amount of the contribution.

The recordkeeping and reporting burdens correspond to the size of the trust. Smaller trusts have smaller burdens in these areas than do large trusts. A member's interest in knowing the details of financial dealings is not diminished simply because the trust is smaller. Even in smaller trusts, members are likely to be interested in the nature and purpose of the trust, the spending decisions of the trust, the money directed to the trust as compared to the wages or wealth of the members, and the extent of the labor organization's control and domination of the trust. The Department's proposal to require reporting by labor organizations with annual receipts of at least $250,000 tracks the mandatory filing threshold for the Form LM-2. Requiring the filing of a Form T-1 on the same basis as the filing of the Form LM-2 ensures that labor organizations required to file Form T-1 will be better prepared to meet the recordkeeping burden having had experience with the recordkeeping and reporting software utilized for filing the Form LM-2.

The Department was persuaded to change to a filing requirement based on the size of the labor organization rather than amount of contribution to a trust by comments in connection with the 2002 NPRM. Many commenters during the 2002 rulemaking expressed the view that the relative size of a labor organization, as measured by its overall finances, would affect its ability to comply with the proposed Form T-1 reporting requirements.

In proposing to eliminate the $250,000 receipts threshold for trusts, the NPRM noted that the Department's review of section 3(l) trusts revealed that a number of trusts do not have substantial annual receipts yet still hold large amounts of labor organization derived money. One building trust held $802,323 in assets, yet had less than $200 in receipts. Another trust reported $434,501 in assets, only $45,285 in receipts, and rental expenses of $75,483 resulting in net receipts of −$29,198. Removing the $250,000 annual receipts threshold provides for the disclosure of significant financial information. As noted in the NPRM, by not including a receipts threshold for trusts labor organization, members will have greater transparency and access to information relating to trusts that hold large amounts of labor organization derived money yet do not receive a significant amount of annual receipts.

Commenters objected to the removal of the $250,000 receipts threshold for trusts because they argued that it may result in Form T-1 reporting of trusts with insubstantial receipts or assets and result in a burden that may outweigh the benefit of disclosure. Commenters also stated that the proposed rule did not offer enough evidence or a reasoned basis for the removal of the $250,000 threshold. Specifically, a commenter questioned the Department's examples of building trusts that have significant labor organization derived assets but do not receive significant receipts. A commenter further noted that there has been no evidence of changed facts or circumstances that would warrant the departure from the threshold requirements of previous proposed Form T-1 rules. A labor organization commented that the $250,000 receipts threshold limited Form T-1 reporting to significant trusts. The commenter asserted that the occurrence of a trust with significant assets but no significant receipts was rare and that the benefits of including such trusts were outweighed by the burden of filing reports on trusts that are insignificant.

After considering the comments in opposition, the Department has concluded that the final rule will not include the $250,000 receipts threshold for trusts. Eliminating the $250,000 in annual receipts threshold for the trust operates to provide information about trusts to labor organization members whose labor organizations have a substantial investment in a trust notwithstanding the absence of significant annual receipts by the trust during the reporting period. The two examples of such trusts provided in the NPRM are illustrative of the problem and were not intended to be an exhaustive list. Like all the examples in the NPRM, they point to the need for disclosure.

The removal of the reporting thresholds will substantially increase labor organization financial transparency and decrease the evasion and circumvention of the LMRDA requirements. Due to the application of the management control and financial dominance thresholds set forth in this rulemaking, the Department believes that the $10,000 contribution threshold and the $250,000 annual receipts threshold are unnecessary.

The Department also sought comments on whether it would be appropriate to establish a threshold based on the amount of assets held by a trust, and if so, what amount would be appropriate. Only one comment responded to the Department's question. A labor organization proposed creating such a threshold and setting the threshold at no less than $250,000 for trust assets, in order to minimize the burden on small trusts. In the absence of significant comment on this point and the Department's further consideration of this alternative proposal, the Department believes the better approach is to continue without an asset threshold. The Department believes that a member's interest in the details of the labor organization's financial dealings is not diminished by the amount of trust assets. A member's interest is more likely to be based on the nature and purpose of the trust, the spending decisions of the trust, the money directed to the trust as compared to the wages or wealth of the members, and the extent of the labor organization's control and domination of the trust. Based on these factors, in this final rule the Department has not established a reporting threshold based on assets held by a trust.

