Labor Organization Annual Financial Reports

DEPARTMENT OF LABOR

Employment Standards Administration

29 CFR Parts 403 and 408

RIN 1215-AB62

Labor Organization Annual Financial Reports

AGENCY:

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

ACTION:

Final Rule.

SUMMARY:

The Department of Labor's Employment Standards Administration (“ESA”) Office of Labor-Management Standards (“OLMS”) publishes this Final Rule to make several revisions to the current Form LM-2 (used by the largest labor organizations to file their annual financial reports) that will provide additional information on Schedules 3, 4, 11 and 12, clarify reporting under certain functional categories and add itemization schedules corresponding to categories of receipts, and establish a procedure and standards by which the Secretary of Labor may revoke a particular labor organization's privilege to file a simplified annual report, Form LM-3, where appropriate, after investigation, due notice, and opportunity for a hearing. The changes are made pursuant to section 208 of the Labor-Management Reporting and Disclosure Act (“LMRDA”), 29 U.S.C. 438. The final rule will apply prospectively.

DATES:

Effective Date:

This rule shall take effect on February 20, 2009.

Applicability Date:

This rule will apply prospectively to labor organizations whose fiscal years begin on or after July 1, 2009.

FOR FURTHER INFORMATION CONTACT:

Denise Boucher, Director of the Office of Policy, Reports and Disclosure, at: Denise M. Boucher, U.S. Department of Labor, Employment Standards Administration, Office of Labor-Management Standards, 200 Constitution Avenue, NW., Room N-5609, Washington, DC 20210, (202) 693-1185 (this is not a toll-free number). (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, identifying the labor organization's 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 during the reporting period. 29 U.S.C. 431(b). The statute requires that such information shall be filed “in such detail as may be necessary to disclose [a labor organization's] financial conditions and operations.”

Id.

Section 208 authorizes the Secretary to establish “simplified reports for labor organizations or employers for whom [s]he finds that by virtue of their size a detailed report would be unduly burdensome.” Section 208 also authorizes the Secretary to revoke this privilege for any labor organization or employer if the Secretary determines, after such investigation as she deems proper and due notice and opportunity for a hearing, that the purposes of section 208 would be served by revocation.

II. Background

A. Introduction

On May 12, 2008, the Department issued a notice of proposed rulemaking (73 FR 27346) proposing to modify and improve the Form LM-2 by requiring additional information about the receipt and disbursement of labor organization funds, and establish standards and procedures for revoking, where appropriate, the privilege afforded some labor organizations to file simplified annual reports, after investigation, due notice, and opportunity for hearing. As noted in the proposal, the revisions to Form LM-2 and the standards and procedures for revoking a labor organization's simplified filing privilege are part of the Department's continuing effort to better effectuate the reporting requirements of the LMRDA.

The Department initially provided for a 45-day comment period ending June 26, 2008. In response to public requests, the Department published a notice extending the comment period to July 11, 2008. (73 FR 34913). The Department received 536 comments on the LM-2/LM-3 NPRM, excluding requests for extensions. Of these comments, approximately 45 were unique comments. The remaining comments were copies of a form letter endorsing the proposal. Comments were received from labor organizations, employers, trade and public interest groups, and two Members of Congress.

The LMRDA's various reporting provisions are designed to empower labor organization members by providing them the means and information to maintain democratic control over their labor organizations and ensure a proper accounting of labor organization funds. Labor organization members are better able to monitor their labor organization's financial affairs and to make informed choices about the leadership of their labor organization and its direction when they receive the 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 organizations' own interests as democratic institutions and the interests of the public and the government. Furthermore, the LMRDA's reporting and disclosure provisions, together with the fiduciary responsibility 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 making improper use of such funds or embezzling assets.

The final rule brings the reporting requirements for labor organizations in line with contemporary expectations for the disclosure of financial information. Today labor organizations are more like modern corporations in their structure, scope, and complexity than the labor organizations of 1959.

1

Further, as benefits have become a larger component of compensation, information about such benefits has

become more important to members.

2

Moreover, labor organization members today are better educated, more empowered, and more familiar with financial data and transactions than ever before. As labor organization members, no less than as consumers, citizens, or creditors, they expect access to relevant and useful information in order to make fundamental investment, career, and retirement decisions, evaluate options, and exercise legally guaranteed rights.

1

There are now more large labor organizations affiliated with a national or international body than ever before. At the close of FY 2005, 4,452 labor organizations, including 101 national and international labor organizations, reported $250,000 or more in total annual receipts. Unless otherwise noted, all estimates are based on data from the OLMS electronic labor organization reporting system (“e.LORS”) for FY 2005.

2

The balance between wages/salaries paid to workers and their “other compensation” has changed significantly during this time. For example, in 1966, over 80% of total compensation consisted of wages and salaries, with less than 20% representing benefits. U.S. Department of Labor, Report on the American Workforce (2001) 76, 87. By 2007, wages dropped to 70.8% of total compensation and benefits grew to 29.4% of the compensation package. U.S. Department of Labor, Bureau of Labor Statistics Chart on Total Benefits, available on the Web site of the Bureau of Labor Statistics,

http://www.bls.gov.

B. The LMRDA's Reporting and Other Requirements

In enacting the LMRDA in 1959, a bipartisan Congress made the legislative finding that in the labor and management fields “there have been a number of instances of breach of trust, corruption, disregard of the rights of individual employees, and other failures to observe high standards of responsibility and ethical conduct which require further and supplementary legislation that will afford necessary protection of the rights and interests of employees and the public generally as they relate to the activities of labor organizations, employers, labor relations consultants, and their officers and representatives.” 29 U.S.C. 401(a).

The statute was the direct outgrowth of a congressional investigation conducted by the Select Committee on Improper Activities in the Labor or Management Field, commonly known as the McClellan Committee, chaired by Senator John McClellan of Arkansas. In 1957, the committee began a highly publicized investigation of labor organization racketeering and corruption; and its findings of financial abuse, mismanagement of labor organization funds, and unethical conduct provided much of the impetus for enactment of the LMRDA's remedial provisions.

See generally

Benjamin Aaron,

The Labor-Management Reporting and Disclosure Act of 1959,

73 Harv. L. Rev. 851, 851-55 (1960). During the investigation, the committee uncovered a host of improper financial arrangements between officials of several international and local labor organizations and employers (and labor consultants aligned with the employers) whose employees were represented by the labor organizations in question or might be organized by them.

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

29 U.S.C. 411-15; financial reporting and disclosure requirements for labor organizations, their officers and employees, employers, labor relations consultants, and surety companies,

see

29 U.S.C. 431-36, 441; detailed procedural, substantive, and reporting requirements relating to labor organization trusteeships,

see

29 U.S.C. 461-66; detailed procedural requirements for the conduct of elections of labor organization officers,

see

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, a prohibition on certain loans by a labor organization to officers or employees, prohibitions on employment and officeholding of certain convicted felons in a labor organization, and prohibitions on payments to employees, labor organizations, and labor organization officers and employees for prohibited purposes by an employer or labor relations consultant,

see

29 U.S.C. 501-05; and prohibitions against extortionate picketing, retaliation for exercising protected rights, and deprivation of LMRDA rights by violence,

see

29 U.S.C. 522, 529, 530.

Financial reporting and disclosure was conceived as a partial remedy for these improper practices. As noted in a key Senate Report on the legislation, disclosure would discourage questionable practices (“The searchlight of publicity is a strong deterrent.”); aid labor organization governance (Labor organizations will be able “to better regulate their own affairs. The members may vote out of office any individual whose personal financial interests conflict with his duties to members.”); facilitate legal action by members against “officers who violate their duty of loyalty to the members”; and create a record (The reports will furnish a “sound factual basis for further action in the event that other legislation is required.”). S. Rep. No. 187 (1959), at 16,

reprinted in 1 NLRB Legislative History of the Labor-Management Reporting and Disclosure Act of 1959,

at 412.

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. 29 U.S.C. 431(b). The Department has developed several forms for implementing the LMRDA's financial reporting requirements. The annual report forms (Form LM-2, Form LM-3, and Form LM-4), require information about a labor organization's assets, liabilities, receipts, disbursements, loans to officers and employees and business enterprises, direct and indirect payments to each officer, and payments to each employee of the labor organization paid more than $10,000 during the fiscal year.

3

The reporting detail required of labor organizations, as the Secretary has established by rule, varies depending on the amount of the labor organization's annual receipts. 29 CFR 403.4.

3

The format of Forms LM-2 and LM-3 remained essentially unchanged from the early 1960s, when the Department issued the first and second generation of rules under the Act, until October 2003 when the revised Form LM-2 was issued.

See

,

e.g.

, 25 FR 433 (Jan. 20, 1960); 28 FR 14383 (Dec. 27, 1963). The Form LM-4 was adopted by a final rule in 1992 with an effective date of December 31, 1993.

See

57 FR 49356-49365 (Oct. 30, 1992). The effective date was subsequently postponed until December 31, 1994.

See

58 FR 28304 (May 12, 1993). The Form LM-4 was then revised slightly and adopted by a final rule with the same December 31, 1994 effective date.

See

58 FR 67594 (Dec. 21, 1993).

Labor organizations with annual receipts of at least $250,000 and all labor organizations in trusteeship (without regard to the amount of their annual receipts) must file the Form LM-2. 29 CFR 403.2-403.4. This form may be filed voluntarily by any other labor organization. The Form LM-2 requires receipts and disbursements to be reported by functional categories, such as representational activities; political activities and lobbying; contributions, gifts, and grants; union administration; and benefits. Further, the form requires filers to allocate the time their officers and employees spend according to functional categories, as well as the payments that each of these officers and employees receive, and it compels the itemization of certain transactions

totaling $5,000 or more. This form must be electronically signed and filed with the Department.

4

4

The Form LM-2 and its instructions are published at 68 FR 58449-523 (Oct. 9, 2003) and are available at

http://www.olms.dol.gov.

Copies of the Form LM-3 and Form LM-4 are also available at

http://www.olms.dol.gov.

Forms LM-3 and LM-4 were developed by the Secretary to meet the LMRDA's charge that she develop “simplified reports for labor organizations and employers for whom [s]he finds by virtue of their size a detailed report would be unduly burdensome,” 29 U.S.C. 438. A labor organization not in trusteeship that has total annual receipts less than $250,000 for its fiscal year may elect, “subject to revocation of the privilege,” to file Form LM-3 or Form LM-4, depending on its total annual receipts, instead of Form LM-2.

See

29 CFR 403.4(a)(1).

5

The Form LM-3, which may be used by a labor organization with annual receipts of $10,000 or greater, but less than $250,000, is a five-page document requiring labor organizations to provide particularized information by certain categories, but in less detail than Form LM-2. A labor organization not in trusteeship that has total annual receipts less than $10,000 for its fiscal year may elect, “subject to revocation of the privilege,” to file Form LM-4 instead of Form LM-2 or Form LM-3. 29 CFR 403.4(a)(2). The Form LM-4 is a two-page document that requires a labor organization to report only the total amounts of its assets, liabilities, receipts, disbursements, and payments to officers and employees.

5

The 2003 rule set this amount at $250,000. However, the rule inadvertently failed to change the figure in 29 CFR 403.4(a)(1) from $200,000 to $250,000. As part of this final rule, the Department has revised section 403.4(a)(1) by correcting it to read “$250,000.”

See

text of regulation.

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 * * * as he may find necessary to prevent the circumvention or evasion of such reporting requirements.” 29 U.S.C. 438. This final rule revises the Form LM-2 and establishes a procedure and standards for revocation of a labor organization's simplified filing privilege. The revised Form LM-2 will provide greater transparency of labor organization finances and effectuate the goals of the LMRDA.

III. Changes to the Form LM-2 and the Form LM-3

A. Form LM-2

1. Introduction

The Department proposed changes to enhance the Form LM-2 by requiring labor organizations to disclose additional information about their financial activities to their members, this Department, and the public. Each of the changes proposed has been adopted in the final rule, with some modifications in response to public comment received on the proposals. On the revised form, labor organizations will provide additional information in Schedule 3 (“Sale of Investments and Fixed Assets”) and Schedule 4 (“Purchase of Investments and Fixed Assets”) that will allow verification that these transactions are performed at arm's length and without conflicts of interest. Schedules 11 and 12 have also been revised to require reporting of the value of benefits paid to and on behalf of officers and employees. This change will provide a more accurate picture of total compensation received by labor organization officers and employees. Labor organizations will report on Schedules 11 and 12 travel reimbursements indirectly paid on behalf of labor organization officers and employees. This change will provide more accurate information on travel disbursements for labor organization officers and employees. The enhancements also include additional schedules corresponding to the following categories of receipts: Dues and Agency Fees; Per Capita Tax; Fees, Fines, Assessments, Work Permits; Sales of Supplies; Interest; Dividends; Rents; On Behalf of Affiliates for Transmittal to Them; and From Members for Disbursement on Their Behalf. These new schedules will require the reporting of additional information, by receipt category, of aggregated receipts of $5,000 or more. The $5,000 threshold for itemization is used throughout the Form LM-2. This change is consistent with the information currently provided for disbursements. Finally, the Department is amending the Form LM-2 instructions to conform to the requirements of the Form T-1 published on October 2, 2008.

6

6

When the current Form LM-2 was revised in 2003, the Department also established a Form T-1. The latter was vacated by the DC Circuit in

American Federation of Labor and Congress of Industrial Organizations

v.

Chao,

409 F.3d 377 (2005). See discussion at 73 FR 57412, 57413 (Oct. 2, 2008). The Form LM-2 instructions contained descriptive information about the Form T-1. As discussed in its proposal to revise the Form LM-2, 73 FR at 57416, the Department noted that it had proposed to establish a new Form T-1 (73 FR 11754 (Mar. 4, 2008)) and that a final Form T-1 rule would affect the instructions to the Form LM-2. Because the Form T-1 published on October 2, 2008, 73 FR 57412, differs in some respects from the Form T-1, as described in the 2003 rule, the Department has revised the relevant portion of the Form LM-2 instructions to reflect the new Form T-1. The most significant changes have been made to Section X of the General Instructions. Compare the language of the new Form LM-2 instructions, at pages 4-6, with the language in the new Form T-1 instructions, at pages 1-3, shown at 73 FR at 57457-59. Minor changes have been made to sections II and VII of the General Instructions; items 10 (“Trusts or Funds”) and 11 (“Political Action Committee Funds”); and Schedule 7 (“Other Assets”).

The Department also sought comment on three specific questions: Whether the functional categories on the Form LM-2 should be changed in order to improve their usability to members of labor organizations and the public; whether the confidentiality exception from the Form LM-2 instructions should be narrowed, clarified or removed; and “whether all transactions greater than $5,000 should be identified by amount and date in the relevant schedules, permitting, however, labor organizations, where acting in good faith and on reasonable grounds, to withhold information that otherwise would be reported, in order to prevent the divulging of information relating to the labor organization's prospective organizing or negotiat[ing] strategy.” 73 FR at 27352-53. Comments were received on these questions; however, with the exception of a clarification about the use of the confidentiality exception for reporting payments under a job targeting or market recovery program, the Department has made no changes to the Form LM-2 on the points for which specific comments were requested.

The Department framed the request regarding the appropriateness of the functional reporting categories as follows:

The Department also requests comment from the public regarding the appropriateness of the current functional disbursement categories in the Form LM-2. Comment is sought on whether changes should be made to these sections in order to improve their usability to members of labor organizations and the public.

73 FR at 27348. Numerous comments were received on this question. Several commenters expressed support for the continued use of the functional categories, which they find useful. Some commenters argued that no changes should be made to the functional categories, arguing that the functional categories place an unnecessary burden on unions and that unions have already spent considerable time to modify their

accounting systems to allow for reporting on the current Form LM-2. Among the suggestions for improving the functional categories were the following:

• Separate reporting for organizing and representation functions and require additional itemization.

• Lower the itemization threshold from $5,000 to $200.

• Require accurate reporting of time spent, rather than an estimate to the nearest 10%, by officers and employees on activities in the functional categories.

• Require details regarding specific matters, cases, contracts, or grievances for which legal fees or other representational expenses, including staff time, are incurred.

The Department requested comment on the functional categories to further its understanding of any problems, concerns, or areas where improvement would be useful. Other than the items specifically listed, the Department did not propose general changes to the functional categories. The Department sought comment for informational purposes. That information has been received and reviewed and will be used to guide any changes that may be proposed in this area in the future.

The remaining two questions are discussed below in connection with Schedule 15.

The enhancements adopted in today's final rule, as more fully described below, will ensure that information is reported in such a way as to meet the objectives of the LMRDA by providing labor organization members with useful data that will enable them to be responsible and effective participants in the democratic governance of their labor organizations. The enhancements are designed to provide members of labor organizations with additional and more detailed information about the financial activities of their labor organization that is not currently available through the Form LM-2 reporting. Moreover, experience with the software and technology developed for the 2003 revisions show that it is possible to provide the level of detail necessary to give labor organization members a more accurate picture of their labor organization's financial condition and operations without imposing an unwarranted burden on reporting labor organizations. The Department is revising the Form LM-2 software currently in use by Form LM-2 filers to conform to the enhancements made in today's final rule and will make the software available to filers without charge.

2. The Revisions to the Form LM-2 and Instructions

a. General

The Department received numerous comments on the proposed changes to the Form LM-2. While many comments concerned particular aspects of the proposal, many who opposed the proposal made some or all of the following claims: (1) The proposal comes too soon after, and without adequate justification to depart from, the reporting requirements established in 2003; (2) the proposal lacks the support of union members and supersedes their right to examine records underlying their union's financial reports; and (3) the proposal, especially the additional itemization to be required of labor organizations, places unnecessary and costly burdens on them. The comments received on these points are discussed below.

(1) Timing and Justification for Changing the Form

Several commenters raised questions about the timing of and justification for the proposed changes. For example, one commenter stated that the Department's proposal to require additional detailed reporting by labor organizations was made without any review by the Department of whether the 2003-revised Form LM-2 has been effective or beneficial to union members. It suggested that the Department failed to provide concrete examples of the need for a particular change or for how a change would address a concrete problem. Another commenter stated that by changing the reporting requirements so soon after the 2003 revision, the Department would impose needless, but significant, non-recurring costs on filers.

The 2003 rule represented an extensive change in the annual financial reports required under the LMRDA. The 2003 rule represented the first significant change in the Form LM-2 in over 40 years. Among other things, it required unions to report information in new functional categories, union officials to allocate how they spend their time working on members' interests, itemize major disbursements, identify tardy accounts receivables, and file the reports electronically in a format that allows for computer-assisted review and dissemination via the Internet. When the Department formulated its proposal to revise further the Form LM-2, it had the benefit of three cycles of reviewing forms submitted in accord with the 2003 revision to assess the utility of the form and to identify areas in which improvement was needed. In developing the proposals, the Department has had the opportunity to review thousands of forms and to tap the experience gained by its staff in investigating Form LM-2 issues and from their dialogue with union officials and union members while providing Form LM-2 compliance assistance to them. The Department has had the additional benefit of the lessons learned since the 2003 rule took effect in developing other LMRDA reports (Form LM-30 and Form T-1) and defending these reports in litigation before the federal courts.

The changes proposed and adopted in the instant rulemaking are incremental changes to the 2003 revisions. As stated in the NPRM and the discussion below, the Department acknowledges that unions will incur some additional burden in making the changes. In contrast to the 2003 revisions to the Form LM-2, however, the burden is minimal. Unions already have systems with the capability of itemizing disbursements; and there is no apparent reason (and none of the commenters suggested otherwise) why the same systems cannot be adapted for itemizing receipts.

As discussed in greater detail in the PRA section of the preamble, the Department has carefully considered the comments about its preliminary burden estimates, as set forth in the NPRM. The Department has revised upwards its estimate of the recurring burden associated with the new changes to the Form LM-2 to 15.6 hours, an increase of about 35 percent from the estimate in the NPRM. The revised estimate includes the changes made to the form and instructions from their proposed versions.

(2) Benefits to Union Members

Some commenters stated that the Department failed to explain why union members would find the proposed reporting requirements to be useful. Another commenter expressed concern about the absence of any studies showing how union members are using the information being reported under the 2003-revised Form LM-2 to improve the accountability and fiscal management of their unions. As the Department explained in the NPRM, 73 FR at 27346-48, the proposed rules were designed to improve the transparency of union finances and better effectuate the intention of Congress in enacting the Act's reporting and disclosure provisions. As discussed above, the proposed changes were the result of the Department's experience with the 2003-revised Form LM-2. Through this experience, it became evident to the Department's staff that

the Form LM-2 incompletely reflected the compensation paid to union officials. Notably missing from the reports was a true reflection of the amounts of compensation being paid to or on behalf of individual officials.

See

73 FR at 27350. While salaries and most other disbursements were being reported on an individual basis, the reports failed to disclose the total amount of travel expenses incurred by union officials or the amount of benefits paid to them. In a similar fashion, the 2003 Form LM-2 failed to provide itemization of a union's receipts. Without this information, union members, the Department, and the public have been missing pertinent, material information about the union's finances. The Department's proposals, as adopted in this rule, provide greater transparency about a union's finances. Further, each of the proposals was accompanied by one or more illustrations of why the changes are necessary and how they will benefit union members. These examples show the still opaque nature of the current reporting in some areas; the examples were chosen to highlight the problems rather than serve as an exhaustive listing of the problems.

Some of the commenters suggest that union members have little or no concern about how the union conducts its finances and none about transactions as little as $5,000. They further suggest that any interest is easily met by a member's right for “just cause” to review the union's financial records if he or she has questions relating to the union's finances. They assert, in effect, that LMRDA section 201(c), which provides union members a right to review records underlying a union's financial report for “just cause,” becomes superfluous because of the additional detail that the Department would require.

The commenters correctly recognize that Congress provided members an important right to obtain additional information about their union's finances. The LMRDA requires both that a labor organization file annual reports with the Department, LMRDA section 201(b), 29 U.S.C. 431(b), and make available to its members the information required to be contained in the annual report. LMRDA section 201(c), 29 U.S.C. 431(c). However, they mistakenly view detailed reporting as undermining that right. In the Department's view, the additional detail required by the changes to the Form LM-2 promotes the right of union members to seek further information about their union's finances. Sections 201(b) and (c) are complementary. As noted by the DC Circuit, there is no inconsistency between the itemization required by the Form LM-2 and subsection 201(c) because section 201(c) simply requires disclosure of data that underlies a subsection 201(b) report.

AFL-CIO

v.

Chao,

409 F.3d 377, 383-384 (D.C. Cir. 2005). The Court explained that additional detail in the subsection 201(b) reports would facilitate a union member's right to probe further pursuant to subsection 201(c).

Id.

Today's rule is entirely consistent with the approach taken by the Department in 2003 and the court's view of the interplay between section 201(b) and 201(c). The information that will be reported on the Form LM-2 under this final rule enhances the member's right to examine underlying records. It enables a member to more easily identify transactions warranting additional scrutiny, which he or she can then pursue by requesting and examining underlying records. It thereby promotes the interests of the inquiring member, his or her fellow members, and the labor organization as an institution.

By providing itemization of receipts, labor organizations will better disclose to their members a more complete accounting of all funds received and the identity of individuals and entities with which the labor organization does business. The Department also can use this information to determine the purpose of any receipt from one source in an amount of $5,000 or more, which will help identify possible misappropriation of funds. Members will be able to determine that money received by the labor organization is actually accounted for. For example, labor organization members can ensure that money they paid to the organization for disbursement on their behalf is properly accounted for on the Form LM-2. If there is no itemized receipt in new Schedule 22 for payments of $5,000 or more, or the receipt is less than expected, then the member will know that the money was not properly reported and may pursue his or her right to examine the union's books and records underlying the information reported on the Form LM-2.

One commenter made the point that the question whether unions should make itemized disclosures of sales of union assets to non-insiders is the kind of question that should be resolved by the unions themselves in accord with their internal democratic processes. This process, it was argued, would better accord with members' real interests than the Department's imputed interest. The commenter points out that in many, if not most, instances the Department has acknowledged that the added detail on the proposed revised Form LM-2—for example the sale of a union automobile for less than its book value to a non-insider-can only be evaluated by a union member who, if he or she believes the matter worthy of further scrutiny, can follow up by exercising his or her LMRDA § 201(c) right to inspect union records. The Department agrees with the assessment that in most cases union members will be in the best position to determine whether a particular transaction or transactions raise questions that demand further examination of the underlying details. Nonetheless, as discussed above, Congress established a reporting system in which the Department and the general public also serve important roles.

The Department cannot ensure adequate disclosure if itemization and reporting policies are left to the discretion of individual unions. Different reporting standards would lead to as many different forms and reporting requirements as there are labor organizations. Finally, members would have to research each individual labor organization to determine whether and where they report. For example, a member of a local who is affiliated with an international has an interest in the local, international, and any intermediate body. Under this final rule, the member can go to the Department Web site and search each labor organization's filings containing information reported in a consistent format. If the decisions were left to the unions' own choice, members would be provided information varying in detail and which could change from year to year, denying members the ability to make reliable historical and cross-union comparisons. The integrated reporting system adopted by the Department ensures that members can find information and know what information is provided on the reports.

A number of the commenters asserted that the new receipt reporting requirements would produce a forest of financial minutia that is expensive to track and impossible for members to meaningfully interpret. One commenter estimated that the average Form LM-2 report is 195 pages. The commenters also stated that labor organizations with $50 million or more in annual receipts filed, on average, 96.3 more pages in 2007 than in 2004, a 97.4% increase. He stated that the proposed changes would add substantial length to the reports. This commenter and others questioned how many members will have the time, patience, and resources to meaningfully

delve into their labor organization's Form LM-2 report.