D. Itemization of Receipts and Disbursements

The Department proposed that the Form T-1 include two itemized schedules for “major” transactions: Schedule 1, which would separately identify any individual or entity from

which the trust received “major receipts” of $10,000 or more, individually or in the aggregate, during the reporting period; and Schedule 2, which would separately identify any entity or individual that received “major disbursements” of $10,000 or more, individually or in the aggregate, from the trust during the reporting period. The final rule retains the itemization and aggregation requirements, but no longer requires the itemization of receipts by a trust made pursuant to a collective bargaining agreement or benefit payments made by the trust pursuant to a written agreement specifying the detailed basis on which such payments are to be made. By exempting labor organizations from filing a Form T-1 for those trusts required to file the Form 5500, as discussed below, the Department has substantially reduced the burden associated with this aspect of the rule. Additionally, the Department has clarified some particular reporting requirements, as suggested by commenters.

As stated in the NPRM:

Itemization is an essential component of Form LM-2 and also is integral to Form T-1 as a means to prevent circumvention or evasion of the reporting obligations imposed on labor organizations and labor organization officials. Itemization not only provides members with information pertinent to the trusts, but allows them to better monitor the other reporting obligations of their labor organization and its officials under the LMRDA and to detect and thereby help prevent circumvention or evasion of the LMRDA's reporting requirements. Among other requirements under this proposal, Form T-1 requires a labor organization to identify:

• The names of all the trust's officers and all employees making more than $10,000 in salary and allowances and all direct and indirect disbursements to them;

• Disbursements to any individual or entity that aggregate to $10,000 or more during a reporting period and provide for each individual or entity their name, business address, type of business or job classification, and the purpose and date of each individual disbursement of $10,000 or more; and

• Any loans made at favorable terms by the trust to the labor organization's officers or employees, the amount of the loan, and the terms of repayment.

73 FR 11763. Where certain payments from a business that buys, sells or otherwise deals with a trust in which a labor organization is interested are made to a labor organization officer or employee or his or her spouse, or minor child, the LMRDA imposes on the labor organization officer or employee a separate obligation to report such payments (Form LM-30, as required by 29 U.S.C. 432). Thus, the Form T-1 operates to deter a labor organization official from evading this reporting obligation.

The proposed $10,000 figure is an outgrowth of the earlier rulemaking efforts and is shaped by the concerns there expressed and the Department's accommodation to those concerns. This amount is a higher amount than the itemization threshold provided for the Form LM-2 ($5,000). The Department will continue to monitor this threshold, as well as all other thresholds established by this rule, in order to ensure that the information reported is meaningful.
See
68 FR at 58389.

The Form T-1 will identify the trust's significant vendors and service providers, i.e., those who make or receive payments of $10,000 or greater during the one-year reporting period. Labor organization members will be able to utilize the advantages of computer technology to review Form T-1s (and other documents required to be filed under the LMRDA). Electronic filing permits the reviewer to use a search engine to guide the inquiry, allowing review of a potentially large number of itemization reports with relative ease compared to review of the same documents in hard copy. Among other uses, a labor organization member who is aware that a labor organization official has a financial relationship with one or more of these businesses will be able to determine whether the business and the labor organization official have filed the required reports (concerning their relationship as required by sections 202 and 203 of the LMRDA, 29 U.S.C. 432 and 433).

The Department proposed that the itemization threshold for major receipts and disbursements be set at $10,000 in the aggregate. No exceptions were proposed; however, a special procedure was provided for reporting sensitive information. Therefore, filers would report all trust receipts from any source that aggregate to $10,000 or more, as well as any disbursements from the trust to any source that aggregate to $10,000 or more during the trust's fiscal year. One commenter urged the Department to increase the threshold for larger employee benefit plans, and instead base it upon a percentage of assets at the beginning of the year. This commenter also urged the entire elimination of itemization of disbursements for benefit payments, because of the many participants who receive in excess of $10,000. This commenter also questioned the value of requiring the reporting of disbursements to service providers and payments to parties-in-interest, which are both reported on the Form 5500. Others opposed the proposed threshold as being too high, and instead would lower it to $5,000, which, in their view, would increase transparency and align the Form T-1 with the Form LM-2.

The Department adopts the $10,000 threshold requirement for itemization in Schedules 1 and 2. This amount, in the Department's view, represents a substantial transaction that would be of interest to labor organization members. For that same reason, a percentage threshold would be inappropriate, as it would deny information about substantial transactions to members of labor organizations with considerable assets, information about transactions that might have a significant impact on the labor organization's finances. A percentage-based threshold that is subject to annual fluctuation would lack predictability and complicate a year-to-year comparison of reports. If a percentage test was used based upon a percentage of assets at the beginning of the year, information concerning large trusts would be disclosed in much higher dollar amounts and information from smaller trusts would be reported in smaller amounts. For example, if there are two trusts, one with $100,000 in assets at the beginning of its fiscal year and the other with $10,000,000 at the beginning of its fiscal year and the itemization threshold was 1 percent, then the first trust would report any receipts and disbursements that aggregate to $1,000 or more while the second trust would only report receipts and disbursements that aggregate to $100,000 or more.

Because knowledge about significant transactions by the trust is an essential element of transparency, the size of the trust should not affect the members' ability to obtain this information. Therefore, the Department adopts a flat dollar threshold of $10,000 for itemization purposes in order to ensure a uniform level of disclosure regardless of the size of the trust. Additionally, in the Department's view, the difference between the reporting threshold for itemized transactions under the Form LM-2 ($5,000) and the threshold under Form T-1 ($10,000) is appropriate because it reduces the reporting burden and because the finances of a trust are less likely to directly impact labor organization members than the expenditures by the labor organization itself. Finally, as the Department said in the NPRM (
See
73 FR at 11763-64), the Department will continue to monitor this threshold and may make future adjustments based on experience and economic conditions.

For itemization and reporting purposes, the Department proposed that

a labor organization aggregate the trust's receipts from, or disbursements to, a particular entity or individual during the reporting period. The Department explained that aggregation provides a more accurate picture of a trust's receipts and disbursements because it focuses on the total amount of money received from or paid to an entity or individual, rather than only on individual receipts or disbursements. The Department further explained its view that insofar as such payments are of interest to a labor organization member, there is no difference between a single $10,000 (or more) receipt or disbursement from one source and several receipts or disbursements from one source totaling $10,000 or more. Furthermore, aggregation reduces the incentive to break up a “major” disbursement to a single entity or individual in order to avoid itemizing the payment and thereby circumvent the Form T-1 reporting requirements.

Several commenters objected to the aggregation requirement. One commenter suggested that the Department remove this requirement because it requires labor organizations and trusts to tally relatively small amounts with no additional benefit. After considering the comments, the Department has decided to retain the “aggregation” standard for itemization on Schedules 1 and 2. The Department believes that multiple payments to or from the same individual or entity that, combined, surpass $10,000 in any single reporting year, require separate identification as much as one payment of such amount. The benefit of such “aggregation” is that the labor organization member or other viewer of the Form T-1 will receive a more accurate picture of the financial activity of the trust. The additional burden imposed on the trust and labor organization in tracking these multiple payments is offset by the increased transparency that enables members to know that the trust has made “major” disbursements or has received “major” receipts, whether in the aggregate or in a single instance.

Several commenters opposed the itemization of a trust's
receipts
. They asserted that it imposed unnecessary administrative burden on the trust without corresponding benefit of disclosure to the labor organization members and the public. Others expressed concerns over potential business competition problems caused by labor organization reporting individual employer contributions to trusts, such as disclosure of detailed manpower information and other business information. Some commenters opposed itemization of certain kinds of transactions such as receipts of pension funds or the sale of investments because they provided no information of value to members, plan participants, or the public.

Several commenters opposed itemization of
disbursements
by trusts. They asserted that it imposed unnecessary administrative burden on the trust without corresponding benefit of the disclosure to the labor organization members and the public. Several commenters also opposed itemization of particular types of transactions, as they argued that this reporting would offer nothing of value to members and the public. In their view, the Department should exclude, among other items, the purchase of investments and benefit payments, particularly pension benefits from Internal Revenue Service (IRS) tax qualified plans.

After carefully considering the comments, the Department continues to believe that Form T-1 should separately identify major receipts and disbursements of the trust. Based on the comments received, however, the Department has made a number of changes to the rule that should ameliorate, if not eliminate altogether, many of the concerns identified by the commenters.

First, the Department agrees with those commenters who questioned the advantages of reporting customary, bona fide contributions to and payments from pension funds and other benefit plans to participants and their beneficiaries. Thus, the Department has changed the instructions to except such contributions and payments from itemization, if made pursuant to a collective bargaining agreement or pursuant to a written agreement specifying the detailed basis on which such payments are to be made, as explained in more detail below. The Department believes that information about these transactions that are constrained by basic governing documents of the trust—collective bargaining agreements and written agreements specifying the detailed basis on which such payments are to be made—is unnecessary for members to monitor the operation of the trust. As a result, labor organizations are only required to report such plan contributions made pursuant to a collective bargaining agreement and beneficiary payments made pursuant to a written agreement specifying the detailed basis on which such payments are made in the aggregate as part of Items 23 and 24.