The Department acknowledges that additional reporting requirements add length to a report and that the interest of individual union members to examine their union's finances will vary greatly from individual to individual. The Department also recognizes that a typical member will not have an interest in investigating each transaction listed on the Form LM-2. However, a member need not study his or her labor organization's entire Form LM-2 for the report to be useful. The member can use the summary schedules for quick references or, as discussed above, use the search function to find specific transactions. The summary schedules allow for quick references. For example, a quick look at any summary schedule might reveal a large number where one would expect a small number or a small number where one might expect a large number. If such a disparity is identified, the member is free to search the itemized receipt/disbursement schedules to investigate the unexpected aggregate. In one case a labor organization indicated on its Form LM-2 summary schedule that it had received $5,037,071 in rent. This accounted for more than ten percent of the labor organization's total receipts. No itemized schedule for rents is available on the current Form LM-2. Another labor organization indicated on its Form LM-2 summary schedule that it had received $15,123,482 in receipts on behalf of affiliates for transmittal to them. This accounted for almost a quarter of the labor organization's receipts, exceeded only by per capita taxes. Like rents, receipts on behalf of affiliates for transmittal to them are not itemized on the current Form LM-2. However, the newly revised Form LM-2 will provide the information necessary to evaluate the rent receipts and receipts on behalf of affiliates for transmittal to them. Another labor organization indicated that it received $6,900,000 in loans. This was the third largest source of its receipts and accounted for more than ten percent of its total receipts. Closer examination of the labor organization's Form LM-2 Schedule 9 (“Loans Obtained”) indicated that the loans were obtained from two institutions. There is no indication that these loans were illegal, but a member may want to know more about a large loan received in a year when the labor organization's total receipts exceeded its disbursements by more than two million dollars. Further, itemization allows a member to search his or her labor organization's Form LM-2 for specific vendors or purchasers.

A commenter expressed concern that the Department has failed to recognize that labor organizations have numerous internal controls in place to detect and prevent embezzlement, including multiple levels of review for receipts and disbursements, annual internal audits, segregation of duties, banking tools such as “positive pay,” digital checks that eliminate check stock inventories and therefore, the changes are not providing additional benefit to union members. The Department acknowledges that many labor organizations have internal controls in place to detect and prevent embezzlement. In 2008, these internal controls combined with the Department's on-going audit program and study of Form LM-2s have resulted in 93 embezzlement convictions and $3,134,415 in restitution. Notwithstanding these efforts, many financial irregularities continue to go undetected. The greater transparency provided by today's rule will allow union members and the Department to better detect such irregularities and better deter, in the first instance, union officials and others from engaging in questionable financial practices.

A few commenters stated that the additional reporting required by the proposals would confuse union members who would not be able to discern the nuances associated with these new requirements. The Department disagrees with this suggestion. The changes required by this rule are straightforward and will not be confusing to union members, whose ability to understand basic financial information seems to be underestimated by some commenters. Moreover, the Department would expect labor organizations to assist their members in properly understanding the financial reports and the Department, through its extensive compliance assistance program, is ready and able to assist any members who have questions.

(3) Itemization

A number of commenters asserted that it was a mistake for the Department in 2003 to require itemization of major disbursements,

7

and that this mistake, in effect, would be compounded by applying this requirement to major receipts by a labor organization. At least one commenter stated that the $5,000 threshold is too high; it suggested lowering it to $200. The question whether itemization is beneficial was answered in the 2003 rulemaking. As set forth in the preamble to that rule, 68 FR at 58389-91, itemization promotes the transparency of union finances, thereby providing union members with information essential for them to exercise their democratic rights within the union and to ensure that the union's finances receive appropriate scrutiny by the members, this Department, and the public.

8

In that rule, itemization was required for major disbursements by a union, providing greater transparency on that side of a union's ledger. Today's rule, in large part, merely extends that requirement to the union's receivables, allowing members to see more clearly the source and amount of the union's finances.

7

The existing instructions for the Form LM-2 (created in 2003) require itemization of “any individual disbursement of $5,000 or more or total disbursements to any single entity or individual that aggregate to $5,000 or more during the reporting period.”

8

The 1959 Senate report on the version of the bill later enacted as the LMRDA mandated that union members receive a full accounting of “union internal processes and financial operations.” S. Rep. No. 187, at 2,

reprinted in 1 NLRB Leg. Hist. of the LMRDA

, at 398. The LMRDA states that a full accounting includes “information in such detail as may be necessary accurately to disclose [the labor organization's] financial condition and operations for its preceding fiscal year * * * [including] receipts of any kind and the sources thereof.” 29 U.S.C. 431(b). Senator Kennedy stated that “receipts of any kind” was “intended to be as broad as it suggests * * * receipts of any kind and the sources thereof.” As noted in the Senate report “the members who are the real owners of the money and property of the organization are entitled to a full accounting of all transactions involving their property.” S. Rep. No. 187, at 8,

reprinted in 1 NLRB Leg. Hist. of the LMRDA

, at 404. This rule furthers the Department's goal of increased transparency.

The principle of aggregation,

i.e.

, reporting an organization's total expenditures within a particular category, while an accepted accounting principle, provides only a partial view of an organization's finances, a shortcoming addressed in the 2003 rule by requiring itemization of disbursements of $5,000 or greater and in today's rule by requiring as a general rule that receipts of $5,000 or greater must be identified. In those instances, where commenters demonstrated a particular problem with itemizing certain receipts, the Department has modified its proposals to meet these concerns. As discussed below, the Department acknowledges that the rule will impose some additional burden on labor organizations, but not nearly as much as suggested by some commenters.

9

9

The Department has reduced the recordkeeping and reporting burden associated with Schedules 14 and 15, by requiring labor organizations to only report on these schedules the yearly aggregates it receives from represented employers and labor organizations.

The primary purpose of this rulemaking is the furtherance of labor organization transparency.

See

73 FR at 27346-47. OLMS experience over years of auditing and investigating union financial activities indicates that increased access to information concerning a labor organization's finances will enable members to protect their own interests through more effective vigilance over union funds, and will aid OLMS in enforcement efforts. Although a member will not have knowledge of each receipt received by the labor organization, interested members will have information on many of the itemized dues and agency fees, per capita taxes, fees, fines, assessments, and work permits, sales of supplies, interest, dividends, rents, receipts on behalf of affiliates for transmittal to them, and receipts from members for disbursement on their behalf. For example, a member will be able to determine whether his or her labor organization is receiving the appropriate interest and dividends on its investments. Schedule 5 (“Investments”) will list the book value of each investment of $5,000 or more as of the end of the year. The member can look at his or her labor organization's most recent Form LM-2 (for the last fiscal year covered by the 2003 revisions) to determine the book value of particular assets. With this information and the information provided on the new Form LM-2, the member can determine how much the labor organization received in increased value or interest during the reporting year. The member can calculate the amount of appreciation or interest, the latter based on either the rate of the particular institution identified on the Form LM-2 or the market average, which is available on the Internet. A disparity between the rate computed from the Form LM-2 and the market rate may indicate that further investigation is warranted to determine whether the disparity is due to bad investment choices or culpable actions. Moreover, as discussed in the preceding section, itemization effectively complements a member's right to examine documentation underlying the information reported on the Form LM-2 by allowing him or her to identify major financial receipts involving the union, a task that would be very impractical, at best, without the itemization required by today's rule.

b. Particular Aspects of the Rule

The following is a “section-by-section” discussion of the sections, items and schedules on the revised Form LM-2 and instructions:

Items 1-21

. These items are unchanged, except for some minor editorial changes, mostly concerning the reporting of information about trusts in which labor organizations hold an interest.

See

n. 6.

Statement A.

This statement is unchanged.

Statement B.

Receipts and Disbursements: This statement currently contains two primary columns, one with the heading “Cash Receipts” and one with the heading “Cash Disbursements.” Under each heading are items listed that describe categories of receipts or disbursements that should be reported. There are no changes to the items listed under “Cash Receipts.” As discussed below, however, the Department is adding, as proposed, additional schedules to correspond to items listed under “Cash Receipts” for which currently no schedules exist. As a result of these changes, the remaining cash disbursement items will be renumbered on Statement B. The new Form LM-2, including the new numbering system for the cash disbursement items can be found in the appendix to this final rule.

Schedules 1-2.

These schedules are unchanged.

Schedules 3 and 4

—Sale of Investments and Fixed Assets and Purchase of Investments and Fixed Assets: The Department adopts its proposal, but exempts certain stock transactions from particularized reporting as further discussed below. The first new column on the form, entitled “Name and Address of Purchaser (A),” will disclose the purchasers of investments and fixed assets from the labor organization, if in the aggregate the sales amount to $5,000 or more per purchaser. A second column “Date (C)” will disclose the date of the sale. These additions will provide members of labor organizations and the public with information necessary to verify that the sale was transacted at market price and at arm's length, thereby helping prevent interested parties from unjustly enriching themselves by purchasing labor organization assets at below-market price. In addition to the reasons discussed below, this disclosure is important because if an insider (

e.g.

, officer or employee) receives property at below market price the receipt of such property is a disbursement to the insider that should be reported on Schedule 11 or 12.

As explained in the NPRM, 73 FR at 27349-50, the Department believes that Schedules 3 and 4 of the current Form LM-2 do not provide labor organization members with adequate information to enable them to determine whether a particular purchase or sale of an investment or asset was transacted at market price and at arm's length. For instance, one labor organization in its latest Form LM-2 reported that it had sold a “John Deere Lawn Tractor, Trailer and Mower” for $678, even though this asset had a book value and cost of $18,000. Another labor organization reported that it had sold automobiles that had a book value of $57,997, a “real estate investment trust” that had a book value of $25,735, and furniture and equipment with a book value of $7,634. For each of these items, the union listed the sale price as $0. This same labor organization sold corporate stocks with a book value of $29,570,505 for $34,297,627. Another union sold a Ford Explorer for $9,252 that had a book value of $23,471. As explained in the NPRM, 73 FR at 27349, in all these situations, labor organization members would be unable to determine whether the labor organization received fair market value for the items that it sold, whether an insider benefited from these transactions, or whether the union's officials are properly managing the labor organization's finances.

The Department's review of data filed on the current Form LM-2 has demonstrated that the current form does not provide labor organization members with a clear understanding of the entities that are receiving in some cases hundreds of millions of dollars of the labor organization members' money. For instance, as discussed in the NPRM,

id.,

one labor organization listed disbursements of $789,369,139, another labor organization reported disbursements of $313,978,214, and another labor organization reported disbursements of $156,544,561. Labor organizations also report smaller amounts on this schedule. For instance, three labor organizations reported disbursements of $5,353, $5,350, and $6,952 on this schedule. None of the reports disclose the parties that sold these assets to these labor organizations. As such, the members of these labor organizations are not in a position to know whether these sums of money were well spent. The enhancements made today to Schedules 3 and 4 will help ensure the disclosure of any potential conflicts of interest between the seller and the labor organization.

The book value of an asset is the value at which the investment or fixed asset was shown on the labor organization's books and reflects the lower of its cost or market value.

See

73 FR at 27413 (unchanged from current instructions to the form). The value of certain assets such as stocks can vary greatly within

the fiscal year. Because the date of sales is not listed on the current Form LM-2, a labor organization member is unable to determine whether the labor organization received good value on the sale transaction. As the Department explained in its proposal, 73 FR at 27349, the stock on the day of the sale may have been worth much more than its book value. In this scenario, a labor organization member would be unable to determine whether the stocks were sold by the labor organization at market value. The labor organization's financial report filed on the current Form LM-2 would show this transaction as a profit for the labor organization, but the transaction could also have been detrimental to the labor organization if the asset was sold at a price below current market value. The changes made in today's final rule will help ensure disclosure of any potential conflicts of interest between the purchaser and the labor organization. The schedule will total all individually itemized transactions and will provide the sum of the sales by itemized individual purchasers and the sum of all non-itemized sales of investments and fixed assets, as well as the total of all sales.

The Department received many comments supporting the proposed changes to the Form LM-2. Many of these comments were identical or nearly so. Commenters expressed support for the Department's proposed revisions to Schedules 3 and 4, which, in their view, would allow union members to spot transactions where union officers and employees are given advantageous prices when purchasing labor organization assets. Another commenter approved of the Department's ongoing promotion of transparency. Additionally, the commenter agreed with the Department that the additions to Schedules 3 and 4 will provide members with the information necessary to scrutinize those transactions to ensure the best practices when managing their money.