Second, the Department has made several other changes that it believes will reduce the burden of reporting itemized receipts and disbursements: the reinstatement of a modified Form 5500 exemption; the clarification that investments that are promptly reinvested are not receipts and disbursements for itemization purposes; the explicit recognition that payments related to the Health Insurance Portability and Accountability Act of 1996 (HIPAA) are confidential information not to be reported; and the explanation that filers do not have to itemize benefit payments made to officers and employees of the trust on Schedule 3 of the Form T-1. These changes are discussed in more detail below.

Several commenters opposed the itemization of the sale of investments as a burden on the trust and filer. The Department concludes that excluding proceeds from the sale of investments that are promptly reinvested from individually identified receipts will alleviate much of this burden. The clarification regarding the reporting of “rolled over” investments will reduce many of these receipts below the $10,000 threshold. This will reduce burden on the trust and the labor organization.

The reinstatement of the Form 5500 exemption has significantly reduced the number of section 3(l) trusts that will file the Form T-1. As discussed in section G(3) of this preamble, labor organizations are not required to file a Form T-1 for their section 3(l) trusts that are required to file the Form 5500. The remaining trusts for which a Form T-1 must be filed,
i.e.
, those trusts that are not required to file a Form 5500, will primarily consist of building trusts, strike funds, and apprenticeship and training funds. Unlike pension and health plans, many of these trusts will have comparatively fewer disbursements, receipts, officers, and employees. For example, strike funds are likely to have few, if any, disbursements unless the labor organization's members are on strike.

The Department believes that there is significant benefit to disclosure to labor organization members of the receipts and disbursements remaining within the scope of the itemization requirement. Specifically, information related to the nature and purpose of transactions in which a trust engages will enable members to actively participate in the governance of their labor organization. Without itemization, members would be denied information critical to monitoring the trust's finances. For example, without itemization, members

would be unable to know the value of the final sale and initial purchase of investments by the trust, as well as the service providers it hires to perform functions of the trust. This separately identified information is important to labor organization members, in part, because they elect the officers who run their labor organization, who in turn will affect the labor organization's funding and operations of the trust over which the labor organization has management control or financial dominance. The financing of these trusts can be used to circumvent or evade the labor organization's reporting requirement and this specified information will empower members to monitor whether or not the trusts are properly investing their money and fulfilling their goals.

Trusts are already tracking most receipts, disbursements, and payments to officials and employees in the regular course of business. However, they may not be currently tracking the information in the detail or structure required by Form T-1 reporting. Therefore, covered section 3(l) trusts may opt to make changes to their accounting systems to track the relevant information in a format that can be provided to the interested labor organization(s) to complete the Form T-1. The Department is not requiring trusts to establish a particular accounting or other system to accomplish this goal. As indicated elsewhere in the document, the labor organization may need to request access to the trust's books and records in order to obtain the information necessary to report information on the Form T-1 in the required detail and structure. Further, as also indicated elsewhere in this document, the Department's Employee Benefits Security Administration (EBSA) advised that it would not consider a plan fiduciary to have violated ERISA's fiduciary duty or prohibited transaction provisions by providing officials of a sponsoring labor organization with financial and other information from the plan's books and records as needed to complete the Form T-1, provided the plan is reimbursed for any material costs incurred in collecting and providing the information to the labor organization officials. Consistent with that conclusion, EBSA further advised that fiduciaries may be able to prudently conclude that it is more efficient and less disruptive of normal plan operations to make adjustments to the plan's information management or accounting software so that the plan can provide information contained in its books and records at a particular level of detail or in a particular structure, provided the labor organization reimburses the plan for any material costs incurred in making such adjustments. Although some section 3(l) trusts may need to contact their third party recordkeepers to collect information requested by labor organizations for the schedules, this burden should be ameliorated as much of required information will already be kept in the normal course of their businesses. And, for labor organizations whose section 3(l) trusts are required to file the Form 5500, there is no Form T-1 to be filed and therefore no LMRDA reporting burden whatsoever.

E. Disbursements to Officers and Employees

The Department proposed that labor organizations would disclose on Schedule 3 of the Form T-1 the names and titles of all officers of the trust and report all direct and indirect disbursements to them as well as to all employees of the trust who received $10,000 or more during the reporting period. The Department adopts Schedule 3 as proposed with clarifications discussed below.

Commenters asked the Department to clarify the meaning of the terms “trust officer” and “trust employee,” including whether the trustees are considered “officers” of the trust, and how the terms will be applied to the trust administrator and individuals working under his or her control who might be employed by an entity other than the trust.

The Department has added clarifications to the definitions of “trust officer” and “trust employee” on the Form T-1 Instructions for Schedule 3. The definition of trust officer is adapted from the LMRDA's definition of “officer.” Section 3(n) of the LMRDA states in pertinent part: “ ‘Officer’ means any constitutional officer [of and], any person authorized to perform the * * * executive functions * * * of a labor organization, and any member of its executive board or similar governing body.” 29 U.S.C. 402(n). The instructions to the Form T-1 now provide that for Form T-1 purposes, a “trust officer” means “any person designated as an officer in the trust's governing documents, any person authorized to perform the * * * executive functions * * * of the trust, and any member of its executive board or similar governing body.” The language is purposefully broad so that it will include the officials of each trust's governing board, and any other individuals conferred with executive authority under the trust's governing documents. Typically, this will include the trustees of each trust, and, depending upon the particular trust, may include the trust administrator and other individuals.

Similarly, the definition of a “trust employee” is adapted from the LMRDA's definition of this term. Section 3(f) states that “ ‘[e]mployee’ means any individual employed by an employer.” 29 U.S.C. 402(f). Thus, for Form T-1 purposes, an “employee” means “any individual employed by an employer” that constitutes a section 3(l) trust. These definitions will require a fact-specific inquiry by filers to determine whether trustees, the trust administrator, and other individuals performing service to the trust under its control or the trust's administrator's control are officers or employees of the trust. In most instances, the determination will be resolved without any significant difficulty. Where such individuals are trust officers, or trust employees who received more than $10,000 from the trust during the reporting period, payments to them, unless otherwise exempted, are required to be reported in the aggregate in Item 24 and by their names in Schedule 3. Where such individuals are not officers or employees, payments to them, unless otherwise exempted, must be reported in the aggregate in Item 24 and separately itemized in Schedule 2 if they aggregate to $10,000 or more.

Two commenters expressed concern over the heavy burden of reporting disbursements to their trusts' officers and employees. Commenters said that this information is disclosed on the Form 5500. The Department notes that no Form T-1 will be required on behalf of trusts that are required to file a Form 5500. The Department acknowledges that this requirement may impose some increased burden on labor organizations and, where requested by the labor organization, on the remaining section 3(l) trusts, but the Department believes that modern developments in electronic recordkeeping (such as software that assists in tracking financial transactions rather than the costly and time-consuming paper records used in the past) have greatly reduced the burden on labor organizations and trusts in terms of overall reporting and disclosure, and that trusts already keep records on their officers and employees for purposes of reporting under other statutes and for internal purposes. Furthermore, labor organization members could benefit from this information to ensure that their labor organization is not, for example, providing undisclosed additional

compensation to labor organization officials.

Commenters also asked the Department to clarify how to report “indirect” disbursements to health care providers, such as hospital and surgery costs, on behalf of trust officers or employees.

The Department has amended the Instructions for Schedule 3, Column (E), Other Disbursements, as well as the definition of “indirect disbursement,” to clarify that benefits payments to the trust officers and employees are not of the type required to be reported in Schedule 3 if made pursuant to a written agreement specifying the detailed basis on which such payments are to be made. Rather, these payments should be reported in Item 24, and in Schedule 2 to the extent that all trust payments to a particular source, in the aggregate, must be separately identified. For example, if a trust makes, in the aggregate, $10,000 in payments to a particular health care provider on behalf of all of its officers and employees, then the filer would report this aggregate amount separately in Schedule 2 and include it within the disbursement total in Item 24. This clarification should eliminate any concerns related to the potential misleading nature of Column (E), particularly as it relates to protecting the confidentiality under HIPAA of health care provider payments.

F. Protection of Sensitive Information

In proposing this rule, the Department recognized the need to balance the legitimate privacy interests of individuals receiving payments from section 3(l) trusts and the right of labor organization members to transparency in the financial operations of such trusts.
See
73 FR 11764. The Department was particularly concerned about protecting the identity of individuals receiving payments for medical-related and similar expenses of a highly personal nature. The final rule strengthens these protections by eliminating the need to itemize any payments—medical or otherwise—customarily made under and in accordance with the trust's governing documents. This point is addressed in the instructions to the Form T-1 and the regulatory text (revising 29 CFR 403.8). This reporting exclusion, coupled with the availability of the rule's reporting exemption for those trusts that are required to file the Form 5500 (which does not require such itemization), substantially reduces the disclosure of individual-specific information on the Form T-1.