Some commenters questioned the wisdom of requiring unions to provide additional detail in the Form LM-2 reports, asserting that the new information would add length to the reports and further burden unions without benefit to members. They raised specific objection to the burden associated with reporting details concerning the sale and purchase of investments and assets. The Department does not expect the average member to investigate each investment or asset sale/purchase listed on the Form LM-2. Such an undertaking by a single member would be time consuming and impracticable. However, a member need not study its labor organization's entire Form LM-2 for the report to be useful. The member can use the Schedules 3 and 4 summary schedules for quick references or use the search function to find specific transactions. For example, a quick look at the summary schedules for Schedules 3 and 4 might reveal a large number where one would expect a small number or a small number where one might expect a large number. Once one of these disparities is identified the member is free to search the itemized schedules for an explanation for the unexpected aggregate. In one case, a labor organization indicated on its Form LM-2 summary schedule that it had received $527,937 from the sale of investments and fixed assets. This accounted for over 94 percent of the labor organization's total receipts. A closer look at Schedule 3 of its Form LM-2 indicated that the labor organization had received all of the $527,937 from the sale of one building. This sale left the labor organization with only $1,347 in fixed assets. Another labor organization indicated that it received $64,389,415 from the sale of investments and fixed assets, almost half of the labor organization's total receipts. Upon closer inspection of the labor organization's Form LM-2 a member would find that $15,782,856 of the $64,389,415 was from the sale of “common stock.” However, the same schedule indicated that none of the money from the sale was reinvested. Nothing indicates that either of these sales was illegal, but a member may want to know more about such a large sale of union assets. Further, itemization allows a member to search his or her labor organization's Form LM-2 for specific sellers or purchasers. Using the OLMS Web site, a member can easily search his or her labor organization's Form LM-2 for a specific seller or purchaser in seconds,

e.g.

, the labor organization's president's brother. The changes to Schedules 3 and 4 will provide members with information necessary to verify that sales/purchases are transacted at market price and at arm's length.

The majority of the commenters believed that an exception should be created for the purchase and sale of publicly-traded assets on a registered market exchange. They stated that the reporting of these open market, arms length transactions would provide no relevant information to a member. Further, since these trades are through the “market,” it is doubtful that the “seller” and “buyer” information is even available, due to investments being pooled and matched by the investment broker market. The only purchaser information available to provide on the proposed new investment schedules would be that of the broker. A national labor organization pointed out that the Department does not require disclosure of transactions involving securities on registered public exchanges, such as the NYSE and NASDAQ, on Form LM-30. Therefore, the labor organization reasoned that the same transactions should not be disclosed on Form LM-2. In both contexts, such sales and purchases of securities are by definition transacted at “market prices” and “at arm's length.” 29 U.S.C. 432(b).

The Department agrees with the commenters' position that an exception should be created for bona fide market transactions over a registered securities exchange. Consistent with the current Form LM-2 and the Form LM-30, the Department excepts marketable securities from itemization on Schedule 3. The labor organization will not be required to itemize the purchase or sale of marketable securities when the end seller or purchaser,

i.e.

, the party transacting with the labor organization, is not known. (Such as sales of stock over a registered exchange.) The instructions have been revised and include the direction that “Marketable securities are those for which current market values can be obtained from published reports of transactions in listed securities or in securities traded `over the counter,' such as corporate stocks and bonds, stock and bond mutual funds, state and municipal bonds, and foreign government securities.” The total amount of such sales will be reported on Schedule 3 Detailed Summary page.

A number of commenters stated that their investment activities are run through independent investment groups, asserting that for this reason such activities should be excepted from the proposed reporting requirement. The Department disagrees that an exception for investment manager transactions is appropriate. Such an exception is neither good policy nor necessary. Although the investment manager may have independent control over the individual investments, the labor organization still has control over the manager. If the labor organization is dissatisfied with returns or particular purchases/sales, then it is free to hire a new investment manager. Thus, the investment manager is never truly independent. Further, the exception laid out above should alleviate many of the commenters' concerns. Most of the investment manager purchases/sales will qualify for the exception provided

for bona fide transactions made with a registered securities exchange. Those transactions that do not qualify for the exception, i.e., securities purchased outside these highly regulated channels, will be of particular interest to members, the public, and the Department. These are the types of transactions that are subject to abuse whether it is abuse by the labor organization or the independent investment manager. Therefore, the Department has chosen not to create an exception for investment manager transactions.

A number of commenters expressed a concern that the additional information required for the sale and purchase of investments on Schedules 3 and 4 will be deceptive. A national labor organization argued that the value of a given stock transaction cannot be understood absent an understanding of market conditions, news affecting that particular stock and market segment at the time of sale and the investment manager's strategy resulting in the sale. Additionally, it stated that the “market price” of a tangible item, such as a car, cannot be objectively determined without knowledge of the degree of wear-and-tear, local market conditions, and the like. Without these essential facts a national labor organization stated that listing the name of the purchaser and the date of the sale may well lead union members to conclude that a buyer received a windfall when, in fact, that is not the case. The labor organization suggested that the Department retain the current reporting format, aggregating the total of all such sales and purchases and the net effect on assets.

The Department disagrees with the suggestion that the proposed changes to Schedules 3 and 4 will be deceptive. As discussed earlier, members will be able to assess without difficulty whether the sale or purchase of an asset and its price appears appropriate given its timing and the existing market conditions. Unlike the previous Form LM-2, members will now be able to evaluate sales/purchases by date and purchaser/seller. This clearly improves the members' ability to evaluate a transaction in its particular context. To use an example discussed above and in the NPRM, 73 FR at 27349, a labor organization indicated on its Form LM-2 that it sold a Ford Explorer for $9,252, but listed its book value at $23,471. The previous Form LM-2 included price information and a general description. The identification of the buyer can be used to identify interested party transactions, but it can also be used to better understand the sale. For example, the Ford Explorer might have been sold to a dealership rather than on the open market. In this case the identification of the buyer would alleviate any concern of an interested party windfall. The disclosure of this information will allow members to make preliminary assessments of sales/purchases from the information provided on the Form LM-2. If necessary, as discussed below, they can then exercise their section 201(c) right to obtain additional information about the particular transaction. It should be noted that most securities transactions will fall within the exception discussed above.

The additional information that will be disclosed on the Form LM-2 will enable union members, the general public, and the Department to focus their attention on particular transactions involving significant sums of money. As some commenters have acknowledged the information will be most directly beneficial to union members who will be most familiar with the transactions and the parties involved, but the information also improves the ability of the public and the Department to examine the details of a transaction. Moreover, to the extent the union believes that any particular transaction could be misleading, the union may choose to provide additional information on the Form LM-2 to minimize this possibility. By adopting this rule, the Department is setting a minimum standard that labor organizations must meet for reporting the sale and purchase of investments and assets. A number of commenters stated that the revisions were not necessary and would not benefit members. Multiple national labor organizations stated that union members already have access to any information necessary to assess sales of union assets. They explained that any individual member could exercise his or her section 201(c) right to obtain the information.

The Department recognizes that members possess the right to examine any books, records and accounts to obtain information on the purchase/sale of investments and assets under 29 U.S.C. 431(c). However, members have no way of knowing whether they need to request the information from the labor organization without the Form LM-2. As explained above, a quick look at the summary schedules for Schedules 3 and 4 might reveal a large number where one would expect a small number or a small number where one might expect a large number. Once one of these disparities is identified the member is free to search the itemized schedules for an explanation for the unexpected aggregate. In one case, a labor organization indicated on its Form LM-2 summary schedule that it had received $35,224,391 from the sale of investments and fixed assets. This accounted for over half of the labor organizations total receipts. A closer look at Schedule 3 of its Form LM-2 indicated that it had sold “corporate stocks” for $34,297,627.

See

73 FR at 27349. Nothing indicates that this sale was illegal, but a member may want to know more about such a large sale of union assets. Under the new reporting requirements the member will now be able to evaluate whether the transaction occurred at arm's length or not. The member need only look for the purchaser/seller information to know whether the transaction merits further inquiry. If the transaction occurred on a registered exchange the labor organization will not detail that transaction. In this case, the member will know that no insiders received unjust enrichment from the transaction. However if the transaction occurred not on a registered exchange but through some other means the transaction information of the date and identity of the purchaser/seller will be useful to the member. If the itemized schedules do not provide an adequate explanation or reveal a transaction with an interested party then the member is free to request additional information from the labor organization pursuant to 29 U.S.C. 431(c). This process is more efficient for both the labor organization and the member. Labor organizations will not have to provide information unless the member finds a particularly interesting transaction and the member will not have to request superfluous information to obtain a clear accounting of the labor organization's activities. Both itemization reporting and the changes adopted in this rule are essential to providing members with a clear picture of their labor organization's activities.

Two commenters offered alternatives to requiring a labor organization to disclose the name and address of the purchaser or seller in transactions involving labor organization investments and other assets. A labor organization suggested that if the Department is concerned about sales of assets for less than market value it can merely mandate disclosure of specifically such sales of union assets. Another commenter suggested that the Department pare down the report and ask about specific areas of concern. For example, instead of modifying Schedules 3 and 4 as currently proposed, the Department should simply ask about related party transactions and any non-routine

transactions and specifically define related parties.

In the Department's view, the suggested approach is a poor substitute for the full transparency achieved under the Department's proposal. The Department seeks to provide members with the tools by which each member can make his or her own evaluations of the financial decisions made by the officials of his or her labor organization. Although members as a general rule will have the greatest interest in matters involving a party in interest or a sale of an asset for less than market value, members will also have an interest in other less easily categorized transactions. For example, a member may have an interest in the sale of a building to a non-party in interest at what appears to be fair market price. As a general matter, the sale of the building might indicate to the member that his or her labor organization is selling off assets or not managing his or her money appropriately. But a sale of the asset to a particular individual or group, such as a sale to a company in which a union official's long-time associate has an interest or to a company in which a politician or his or her associate has an interest (who might have inside information about a possible change in zoning that would substantially increase the value of the property) would be of substantial interest to members. Itemization of the purchase/sale of investments and assets provides members with a base from which they can evaluate transactions.

10

10

One commenter suggested that the Department replace the Book Value column with a Market Value or Par Value column. In the commenter's view, this change would allow those studying the Form LM-2 to determine whether the sale of an investment or fixed asset was at market value and at arm's length.

The Department has decided not to change the values reported on Schedules 3 and 4 column (E), “Book Value.” Book value is “the value at which the investment or fixed asset was entered on the labor organization's books.” Form LM-2 Instructions page 16. Depending on when the asset was obtained, the book value will reflect the asset's original or depreciated value. Book value allows for regularized reporting of the value of assets. Unlike market or par value (the latter applicable only to equitable assets and even then of limited utility to union members and the public), book value does not pose problems of verification in comparing the value of the reported asset and the value carried on the union's books. Further, unlike market value which can be determined independently through the market (

e.g.

, by bluebook, comparable real estate values, market price of stock) book value cannot be easily ascertained by union members and others reading the Form LM-2. For these reasons, the Department views the book value as an essential check to determine the union's compliance with this aspect of its reporting obligation.

Therefore, the Department adopts the reporting requirements as outlined in the NPRM with an added exception that labor organizations need not report bona fide purchases or sales of securities traded on a securities exchange registered as a national securities exchange under the Securities Exchange Act of 1934, shares in an investment company registered under the Investment Company Act of 1940 or securities of a public utility holding company registered under the Public Utility Holding Company Act of 1935.

Schedules 5-10.

These schedules are unchanged except for a minor editorial change to the instructions for Schedule 7 to clarify the reporting of information about a trust in which a labor organization is interested.

See

n. 6.

Schedule 11

—All Officers and Disbursements to Officers; and

Schedule 12

—Disbursements to Employees: The Department proposed two substantive changes to the categories of disbursements reported on these schedules: Reporting of indirect disbursements to officers and employees for hotels (room rent charges) and public carrier transportation; and disclosure of benefits disbursed to officers and employees. No commenters suggested that one approach was appropriate for officers and another for employees. In today's rule, the same revisions are being made to both Schedules 11 and 12. In today's final rule the Department has decided to adopt the proposed items with minor changes. These changes are discussed below.

a. Indirect Disbursements to Officers and Employees for Hotels (Room Rent Charges) and Public Carrier Transportation

The Department proposed to eliminate the existing exception to the reporting of indirect disbursements, thus requiring the reporting of both direct and indirect payments on behalf of a particular union official for hotels (room rent charges and public carrier transportation charges) on Schedule 11. The Department adopts the proposal, with a minor clarification as discussed below.

Indirect disbursements for official business, which include travel and lodging expenses, will be reported in Column G, on both Schedule 11, “All Officers and Disbursements to Officers” and Schedule 12, “Disbursements to Employees.” This column is clearly identified, and is distinct from columns listing gross salary, allowances, and benefits. Concerns raised by commenters that union members may not grasp the “nuances of the reporting categories” and that disclosure would result in inflated figures of total compensation are unwarranted.

As explained in the NPRM, 73 FR at 27350, disbursements for temporary lodging and transportation made directly to a labor organization official by the labor organization are now reported, by individual, on Schedule 11; however, if the labor organization pays the vendor directly for the travel it is not reported by individual. This distinction does not serve the purpose of section 201(b)(3) of the LMRDA, 29 U.S.C. 431(b)(3), which calls for reporting of “other direct or indirect disbursements (including reimbursed expenses) to each officer and also to each employee.”