Many commenters expressed concerns relating to the itemization of disbursements, most on privacy or security grounds, or both. Some expressed concern that the posting of such information on the Department's Web site would be intrusive and heighten the possibility of identity theft. They asserted that plan participants and beneficiaries have an “expectation of privacy” and that the trustees of benefit and pension plans are obliged to protect their privacy under ERISA and other state and federal laws. Several commenters referred to the regulations issued by the Department of Health and Human Services (45 CFR 160-164) pursuant to HIPAA, prohibiting the disclosure of “Protected Health Information.” Other commenters argued for an exemption of all payments made pursuant to the terms of an employee benefit plan. Another suggested that the Department include in the final rule an exception akin to that provided in the Department's Form LM-30 rule. The commenter noted that the Form LM-30 excepts from reporting benefit payments to officers and employees from a trust that are provided pursuant to a specific written agreement covering such payments. Others expressed doubt about the value of requiring the reporting of routine payments to or by section 3(l) trusts, especially given the voluminous number of such payments by large trusts, notwithstanding the $10,000 threshold for itemization. Some commenters expressed concern that reporting of employer contributions to trusts could reveal the extent of its business operations to competitors and unnecessarily affect its business interests.

The Department has carefully considered these comments. As noted, the Department crafted the proposed rule with an eye toward protecting the privacy interests of plan participants. The Department has been persuaded that additional protections are appropriate. As discussed in the preamble section relating to itemization, the Department has established a broad exemption for reporting customary payments to and by the trust made in accord with a collective bargaining agreement in the case of payments to the trust or the trust's governing documents in the case of benefits payments by the trust. Thus, for purposes of Schedule 1, Individually Identified Receipts, labor organizations are not required to separately identify any individual or entity from which the trust receives receipts of $10,000 or more, individually or in the aggregate, during the reporting period, if the receipts derived from pension, health, or other benefit contributions are provided pursuant to a collective bargaining agreement covering such contributions.

Similarly, for purposes of Schedule 2, Individually Identified Disbursements, the labor organization is not required to itemize benefit payments from the trust to an individual plan participant or beneficiary, if “the detailed basis on which such payments are to be made is specified in a written agreement.”
See
29 U.S.C. 186(c). These exceptions apply to all section 3(l) trusts, whether jointly administered or not. This will ameliorate concerns about the adverse impact on an employer whose payments into a trust may reveal confidential business information. Where such payments to and by the trust are undertaken in conformance with governing documents, there is less opportunity for improper diversion of funds and evasion of the Act's reporting requirements than where the trust's discretion is less constrained such as approving the sale and purchase of investments, making payments to service providers, and arranging disbursements to parties-in-interest and other third parties. This is true of information regarding receipts as well, as there may be multiple employers who contribute to the trust pursuant to a collective bargaining agreement. Moreover, such information about transactions that are not made pursuant to a specific written agreement is not likely to pose the same danger of jeopardizing private and confidential information or violating laws designed to prevent such occurrence. As a result, labor organizations are only required to report such plan contributions made pursuant to a collective bargaining agreement and beneficiary payments pursuant to a written agreement specifying the detailed basis on which such payments are to be made, in the aggregate as part of Items 23 and 24.

The Department believes that the addition of an exception pertaining to beneficiary payments made pursuant to a written agreement specifying the detailed basis on which such payments are to be made will also reduce the administrative burden on trusts and reporting labor organizations. Trusts will not have to compile information pertaining to the potentially thousands of beneficiaries, nor will it have as many complications with existing privacy and other state and federal laws. While the burdens of contacting service providers for those transactions not governed by such an agreement and of reprogramming computer systems to capture this data will still exist, the Department believes that many trusts

already have this information as a result of their normal business practices.

As an additional protection, the Department has clarified the rule to ensure that information maintained by the trusts relating to HIPAA-protected payments, subject to a non-disclosure provision in a settlement agreement, specifically protected against disclosure by state or federal law, or that potentially endangers the health or safety of an individual is not available to labor organization members under the LMRDA's “just cause provision.”
See
; . Notwithstanding these exceptions, as explained in the instructions, the labor organization is required to describe generally the nature of any payments that have not been itemized,
e.g.
, “disbursement of payments on insurance claims,” in Item 25 of the Form T-1 (Additional Information) and to include the payments in the total amount reported in Item 23 (Receipts) or Item 24 (Disbursements) of the form.

In the NPRM, the Department proposed to provide labor organizations the same reporting option available under the Form LM-2 for reporting certain major transactions in situations where a labor organization, acting in good faith and on reasonable grounds, believes that reporting the details of the transaction would divulge information relating to the labor organization's prospective organizing strategy, the identification of individuals working as “salts,” or its prospective negotiation strategy. The Department further sought comments on whether the confidentiality exception from the itemized reporting requirement should be narrowed, clarified, or removed from the Form T-1. Under the proposed special procedures, the labor organization could choose not to report the information in itemized form provided the filer identified in Item 25 (Additional Information) the general types of information excluded. The Department outlined this procedure in the Form T-1 Instructions for Schedules 1 and 2.

As under the LM-2 instructions, the proposal in the NPRM recognized that a labor organization member has a statutory right “to examine any books, records, and accounts necessary to verify” the labor organization's financial report if the member can establish “just cause” for access to the information. 29 U.S.C. 431(c); 29 CFR 403.8. Aggregation of transactions by a labor organization under the Special Procedures for Confidential Information constitutes a
per se
demonstration of “just cause for access to the information” and thus the information must be available to a member for inspection. 73 FR 11764. The Department invited comments on whether to narrow, clarify or remove this confidentiality exemption from the Form T-1 instructions.

Several commenters specifically addressed the Special Procedure for Reporting Confidential Information, as set forth in the proposed rule and instruction. Two commenters opposed these procedures, arguing that agents (
i.e.
, the labor organization and trust officials) cannot withhold “secret records” or engage in “secret transactions,” but rather the principals (
i.e.
, the labor organization members) have a right to see this information. These commenters argued that the proposed procedure allowed labor organizations greater leeway in withholding information than is permitted under the discovery rules of federal civil procedure or the National Labor Relations Board (NLRB)'s application of those rules. One commenter raised concerns over the reporting of job targeting/market recovery fund disbursements, identifying instances where, in its view, unions were improperly using the special procedure to shield from disclosure
any
itemized disbursements relating to their job targeting program, not merely those that arguably would be covered by the special procedure. One commenter supported the confidential information exception because it protects organizing strategies.

The Department's review of Form LM-2 data has indicated that the confidentiality exception is not used by the majority of Form LM-2 filers. However, the Department has found that in some cases where the confidentiality exception is used, large portions of the labor organizations' disbursements are not itemized. For example, one labor organization treated $360,308.00 in disbursements as confidential information and entered this amount on line 5 of Schedule 17. The $360,308.00 accounted for 45% of the labor organization's total disbursements. A midsized local labor organization treated $1,011,863.00 as confidential. This accounted for 49% of the labor organization's total disbursements. Finally, a large local labor organization treated $5,931,513.00 as confidential. This accounted for 46% of the labor organization's total disbursements. Thus, an undisciplined use of the special procedures in many cases could result in the non-itemization of disbursements of millions of dollars.

The Department understands that labor organizations have an interest in maintaining confidentiality in situations where disclosure would expose an ongoing or planned organizing or representational campaign. However, this interest must be balanced with the LMRDA's general reporting requirements. Depriving members of information about almost half of their labor organization's disbursements does not promote transparency.

In the 2003 final rule promulgating the Form T-1, the Department recognized that the commenters believed that a confidentiality exemption was needed to protect information on certain transactions from immediate public disclosure. Thus the Department provided an exemption from the normal itemization requirement for reporting of information that would harm an organizing drive or contract negotiation and also provided that, absent unusual circumstances, this exemption should not be applied to information related to transactions for past organizing campaigns or negotiations. The Department in this final rule is not changing the decision that a labor organization should not be required to disclose information that would harm the organization's
prospective
organizing campaigns or negotiations, by disclosing strategy that would otherwise be confidential. However, the Department reiterates that labor organizations may not shield such information from full disclosure after the organizing or negotiations have concluded. Thus, the final instructions for the Form LM-2, and the instructions for the Form T-1, provide that “[a]bsent unusual circumstances information about past organizing drives should not be treated as confidential.”

For the reasons discussed, the Department adopts the Special Procedures for Reporting Confidential Information as presented in the NPRM, but reiterates that the procedures require itemized reporting of transactions related to organizing campaigns and negotiations after the confidentiality interest giving rise to the exemption from itemized reporting in these categories has ended. Labor organizations will continue to be able to use the confidentiality procedures to withhold itemized information “that would expose the reporting union's prospective organizing strategy.” If the strategy becomes public, the confidentiality privilege no longer applies to the information. Once the organizing campaign or negotiations have concluded, the confidentiality privilege is lifted absent unusual circumstances where disclosure of itemized information would harm an ongoing or prospective organizing campaign or negotiations. As provided, in part, in the Form LM-2 instructions,

under the proposal, labor organizations are permitted to withhold from itemization information that would “expose the reporting union's prospective organizing strategy” or would “provide a tactical advantage to parties with whom the reporting union or an affiliate union is engaged or will be engaged in contract negotiations.” The instructions direct that information should be disclosed unless the labor organization could demonstrate that its disclosure would cause harm to the organizing drive or contract negotiations; the instructions also advise that absent unusual circumstances information about past organizing drives or contract negotiations should not be treated as confidential.