A “direct disbursement” to an official is a payment made by the labor organization to the official in the form of cash, property, goods, services, or other things of value. An “indirect disbursement” to an official is a payment made by the labor organization to another party for cash, property, goods, services, or other things of value received by or on behalf of the officer. Such payments include those made through a credit arrangement under which charges are made to the account of the labor organization and are paid by the labor organization. For example, when a union, through its credit arrangements, is billed directly and pays the airline bills of an officer or employee, the union will have to include this amount as part of the disbursements made to the particular official. If the credit arrangement results in an invoice that is detailed by officer or employee,

e.g.

, hotel room rent charges, the labor organization will use this detailed invoice when allocating expenses by officer or employee. If the billing arrangement is set up in such a way that expenses are not detailed by officer or employee,

e.g.

, when a labor organization purchases a block of hotel rooms for its officers or employees, then the labor organization will divide the total cost by the number of officers or employees for which the expense was incurred. The instructions to the form now clarify that unions may allocate these disbursements in this manner.

The distinction between reporting of direct and indirect disbursements was established because of the difficulties faced by unions over 40 years ago in reconstructing documentation for certain payments for their prior fiscal year. Because of this difficulty, organizations were allowed to report such disbursements as functional expenses of the organization rather than as disbursements to particular officials. This distinction remained in the instructions and was not revisited by DOL despite changes in data reporting and record retention methods over the

intervening decades. This issue was not addressed in the 2002-2003 rulemaking.

As noted in the NPRM, 73 FR at 27350, payment for an official's travel and lodging expenses by credit card does not reduce the significance of the expense to a labor organization member; yet the current Form LM-2 treats the method of payment as significant. Travel and lodging expenses for a particular official may raise questions among the membership for various reasons. The choice of transportation by public carrier (airplane, train or bus) and the level of accommodation (first-class or coach) may be significant to a member. Lodging choices may run from a motor inn to a five-star hotel; where options are available, the officer's choice of accommodation may be significant to a member. However, the mode of payment now controls whether a labor organization member knows the full extent of disbursements made for a particular official of the labor organization. Although the specifics of the travel will not appear on the Form LM-2, members will have a better understanding of the total amount of disbursements made to or on behalf of a particular official. Through this more complete reporting, members of the labor organization will be better able to determine whether such disbursements warrant further scrutiny, including review of the underlying documentation maintained by the labor organization.

The Department received almost 500 form letters endorsing its proposal to require disclosure of indirect disbursements. These commenters stated that such disclosure would provide union members a more accurate idea of how much their union is spending on these matters. Noting agreement with the proposal, a commenter stated that all expenditures for travel for officers should be reported regardless of the method of payment to the vendor. Another commenter noted specific examples of union spending that highlighted the importance of disclosure of travel disbursements. The commenter explained that while one large union's membership declined 15% last year, the union expended members' dues money to hold meetings at resorts and casinos in destinations including Palm Springs, Las Vegas, and Atlantic City.

One commenter alleged that a review of the legislative history of the LMRDA does not provide support for the disclosure of indirect disbursements made on behalf of an officer or employee for official business. The commenter alleged that Congress was particularly concerned with schemes through which corrupt employers and union officials could enrich or benefit themselves by structuring indirect payments through relatives or to vendors of goods and services that were unrelated to their duties as union officials.

While Congress did evince a particular concern over corrupt schemes in which union officers sought to enrich themselves through indirect payments, it also clearly intended that union members receive a full accounting of their union's financial operations.

See

discussion above, at n.8. The mandate for a full accounting does not exempt transactions that may be considered “official business.”

Commenters questioned the utility of providing disclosure of indirect disbursements. The Department believes that union members have an interest in learning the full extent of disbursements made to or for labor organization officials. Travel and lodging expenses may be of particular interest when officers and employees are not utilizing particularly cost effective modes of transportation, levels of accommodation, or choice of lodging. This more complete reporting will help members determine whether such disbursements warrant further scrutiny. Information about travel and lodging expenses is no less valuable when payments are made indirectly to the vendor rather than directly to the union official.

Several commenters suggested that sums aggregated by individual officials, as called for under the proposed rule, could easily be misconstrued by membership and the public. One commenter believed that the data would unfairly make individual officers targets because of their “allegedly excessive spending.” They provided as an example the contrasting circumstances of two union officials—one who travels often, but cheaply, will have a large amount of money in travel expenses, while another official who only travels once but flies first class and stays at a high-end hotel will appear to be more fiscally responsible with union funds. The Department recognizes that dollar figures alone will not show how profligate or not union officers are with their members' money. A member, however, who is familiar with the demands of an officer's duties, including travel on behalf of the union, will be able to determine from the sums reported whether the expenses incurred seem about right or not and, if the latter, identifies a need for closer scrutiny of particular expenses. One commenter stated that the proposed change would allow “labor's enemies” to falsely inflate an official's compensation by including the cost of legitimate business travel. Another commenter noted that such indirect disbursements do not meet the IRS definition of income. As discussed earlier, the Department believes that union members deserve the benefit of increased transparency and these commenters concerns can be best addressed by providing information about a union's policies, so members will better understand the amounts reported by individual officers. Better education may also be the answer to concerns about false claims about disbursements to union officer officials. In any event, the Department does not believe that members should be denied information relevant to disbursements made to their officers because of the asserted “misuse” of public information. Because Congress chose to make union financial reports public, the Department is required to make public information it deems necessary for union members to possess a full picture of their union's finances. Finally, the Department recognizes, as it believes the public does also, that the Form LM-2 and IRS forms do not capture identical information. Indirect disbursements represent a significant aspect of a union's expenditures—and as such are important for purposes of disclosure without regard to any tax consequences they may pose for individuals.

Commenters also noted that aggregation of the data by specific officers would not provide the same utility as disclosure of the specific details of such payments and that aggregation may prove misleading to members. Two commenters argued that disclosure of union travel and expense policies would be more useful to members than data regarding indirect travel expenses. One commenter asserts that the data revealed by eliminating the exemption for indirect expenses will not afford union members any more useful information than they already have by examining the labor organization's itemized expenditures for individual hotels and common carriers on Schedules 15 and 19. This commenter provides that a union's travel and expense policies, which are available to members upon request, are far more probative because they explain the types of expenses that officers and employees are entitled to incur when they travel. Some commenters noted that providing specific details of payments for travel and lodging would be more useful to union members than providing aggregate sums. Two international unions argued that requiring disclosure of union travel and expense policies would be more useful to members.

The Department acknowledges that providing union members additional information regarding the specific details of travel disbursements and providing members copies of travel and expense policies would provide the members access to possibly useful information. As noted in the NPRM, 73 FR 27350, eliminating the exception from reporting indirect disbursements will provide union members a more accurate accounting of the total amount spent on travel and lodging for union officials. This data will help union members better determine whether further investigation is warranted. To the extent that labor organization commenters believe greater detail would benefit union members, labor organizations are free to amend their bylaws to require a level of disclosure or specificity that is greater than that required by the Form LM-2.

b. Disclosure of Benefits Disbursed to or on Behalf of Officers and Employees

As a second change to this schedule, the Department proposed the addition of a new column to allow disclosure of benefits disbursements made to each labor organization official. The final rule adopts the proposed changes. Columns “(A)” through “(E)” are unchanged from the current form. Column “(F)” will be redesignated “Benefits.” This is the only new column on the schedules requiring disclosure of additional information. Column “(G)” will be redesignated “Disbursements for Official Business.” Column “(H)” will be redesignated “Other Disbursements not reported in (D) through (G).” Column “(I)” will be added for “Total.”

In response to comments received, the Department is adding clarifying information to the requirements for this schedule as follows:

• Reasonable estimates may be used if precise cost figures are not readily available for benefits provided to individual officers, e.g., insurance premiums, defined benefit plan contributions, and so forth.

• FICA, federal and state unemployment tax, workers' compensation taxes, and other employer taxes that are legally required to be paid by the employer are not included within the scope of benefits for officers and employees. These types of payments are to be reported on the Form LM-2 in the manner provided for in the current instructions.

• The reporting changes adopted by this rule only apply to disbursements on behalf of labor organization officers and employees. These changes do not apply to disbursements to persons who are no longer officers or employees of the labor organization. Thus, disbursements on behalf of individuals who have retired from employment by the labor organization will be handled the same way that these disbursements are currently handled for members,

i.e.

, they will be aggregated in Schedule 29.

In proposing the identification of total benefits paid to officials on an individual by individual basis, the Department explained that the current Form LM-2 fails to provide sufficient information on disbursements by the labor organization to or on behalf of its officers.

See

73 FR at 27350. In the Department's view, labor organization members should know the value of benefits paid by the union to its officers. Benefits received by officers for life insurance, health insurance, and pensions, for example, make up an important part of the compensation package paid for by the union and its members. Reporting benefits disbursed in the aggregate on Schedule 20 (

i.e.

, reporting the total benefits paid to all union officials) does not provide a complete picture of compensation received by individual labor organization officers. For example, as noted in the NPRM,

id.

, one local in its Form LM-2 listed almost $500,000 for “Officer's Union Fringes” even though the labor organization had fewer than ten full-time officers. From this information alone, a member of a labor organization would have no way of knowing, for example, if these benefits were evenly distributed among the officers, or if one officer received $400,000 and the other eight officers split the remaining amount. Rather than report fringe benefits in the aggregate on the current Schedule 20, the labor organization will now report the benefits on Schedule 11 by individual labor organization officer.

In another instance, again as noted in the NPRM,

id.

, a labor organization reported payments of $49,542 to “Various Companies” for “Benefits Administration” and payments of $64,219 to “Various School Districts” for “Benefits paid on behalf of officers.” Another labor organization reported on its Form LM-2 total disbursements of $461,971, $460,203, and $244,780 to certain individual officers.

Id.

This disclosure did not take into account that these same officers and employees also received $181,297, $184,397, and $161,240 respectively as contributions to their employee benefit plans. These benefits payments were reported to the IRS on an individual-by-individual basis, as required by the IRS; however, these payments are simply lumped together on the Form LM-2, without identifying the amounts paid to individual officers. The above examples demonstrate that the current Form LM-2 fails to provide a full accounting of labor organizations' disbursements to their officials. The current Form LM-2 allows benefits payments made to or on behalf of officers to be lumped together with general benefits paid to members in Schedule 20. With such large disbursements listed in one category, it is impossible for labor organization members to ascertain what benefits are being paid to labor organization officers and employees. The Department believes that combining these disbursements into an aggregate on a single schedule does not adequately inform labor organization members and the public regarding benefits paid to labor organization officers, and thus in this area the full reporting mandate of the LMRDA is not fulfilled.

By requiring unions to report the total amount of benefits disbursements made to each officer, members and the public will see the total payments made to or on behalf of each officer. This increased transparency will better enable union members to evaluate whether the compensation paid to each officer is appropriate for the services he or she renders to the organization. This information will allow union members, among other uses, to debate and vote to change the amount of the compensation if they deem it appropriate and consistent with their organization's constitution, by laws, and the organization's financial status. They also will be able to evaluate whether the costs of the benefits provided by the union are in line with market conditions and benefits paid to officers by other labor organizations—a factor that may bear on the performance of the union officials with stewardship over the union's finances.

The Department received mixed comments on its proposal. About 500 commenters who submitted form letters endorsed the Department's proposal to require unions to report aggregate benefits disbursements for each officer and employee. One commenter cited data from a large labor organization's 2007 Form LM-2 that showed pension benefits paid of $15,858,309 and combined payroll for officers and employees of $40,468,063. The commenter noted that the data may indicate “very generous pension benefits,” but without the proposed change “there is no way of telling from looking at Form LM-2.” Many others opposed the proposal. One commenter stated that the proposed disclosure of aggregate benefits data is unnecessary because union members already have access to much of this information

already under the Form LM-2; others stated that any other information needed may be obtained by invoking their “just cause” right to examine the union's underlying financial reports; while some suggested that the information, as earlier noted, was available to union members by requesting a copy of the union's IRS Form 990. While the Department agrees that the current Form LM-2 provides important information about the salaries paid to individual officers, members receive only an incomplete picture of the payments made to individual officers. Without the reporting required by today's rule, members would be left guessing as to the total compensation paid to particular officers. Moreover, as discussed further below, the IRS Form 990 fails to provide the same level of transparency as proposed by the Department.

Commenters are correct that labor organizations are required to track and report officer benefits disbursements for the IRS Form 990. There is a minor level of overlap in the information required to be disclosed for officers and employees on the Form 990 and the Form LM-2. Disclosure of benefits disbursements on the Form LM-2 is not identical to the disclosure required on the Form 990 because the Form 990 requires disclosure of this information for “key employees,” unlike the Form LM-2 where this information must be disclosed for all employees earning $10,000 or more a year.