The Department has considered the suggestion by some commenters that the proposed procedure should be eliminated because of its perceived misuse by some Form LM-2 filers. The commenter's examples indicate that some labor organizations may have used, or will be tempted to use, the special procedure to hide disbursements that—either at the time they occurred or at the time that the Form LM-2 was filed—posed no danger to the labor organization's organizing or negotiating strategies.

The Department believes that there is reason to be concerned that the procedures may be misused by some labor organizations. Thus, although, the Department is retaining the Special Procedure for Reporting Confidential Information, the Department reemphasizes that this procedure is to be used sparingly and only in the limited circumstances for which it is provided. The Department will continue to review and monitor the use of the Special Procedures for Reporting Confidential Information. Because of the substantial interest in financial transparency that is compromised if certain information that should be disclosed is kept confidential, the Department will give priority in investigations of violations of the trust reporting rules to those reports in which the exemption is claimed. This will be done to insure that the exemption is not abused. The Department will continue to examine the use of the Special Procedure and, if evidence and experience indicate that it is being abused, may propose to eliminate or narrow it. The Department further notes that the provision of a confidentiality exemption for the Form T-1 does not affect other reporting duties under the LMRDA or other laws.

G. Exemptions and Alternative Means of Compliance

The Department proposed an exemption from the Form T-1 reporting requirement for a trust established as a political action committee (PAC) or an organization established pursuant to Internal Revenue Code section 527 provided that the trust files timely, complete and publicly available reports with federal or state agencies, as required by federal or state law. The Department also proposed a partial exemption where an independent audit of the trust has been conducted in accordance with proposed standards discussed below and the audit is filed with the Department along with a fully completed page 1 of Form T-1. Each of these alternative methods for meeting the labor organization's Form T-1 obligation provides significant, timely financial information about the trust that is updated on a regular basis (for PAC and section 527 reports, typically more frequently than the Form T-1) and requires the itemization of receipts and expenditures. The proposed rule did not include an exemption for trusts that filed timely and complete Form 5500 reports under ERISA; the Department explained that the information reported on the Form 5500 was not designed to capture information for LMRDA purposes and that many section 3(l) trusts were not subject to ERISA or its reporting requirements.

This final rule, like the proposal, includes the exemptions for trusts that constitute a PAC or a section 527 organization provided that the trusts file timely, complete and publicly available reports as required by federal and state law and includes the partial exemption for those trusts where an independent audit has been conducted as set forth in the instructions. This final rule, unlike the proposal, contains an exemption for those trusts required to file a Form 5500 report, as defined in this rule.

1. Exemption for PAC and 527 Funds

In proposing to exempt labor organizations from filing a Form T-1 for trusts that constitute a PAC or a section 527 organization, the Department explained that the purpose of limiting the filing requirements in this way was to minimize any overlapping obligations that apply to such entities where other statutes required the filing of publicly available reports that contain information roughly comparable to that required by the Form T-1. The Department received no comments on the proposed exemption for a trust established as a PAC or established under section 527 of the Internal Revenue Code. Thus, the final rule retains the exemption for a trust established as a PAC or an organization exempt under Internal Revenue Code section 527, provided that the trust files timely, complete and publicly available reports with federal or state agencies, as required by federal or state law.

2. Audit Exemption

Under this final rule, a labor organization may use the audit exemption provided the audit meets the requirements described in the Form T-1 Instructions. The audit requirement in this exemption is modeled after section 103 of ERISA, 29 U.S.C. 1023 and 29 CFR 2520.103-1 (relating to annual reports and financial statements required to be filed under ERISA). As noted in the NPRM, the Department recognizes that the audit option may not provide the same level of detail required by the Form T-1. The Department nonetheless believes that this approach is an acceptable trade-off for reducing the overall reporting burden on the labor organization and the section 3(l) trust. Under the audit alternative, a labor organization need only complete the first page of the Form T-1 (Items 1-15 and the signatures of the organizations' officers) and submit a copy of an audit of the trust that meets all the following standards:

• The

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Source: Frix Law Library, https://www.frixlaw.com/law-library/documents/fr%3AE8-22853. Public record. Not legal advice.