11

As such, while there is overlap between the Form 990 and the Form LM-2, the Form LM-2 will provide more comprehensive information because the required disclosures apply to a larger group of individuals. Moreover, the Department's proposal ensures that all members will have ready access to this particular information in a single database. While some members might be aware that individual payments would be reported to the IRS, others are not likely to be aware of this disclosure source. Additionally, union members should be able to determine easily the total compensation paid to all their officials, not merely the key officials. Where a labor organization has a large number of highly paid employees, only a fraction will be reported on the Form 990. While a few commenters suggested that the Department underestimates the burdens associated with tracking the information in a way that allows compliance with both the Form LM-2 and the IRS Form 990, the Department remains convinced that unions can maintain their records in a way that avoids any unnecessary additional burden. This point is further discussed below in the Department's analyses under the Regulatory Flexibility Act and the Paperwork Reduction Act.

11

For Form 990 purposes, the IRS defines a “key employee” as “any person having responsibilities, powers, or influence similar to those of officers, directors, or trustees.” Instructions to IRS Form 990 (2007), at p. 40. To illustrate this requirement, the IRS states: A chief financial officer and the officer in charge of the administration are both key employees if they have the authority to control the organizations, activities, its finances, or both.”

Id.

For the 2008 tax year, the IRS is requiring Form 990 filers to also provide information on the filer's five current highest compensated employees (other than officers, directors, trustees, or key employees) receiving more than $100,000 in reportable compensation from the filer or related organizations. IRS Form 990 (2008), Part VII, Section A, 1a.

Other commenters stated that members already know or can easily estimate the value of the benefits paid to officers. One commenter stated that each of its officers and employees participated in the same medical plan as its members, so members could already ascertain the value of the benefits provided to officers and employees. The Department recognizes that in some instances a member can estimate the value of a particular benefit, but that this will exist only for certain benefits and for certain unions. Transparency is ill served where it varies from union to union and from benefit to benefit.

Several commenters asserted that some benefits would be difficult to report on an individual-by-individual basis. For example, one commenter noted that it would be burdensome to collect data because there may be multiple benefit plans involved (0034) (0044). Another commenter noted that the insured group may vary from month to month, requiring the organization to recalculate the amount attributed to each officer and employee, which may result in increased costs. Other commenters requested clarification of how to treat benefits for retirees, lump sum benefit data, and administration expenses associated with benefits.

The Department recognizes that labor organizations may have to estimate the particular value of a benefit provided a union official. It is not the intention of the Department to impose on unions a complex methodology to arrive at the most precise valuation of benefits made to each individual official. In this regard, the Department notes that the IRS, which requires labor organizations to report all forms of deferred compensation, allows: “[r]easonable estimates * * * if precise cost figures are not readily available.”

See

instructions to 2007 IRS Form 990, p. 41. Under this final rule, the Department will also accept reasonable good faith estimates of the value of benefits paid to individual officials.

12

12

As noted in the NPRM, 73 FR at 27351, the changes are consistent with the level of disclosure required in other contexts for executive and employee compensation. Both the IRS (

see

Form 990) and the Securities and Exchange Commission (

see

71 FR 78338 (2006)) require similar disclosure for certain officials.

As noted above, several commenters expressed concerns about the need to report information that could intrude upon an individual's legitimate concerns for his or her privacy. Several commenters raised a generalized concern that the proposal would raise privacy issues under HIPAA. Four commenters raised specific concerns about reporting payments where the labor organization is self-insured and thus pays directly for the health care of its officials. The commenters argue that a self-insured organization would violate HIPAA by providing information relating to “past payment[s] for the provision of health care.” One commenter noted that it would be unable to report some information, even if it were required, because the employees in the union's accounting office are unable to view records that include protected health information. Two comments noted that the proposal would allow a union member for just cause to examine the underlying information which would violate HIPAA. Another commenter, while noting that the Department was not requiring labor organizations to identify the nature or value of any particular benefit—the Department proposed only that the total value of all the benefits to an individual be reported—questioned whether this would sufficiently address HIPAA privacy concerns.

As noted in the NPRM, 73 FR at 27351, the Department is fully cognizant of the need to protect the legitimate privacy interests of individuals under HIPAA and other laws. To further address the concerns of commenters, the Department, as discussed below, has clarified the rule to further protect the privacy of individuals. However, the Department disagrees with the premise of some commenters that the rule as proposed infringed on the privacy of individuals. In the 2003 revisions to the Form LM-2, the Department made the decision to aggregate the benefits paid to union officials on Schedule 20 (Benefits) based on privacy considerations.

See

68 FR 58374, 58387, 58399, 58426 (Oct. 9, 2003). Based on those same considerations, the Department crafted Schedule 11 and Schedule 12 in order to preserve the privacy interests of individuals. Under the proposal and the final rule, a person

reading the report would be unable to ascertain what types of benefits labor organization officers and employees receive, only the total value of these benefits. For instance, if a labor organization officer received a matching contribution to a 401(k) plan in the amount of $5,000, indirect payment of health insurance premiums in the amount of $6,700, and a health club membership in the amount of $1,200, the labor organization's Form LM-2 would disclose that this officer received a total of $12,900 in benefits. Given that benefits that must be reported are aggregated without identifying the nature of particular benefits that comprise the total, the potential for disclosing information of a private or protected nature is only remotely possible if at all. However, in those rare instances, where a labor organization, in good faith and on reasonable grounds, believes that a particular disclosure would violate HIPAA, or other federal or state law, or confidential settlement agreement, it should not include that particular information for the affected individual, but should instead include its value as part of the aggregated, non-itemized amount reported on the schedules and identify that reason and the individual affected in item 69 (additional information) of the Form LM-2.

On a related matter, a commenter questioned whether FICA, federal and state unemployment tax, long term disability insurance, accident death and dismemberment insurance, and workers' compensation would be required to be included in the benefits disclosure by the officer or employee's name. As noted above, the Department is not requiring labor organizations to report the value of such payments on an individual-by-individual basis.

Schedule 13

—Membership Status: This schedule is unchanged.

Detailed Summary Page:

The current detailed summary page contains information from Schedule 14 through Schedule 19. The new detailed summary page, as proposed and adopted by today's rule, includes information from Schedule 14 through Schedule 29. These summary pages provide a snapshot of the labor organization's activities. Members of the union and the public may then use this snapshot to determine whether further analysis of the individual itemized schedules is required. There is no additional burden associated with these summary schedules because the software will automatically enter the totals in the appropriate lines of the summary schedules as the labor organization fills out the individual itemization schedules.

Schedules 14-22.

Currently, Form LM-2 filers only report the total amount received from dues and agency fees, per capita taxes, fees, fines, assessments, and work permits, sales of supplies, interest, dividends, rents, receipts on behalf of affiliates for transmittal to them, and receipts from members for disbursement on their behalf on Statement B. As noted in the NPRM, these line items exceed $20 million in some instances. 73 FR at 27351. For example, one labor organization stated that it received over $298 million in per capita taxes and another received over $28 million in rent.

Id.

Little useful information can be discerned from these totals alone. The Department proposed that for each of these schedules the labor organization would separately identify payments from any individual or entity that alone or in the aggregate total $5,000 or greater during a reporting period. The Department has adopted this proposal with some modifications for schedules relating to the receipt of dues payments and per capita taxes. The general instructions for completing these schedules have been modified to account for these changes, including notice to filers that they should complete the revised schedules 14 (“Dues and Agency Fees”) and 15 (“Per Capita Tax”) before completing the summary detail page.

As explained in the NPRM, 73 FR at 27351, the lack of itemization of most receipts on the current Form LM-2 makes it easier for individuals to embezzle money coming to labor organization accounts. In one case, the president and treasurer of a local labor organization converted over $184,129 in dues checks.

See

73 FR at 27352. One commenter took issue with this example in the NPRM, stating that simply requiring a listing of checks received by a Form LM-2 filer will not prevent the type of embezzlement identified in the example. (38) The commenter noted that the purpose of every receipt is not reflected in a corresponding disbursement of the same amount, reducing the value of the new itemization schedules. The Department agrees that it will not be possible to track the disbursement of each receipt from the information on the revised Form LM-2. The difference between the receipt and disbursement functional categories makes such a comparison impossible. Nonetheless, the itemization of individual receipts provides helpful information to union members. The revised form will contain itemized information for each check that is $5,000 or more and disclose whether other checks aggregate to $5,000 or more. The change will address this problem, which extends to all the various reporting categories on the current form and not merely the receipt of dues payments, because now receipts-side embezzlements like the embezzlement of $184,129 mentioned above will be harder to hide.

The Department proposed to add new schedules that coincide with the items of cash receipts listed on Statement B.

13

In today's final rule, the Department adopts the proposal with the modifications discussed below. The Department is revising the existing Form LM-2 to include schedules for dues and agency fees, per capita taxes, fees, fines, assessments, and work permits, sales of supplies, interest, dividends, rents, receipts on behalf of affiliates for transmittal to them, and receipts from members for disbursement on their behalf. Except as discussed below, the itemization schedules for receipts will operate in the same fashion as do the itemization schedules for disbursements.

13

Current schedules 14 through 20 will be re-numbered as schedules 21 through 29.

Schedule 14—

Dues and Agency Fees. The Department proposed the requirement that a labor organization report dues and agency fees of $5,000 or more it receives from an individual or entity during the reporting period, and that each individual payment of $5,000 or more be disclosed on a separate line. The Department adopts the proposal as modified. As modified, labor organizations are not required to itemize such payments made by individual members. The aggregate dues and agency fees received directly from a represented employer must be reported by each individual employer. However, as modified, filers will only have to report for each employer the total such payments received during the reporting period—not each payment from the employer that alone or in combination with other payments is $5,000 or greater. Filers will enter in Column (A) the full name and business address of the represented employer. Filers will enter in Column (B) the purpose of the receipt of $5,000 or more, which means a brief statement or description of the reason the receipt was received. An adequate description includes information about the number and type of units covered by the receipt and the number of employees covered by the receipt. Filers will enter in Column (C) the total received from the represented employer during the reporting period.

Some commenters expressed concerns with the difficulties associated with

itemizing the receipt of dues. As explained by one commenter, its members work for multiple employers that are signatory to collective bargaining agreements. Under collective bargaining agreements, working dues are deducted from members' paychecks and forwarded to an intermediate body or a local union. The commenter explained that in such situations information regarding the specific employer may not be transmitted to or recorded by the intermediate body, leading to difficulties in how to report such receipts. The commenter posited three possibilities: The dues can be considered received from (a) the member from whose paycheck the dues were deducted, (b) the employer that forwarded the dues either to the labor organization or to another entity that then forwarded the dues to the labor organization, or (c) where the working dues were sent by an employer to some other entity and then forwarded to the union, the entity that forwarded the dues. Another commenter explained that many unions do not allocate or transmit on a receipt-by-receipt basis the dues they receive on behalf of local unions or affiliates. The commenter explained that under the unions' own internal procedures they would do so only periodically and based on the total amount collected during that period. This commenter explained that the itemization of dues receipts would have to make calculations that do not correspond to the amounts they actually transmit to their locals; he also indicated that unions would have to devise accounting systems that pro rate every dues check received or perform such calculations manually. One commenter explained that the timing of the dues deductions from members' pay varied from unit to unit and that employers of more than one unit often remit payment for these units in a single check to the international. One commenter expressed concern that the Department was confused about how dues money is handled by most unions, including unions in the railroad industry.

The Department believes that labor organizations have misread the Department's proposal and thereby overstated the burdens associated with reporting the receipt of dues payments. The Form LM-2 Instructions, as proposed, state on page 31 that the filer must enter “the purpose of each individual receipt of $5,000 or more which means a brief statement or description of why the union received the receipt.”

See

73 FR at 2742. The proper reporting of dues will depend on how the dues are collected. If the dues are received directly from the employer, the labor organization receiving these payments should identify the employer that sent the dues. If another entity, such as an intermediate body, sent the dues to the labor organization, then the labor organization receiving the payments should identify the intermediate body and the intermediate body should list the dues payments received from the employer on the schedule for “receipts on behalf of affiliates for transmittal to them” (now renumbered as schedule 21). Both the intermediate body and the labor organization must identify the units covered by the payment.

If a parent labor organization receives $5,000 or more on behalf of affiliates for transmittal to them from a represented employer covering an affiliated labor organization then the parent labor organization must identify the payer, the type or classification of the payment (which in most cases will be dues), the purpose, including information as to which affiliates the receipt covers, and the amount of the receipt. This type of information will be readily available as the parent must determine what portion of the check is to be disbursed to each local. The Department recognizes that unions may have to change the manner in which they capture and report information such as dues, but they remain free to devise their own procedures for collecting this information in order to meet the reporting requirements. The Department has not required unions to conform their procedures to a prescribed template; they are free to craft their own procedures so long as the dues receipts are fairly and accurately allocated and reported.

Two commenters expressed concern that the itemization of the dues schedule would disclose members' personal information. Under the proposal, a labor organization would have to report the member's name and address. The commenters felt that members' names and addresses should remain confidential. The same concern was expressed with respect to initiation fees, fines, assessments, and work permits. The Department has accommodated these concerns. The Department is not requiring the identification of members who made payments directly to their labor organization for dues, fees, fines assessments, work permits, and disbursements on their behalf. Instead, the labor organizations should add these amounts to the aggregate reported on the line 3 (Other Receipts) of summary schedules 14, 16, and 22.

Schedule 15

—Per Capita Tax. The Department proposed that a labor organization report on a new Schedule 15 per capita payments it receives from an individual or entity during the reporting period. The Department adopts the proposal as modified to clarify how the information should be described.

The labor organization will report per capita taxes of $5,000 or more received during the reporting period. Per capita taxes received directly from a labor organization must be aggregated for the year and reported by each individual labor organization. Filers will enter in Column (A) the full name and address of the labor organization from which the per capita tax was received. Enter in Column (B) the purpose of the receipt of $5,000 or more, which means a brief statement or description of the reason the receipt was received. An adequate description includes information about the number and type of units covered by the receipt and the number of employees covered by the receipt. Filers will enter in Column (C) the total received from the represented employer during the reporting period.

The Department received several comments relating to the reporting of per capita taxes. Because the comments on this schedule were essentially the same as those received on the other new schedules proposed for a labor organization's receipts, they are discussed together below.

Schedule 16-22.

As earlier discussed, the Department proposed the addition of these schedules to capture, by functional category, a labor organization's various receipts. Labor organizations are required to itemize the individual categories of receipts aggregated to $5,000 from any one source. The labor organization will be required to complete a separate itemization schedule for each individual or entity from which the labor organization has received $5,000 or more. Each transaction from that individual or entity will include information about the individual, the purpose of the payment, the date of the payment, and the amount of the payment. The total amount received from the individual or entity, both itemized and non-itemized, will be included at the bottom of the itemized schedule. The totals from each itemized schedule will then be added together and that number will be entered in the appropriate item on Statement B.

By establishing this reporting obligation, the Department is requiring labor organizations to provide the same information about their “major” receipts as they are currently required to report

about their “major” disbursements. Most of the general comments about the proposal to require itemization of both sides of the ledger were addressed earlier in the preamble. Neither those comments nor the Department's response to those comments will be repeated. Instead, only comments about particular aspects of the receipts schedules, not already discussed, are addressed below. Schedules 16, 21, and 22, like Schedules 14 and 15, require filers to identify receipts by units, jobs, and timeframes. The instructions have been modified for this purpose.

A national labor organization stated that it does not break down sales of supplies by entity and will have to alter substantially its account system to track the sales of supplies to affiliates by entity. Another national labor organization was particularly concerned with itemizing receipts on Schedule 21, “Receipts on Behalf of Affiliates for Transmittal to Them.” The commenter explained that many parent labor organizations collect dues, fees, and other amounts that include the members' dues for subordinate or local unions. The commenter stated that it will be extremely difficult to designate the precise amount of each receipt to be transmitted to one or more locals or affiliates. One labor organization calculated that the proposed receipts schedules will increase its yearly burden by 250-500 hours (compared to the Department's estimated average of .47 hours per year). A commenter estimated that the “per capita tax” schedule alone would increase the number of itemized entries on its Form LM-2 by 1,200. Another commenter stated that under the Department's proposal it would have to make about 10,000 itemized entries, one for each employer from whom it receives members' dues payments.

As stated earlier in this preamble and in the preamble to the proposed rule, greater transparency promotes the detection of embezzlement and financial irregularities and, in so doing, also deters individuals at the front end from engaging in criminal or other improper conduct. Receipts from dues, per capita taxes, and sales of supplies are as susceptible to embezzlement or other improper use as any other receipt. For example, as noted in the NPRM, 73 FR at 27351-52, the president and treasurer of a local labor organization converted over $184,129 in dues checks. The dues and agency fees schedule will provide an essential check for transactions between affiliates and parent bodies.

14

14

The Department recognizes that some national or international labor organizations receive dues payment from hundreds and, in some cases, thousands of employers. Although this will add length to the reports, the recurring burden will be minimal given the sorting feature in accounting software. Further, members interested in tracking payments to and from the national organization and between that organization and an intermediate body of local labor organization will be able to quickly search for payments involving particular employers, labor organizations, and bargaining units. The Department expects that most labor organizations already track such payments in order to ensure they are receiving the appropriate amount in dues payment and that most will receive payments from only a relatively small number of employers.

Members of the affiliate labor organization will be able to check the amount their labor organization received in dues against the parent labor organizations receipts on behalf of affiliates for transmittal to them. The same analysis can be done on lump sum payments from the represented employer to the parent labor organization covering multiple affiliates. The member need only look at each of the covered affiliates' dues schedule and aggregate the payments to ensure they match the sum reported on Schedule 21. A difference in these two numbers could indicate embezzlement and warrant further investigation.

As discussed in the NPRM, 73 FR at 27352, the per capita tax schedules of affiliates and parent labor organization can also be used to detect embezzlement and financial irregularities. The member can check for possible embezzlement or misallocation of funds owed his or her labor organization by checking his or her labor organization's per capita tax disbursements reported in Item 57 against the per capita tax receipts of the parent and its intermediate bodies. This can be done by entering his or her labor organization's name in the payer/payee search available on

unionreports.gov.

The search results will identify each labor organization that received per capita taxes from the member's labor organization. These payments can then be aggregated to determine whether the per capita disbursements from the member's labor organization match the per capita receipts reported on all the recipients' per capita tax schedules (Schedule 15). A difference in these two numbers could indicate an embezzlement or misallocation and warrant further investigation.

15

15

One commenter noted that it has 750 local affiliates, the vast majority of which have no office address other than the home of the local president or treasurer. It explained that all of these local affiliates make per capita payments over $5,000 per year and therefore it would be required to report on Schedule 15 the name and address of the person/entity making the payment. Expressing concern for the privacy of these officials, it urged the Department to except it from reporting their home addresses. The Department does not agree that an exception is necessary. Labor organizations already must disclose a publicly available address for itself or a registered agent for service of process in order to comply with state corporation laws. Further, the IRS requires a labor organization to list its address on IRS Form 990. For purposes of Schedule 15, a labor organization may use the address used by the labor organization in complying with state law or reported on the Form 990. Alternatively, a labor organization concerned about the disclosure of an officer's home address may elect to obtain a P.O Box and use that as its mailing address.

Schedule 23

—Other Receipts: This schedule, currently numbered Schedule 14, will be renumbered Schedule 23. No other changes will be made to this schedule.

Schedule 24

—Representational Activities: This schedule, currently numbered Schedule 15, will be renumbered Schedule 24. No other changes will be made to this schedule.

Schedule 25

—Political Activities and Lobbying: This schedule, currently numbered Schedule 16, will be renumbered Schedule 25. No other changes will be made to this schedule.

Schedule 26

—Contributions, Gifts and Grants: This schedule, currently numbered Schedule 17, will be renumbered Schedule 26. No other changes will be made to this schedule.

Schedule 27

—General Overhead: This schedule, currently numbered Schedule 18, will be renumbered Schedule 27. No other changes will be made to this schedule.

Schedule 28

—Union Administration: This schedule, currently numbered Schedule 19, will be renumbered Schedule 28. No other changes will be made to this schedule.

Schedule 29

—Benefits: This schedule, currently numbered Schedule 20, will be renumbered Schedule 29. As described above in the discussion regarding the proposed changes to Schedule 11 and Schedule 12, those benefits inuring to officers and employees of the labor organization will be listed next to the corresponding officer's or employee's name. Apart from this change, the same disbursements that were disclosed on Schedule 20 will be disclosed on the new Schedule 29. These include direct and indirect disbursements associated with direct and indirect benefits to members and members' beneficiaries.

Special Procedures for Reporting Confidential Information

The Department requested comments on whether to narrow, clarify, or remove the confidentiality exception from the Form LM-2 instructions. The Department recently considered this same question in connection with the Form T-1 rulemaking. There the Department issued a final rule retaining the special procedure without change but cautioning that it was to be used in

limited circumstances. As discussed below, the Department reaches the same result here,

i.e.

, preserving the confidentiality procedure. However, based in part on comments received in connection with the proposed changes to the Form LM-2 but primarily based on the agency's interpretation of its own regulations, the Department is clarifying that the procedure may not be used by unions in connection with payments made by them to employers if such payments are made as part of a job targeting, market recovery or similar program.

Additionally, the Department modifies the instructions to clarify that the procedure may be used to report information the disclosure of which is proscribed by HIPPA or other federal or state law and that where this information is reported in aggregated form for this purpose, it is not subject to the per se “just cause” proviso of the procedure.

See

29 CFR 403.8 (2008);

see also

73 FR at 57449 (revising 29 CFR 403.8(c)).

16

This change conforms the instructions in the Form LM-2 to the instructions and regulatory text in the Form T-1 final rule, which takes effect on December 31, 2008.

See

73 FR at 57449, 57469.

17

16

In this rulemaking the Department only addresses whether the information is available pursuant to the “just cause per se” provision of the special reporting procedure. The Department does not reach the question whether a union member for “just cause” would be able to examine underlying documents. The result may well depend upon the particular circumstances giving rise to the member's request, the nature of the information that is at issue, and the potential applicably of non-disclosure provisions under statute and case law.

17

The revised section reads: “This provision does not apply to disclosure that is otherwise prohibited by law or that would endanger the health or safety of an individual, or that would consist of individually identifiable health information the trust is required to protect under the Health Insurance Portability and Accountability Act of 1996 (HIPAA) Privacy Regulation.”

The instructions currently allow unions to use the confidentiality procedure for information that would (1) identify individuals paid by the union to work in a non-union facility in order to assist the union in organizing employees, provided that such individuals are not employees of the union who receive more than $10,000 in the aggregate from the union in the reporting year; (2) expose the reporting union's prospective organizing strategy; (3) provide a tactical advantage to parties with whom the reporting union or an affiliated union is engaged or will be engaged in contract negotiations; (4) subject to a confidentiality agreement in a settlement agreement; or (5) endanger the health or safety of an individual.

See

73 FR at 27423-24 (unchanged from current rule). If the receipt or disbursement fits within one of the above categories, then the labor organization need not itemize the receipt or disbursement. Instead, it may include the receipt or disbursement in the aggregated total on Line 3 of Summary Schedule 23 (“Other Receipts”) or on Line 5 of Summary Schedules 24 (“Representational Activities”) or 28 (“Union Administration”), as appropriate. A union 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. The instructions and regulatory text expressly provide that if a labor organization chooses to utilize the special procedures for confidential information, such use 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. 68 FR at 58448, 58499-00. Information that is withheld from full disclosure is not subject to the

per se

disclosure rule if its disclosure would consist of individually identifiable health information of the kind required to be protected under the Health Insurance Portability and Accountability Act of 1996 (HIPAA) privacy regulation, violate state or federal law, violate a non-disclosure provision of a settlement agreement, or endanger the health or safety of an individual.

Several commenters objected to the use of special procedures for reporting confidential information. The objections, however, were directed at the use of the procedure to shield from the view of union members and the public the amount of union funds directed at organizing activities, not at the use of the procedure to protect the legitimate privacy interests of individuals. One commenter asserted that the procedure effectively allowed labor organizations to assert unsubstantiated claims as a guise to justify any instance where they elect to withhold information. One commenter argued that the exemption affords labor organizations greater ability to withhold information than what is permitted under the discovery rules of federal civil procedure or permitted by the National Labor Relations Board (NLRB). Another commenter noted that narrowing or removing the exemption “will provide labor organization members with clearer information regarding [labor organization] receipts and disbursements.” The commenter argued that financial information should be available to labor organizations' membership without having to petition the labor organization directly. The commenter also alleged that because of potential tax and other impacts and implications, the public is entitled to and should have the same benefit of clarity regarding labor organization receipts and disbursements.

Several commenters argued in favor of maintaining the special procedure for reporting organizing activities, asserting it was necessary to balance the interest of union members in transparency against the interest in protecting a union's ongoing organizing campaigns. One commenter expressed the unsubstantiated view that but for the inclusion of the special procedure in the 2003 rule, the courts would have overturned the rule. Another commenter, while noting that transparency is a positive benefit to the public, urged the Department to weigh this benefit against the labor organizations' primary responsibility—to represent its members. This commenter concluded that the damage done to unions' representational responsibilities far outweighs the value of this transparency in and of itself.

Other comments noted that eliminating the confidentiality exception would be detrimental to legitimate organizing efforts and could compromise a labor organization's efforts to effectively engage in collective bargaining. Specifically, one commenter argued that requiring a union to identify “salts” on the Form LM-2 will unreasonably chill, if not destroy, this legitimate form of organizing under the NLRA. Disclosure of “salts” could jeopardize the individual's ability to earn a livelihood. This category of information subject to the Special Procedures for Confidential Information remains unchanged in the final rule. Labor organizations should note that notwithstanding the confidentiality provisions any employee who receives over $10,000 in any fiscal year is required by the LMRDA to be disclosed, even if employed as a “salt.”

One commenter argued that the need for a confidentiality exemption is self evident. One commenter noted that the current exception is already narrowly tailored to protect legitimate union interests while ensuring union members have access to information. Two commenters suggested that concerns that the Department found “persuasive” in 2003 when it adopted this narrow exception to itemized reporting are no less real or compelling today. Several commenters also noted that the

Department cited no complaints from union members that this exception prevented them from accessing information on their union.

Several commenters argued against imputing an improper motive to a labor organization's use of the confidentiality procedure. One noted that a union's decision to protect information from disclosure should not be assumed to connote misuse or abuse of the exception. This commenter alleged that use of the exemption is evidence of the extent to which the Department has already transformed the Form LM-2 from a vehicle Congress created to strengthen unions into a trap for the unwary and a weapon of choice for anti-union consultants bent on stopping workers from organizing. Two commenters believed that misuse of the exemption may be attributed to the steep “learning curve” inherent in the complex reporting scheme.

The Department also specifically invited comments on an alternative proposal to require that all transactions greater than $5,000 be identified by amount and date on the relevant schedules, permitting however, labor organizations, where acting in good faith and on reasonable grounds, to withhold information that would otherwise be reported, in order to prevent the divulging of information relating to the labor organization's prospective organizing or negotiating strategy. Only one commenter addressed this proposed alternative. The commenter noted that such an approach did not provide protection for information recognized in the other parts of the existing confidentiality section, such as information that is required to be kept confidential pursuant to a settlement agreement, information the union is prohibited by law from disclosing, or information where disclosure would endanger the health or safety of the individual. The commenter also noted that such an approach would require additional itemization and reporting that would provide meaningless information to members.

The Department has carefully considered the comments relating to the Special Procedures for Reporting Confidential Information. It also has undertaken further review of the use of this procedure by reporting labor organizations. The Department's review of Form LM-2 data indicates that the confidentiality exception is used only by a small number 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 being 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 accounted for 45% of the labor organization's total disbursements. A mid-sized local labor organization treated $1,011,863 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. As these examples demonstrate, an undisciplined use of the special procedures may result in the non-itemization of disbursements of millions of dollars and thus deny members the very transparency that is the foundation of the LMRDA's disclosure provisions.

Thus, while this final rule retains the Special Procedure for Reporting Confidential Information, the Department reemphasizes the limited situations in which it should be used and clarifies that it was not the Department's intention that it should be used to shield the itemization and full disclosure of payments to employers for job targeting, market recovery or other similar programs. In clarifying this aspect of the rule, the Department remains of the view that a labor organization should not be required to disclose information that would harm the labor organization's

prospective

organizing campaign or negotiations, by disclosing strategy that would otherwise be confidential. However, the Department reiterates, as it did in the Form T-1 final rule, that labor organizations are required to itemize transactions related to organizing drives and contract negotiations after the confidentiality interest giving rise to the exemption has ended. The instructions make clear that absent unusual circumstances information about past organizing drives or contract negotiations should not be treated as confidential under the reporting requirements. The Department also reiterates, as noted in the 2003 final rule, the procedures may not be used for Schedules 16 through 18. 68 FR at 58500. This rule has renumbered Schedules 16 through 18 as Schedules 25 through 27. Thus, the instructions for this final rule state that the procedures may not be used for the new Schedule 25 (“Political Activity and Lobbying”), Schedule 26 (“Contributions, Gifts and Grants”), and Schedule 27 (“General Overhead”).

The Department is also clarifying that the procedure may not be used for payments made to employers as part of a labor organization's job targeting, market recovery or other similar program. A commenter urged the Department to eliminate the confidentiality procedure because of what it saw as a widespread practice by labor organizations to avoid reporting the names of, and amount of payments to, employers who had received job targeting funds. Independently, the Department's own recent investigative experience has shown that some labor organizations have been using this procedure to shield from disclosure payments to employers as part of the unions' job targeting or market recovery programs. Although the total number of instances appears relatively small, the amount of money involved is substantial. The labor organizations have informed the Department that they consider such payments to be part of their “organizing strategy” and that the disclosure of such payments would adversely affect future organizing efforts. As discussed below, the Department has determined that payments to employers for job targeting or market recovery purposes are not encompassed by the special procedure. Therefore, any payments of $5,000 or greater to a particular employer must be itemized.

In the 2003 rule, the Department, recognizing that the disclosure of certain payments related to organizing might adversely affect a union's legitimate interests, created a special procedure for reporting confidential or sensitive information. The key language of the 2003 rule is embodied in the instructions to the Form LM-2: “Filers may use the [special procedure for reporting confidential information] to report * * * [i]nformation that would expose the reporting union's prospective organizing strategy. The union must be prepared to demonstrate that disclosure of the information would

harm an organizing drive

” (emphasis added).

Neither the rule nor its preamble illustrated the particular kinds of payments that would or would not qualify for this limited reporting procedure. Although the preamble to the rule mentioned “job targeting” in a few instances, the preamble did not specifically identify which particular schedule should be used for reporting such payments.

See

68 FR at 58387, 58400. The closest the preamble comes to addressing how job targeting disbursements should be reported is the following statement: “In the Department's view, receipts and disbursements of job targeting funds that exceed the itemization threshold will be disclosed as a result of the

general reforms implemented by this rule.”

Id.,

at 58400. The Department acknowledges that the term “organizing strategy” is ambiguous, and that the rule did not make clear whether payments made directly to employers, such as job targeting payments, would qualify. The ambiguity of the term is illustrated by literature reviewed by the Department, some of which classified activities as far flung as community service projects and pension investment strategies as being part of a union's “organizing strategy.” Kate Bronfenner,

Organizing to Win: New Research on Union Strategies,

302. The Department never intended that the term should be read so broadly. Such activities may have an indirect impact on the attractiveness of a union to workers, but do not directly attempt to organize workers, and thus fall outside the meaning of the term as interpreted and administered by the Department. Moreover, the “key language” of the rule, as quoted above, dictates that the special procedure must be read as limited to information that would “harm an organizing drive.” Payments to an employer in order to assist it in bidding for construction jobs on which union members will be paid in accord with union industry practice cannot be viewed as part of an “organizing drive.” Such payments stand in contrast to payments commonly associated with an organizing drive, such as payments to printing vendors for literature and signage, and rental of meeting facilities, communication equipment, transportation vehicles, and various consultants. For this reason, the Department modifies the rule by explicitly stating that “payments made by a labor organization to an employer under a market recovery, job targeting, or like program (

e.g.

, for “industry advancement”), must be reported. Such payments must be itemized where they aggregate to more than $5,000. If the labor organization chooses to report such payments on Schedule 24 (“Representational Activities”), it may not use the confidentiality exception. Additionally, it is the Department's view that this clarification best serves the LMRDA's purpose, by providing transparency to this substantial aspect of a union's financial operations without impeding a union's prospective organizing drives. In making this change, the Department takes no position in this rule on the propriety or not of job targeting or similar payments made by a labor organization under the Labor Management Relations Act, the Davis-Bacon Act, or other law, or how such information has been addressed under the discovery rules of federal civil procedure and NLRB practice. The changes are based solely on the Department's interpretation of the confidential reporting procedure and its view that the disclosure purposes of the LMRDA are best served by making known to union members and the public the amounts and recipients of job targeting, market recovery or other similar payments.

C. Proposed Procedure and Standards To Revoke the Simplified Reporting Option Where Appropriate in Particular Circumstances

1. Introduction

The Department proposed to establish standards and procedures for revoking the simplified report filing privilege provided by 29 CFR 403.4(a)(1) for those labor organizations that are delinquent in their Form LM-3 filing obligation, fail to cure a materially deficient Form LM-3 report after notification by OLMS, or where other situations exist where revoking the Form LM-3 filing privilege furthers the purposes of LMRDA section 208. The final rule adopts the proposal with some modifications. The new procedure will effectuate the Department's authority to revoke a labor organization's existing Form LM-3 filing privilege if it fails to timely file a Form LM-3 or files a Form LM-3 that is materially deficient. Without such a procedure, the Department has been unable to revoke a labor organization's privilege to file a simplified report—no matter how egregious a labor organization's noncompliance with its reporting obligations, or obvious the indications of financial mismanagement, embezzlement, or corruption within that organization.

See

73 FR at 27353. The procedures established in this rule will remedy this shortcoming in the Department's reporting system.

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18

The revocation procedures will not affect labor organizations with annual receipts less than $10,000. While section 208 allows the Secretary to revoke the privilege of such labor organizations to file the highly simplified Form LM-4, the Department is not proposing at this time to apply such procedure to Form LM-4 filers.

As discussed in the NPRM, 73 FR at 27346-47, the goal of these changes is to improve transparency in situations where it is most needed,

i.e.

, where a union has failed to comply with its basic financial reporting obligation. Although it may appear counterintuitive to require a non-compliant organization that fails to meet its relatively simple Form LM-3 obligation to file a more detailed Form LM-2, this view assumes that the only reason for non-compliance was relatively benign,

e.g.

, a responsible officer was brand new to the position or his or her illness delayed the timely submission or clarification of a submission. The Department recognizes that some submissions are delayed for such reasons; thus, the Department did not propose that a delinquent or materially deficient filing would automatically trigger revocation and require the submission of a Form LM-2. However, as most commenters appeared to recognize, the reasons for non-compliance are varied and by no means all benign. Labor organizations will be given the opportunity to explain the reasons for the delay, including mitigating circumstances, and may thereby avoid having to file the Form LM-2. But where revocation is appropriate, the union will incur some additional burden in completing the Form LM-2 but, as discussed below, the burden is manageable and outweighed by the gains in transparency. The Form LM-2 not only requires more detail in general than the Form LM-3, but the Form LM-2 requires information that may be particularly pertinent to situations where possible financial mismanagement or embezzlement may have occurred. This additional financial information will assist members of labor organizations and OLMS investigators in reviewing the labor organization's funds and assets during the reporting period and enable them to determine whether additional scrutiny of the labor organization's finances is in order, for example, by requesting an explanation of the accounting, examining the underlying records of various transactions, or both.

19

19

OLMS intends to continue its regular practice of contacting Form LM-3 filers at the end of their fiscal year about their filing obligation, and, in doing so, it will inform them of the potential revocation of their privilege to file the Form LM-3 if they are delinquent in filing the form, file a Form LM-3 that is materially deficient, or for other appropriate cause. The instructions to the Form LM-3 already inform labor organization officers of their statutory obligation to file the completed forms with OLMS within 90 days after the end of their labor organization's fiscal year.

The differences between the Form LM-2 and the Form LM-3 forms have been accentuated by the substantial revisions made to the Form LM-2 in 2003 and those adopted in this final rule. As the Department explained in the preamble to the 2003 Form LM-2 rule, the broad aggregated categories on the old Form LM-2 enabled officials of labor organizations to potentially hide embezzlements and financial mismanagement. 68 FR 58420. The more detailed reporting required of all financial transactions covered by Form LM-2 was designed, in part, to discourage and reduce corruption by making it more difficult to hide

financial irregularities from members and the Department's investigators and thereby strengthen the effective and efficient enforcement of the LMRDA. 68 FR 58402. Requiring labor organizations to file a Form LM-2, after a determination that revocation of the privilege of filing a Form LM-3 is warranted, will make it more difficult to hide fraud.

The Form LM-2 requires labor organizations to provide more specific information than the Form LM-3 in several areas relating to labor organization finances including, in part, the following: Investments, fixed assets, loans payable and owed, contributions, grants, and gifts, overhead expenses, union administration, and receipts. With regard to labor organization receipts, Form LM-2 filers are explicitly required to report all receipts including: “Receipts from fundraising activities, such as raffles, bingo games, and dances; funds received from a parent body, other labor organizations, or the public for strike assistance; and receipts from another labor organization which merged into the labor organization.”

See

p. 29 of Instructions to Form LM-2, as reproduced at 68 FR 58501.

Form LM-2 requires filers to itemize receipts from and disbursements to any individual or business or other entity that exceed $5,000 in a fiscal year either in a single transaction or aggregated over the year. Itemization prevents a labor organization from “hiding” significant receipts from or disbursements to the same individual or entity, a possibility that exists under the Form LM-3. The name, address, and other information must be provided for any such entity or individual. This information, which is not required by the Form LM-3, enables members of a labor organization to detect payments to individuals or entities that are out of the ordinary (given information that is known to the member but would not appear irregular to someone without such information). Thus, this information enables members to identify situations that may reflect a breach of the labor organization's duties to its members or provide a reasonable basis for inquiry to determine whether officials of the labor organization are improperly diverting funds for their own benefit or the shared benefit of others. Additionally, a member who is aware that the labor organization has a financial relationship with one or more of these businesses will be in a better position to determine whether the business has made any required reports (Form LM-10). The itemization of payments at or above $5,000 also puts members in a better position to determine whether any of the recipients of the payments are businesses in which a labor organization official (or the official's spouse or minor child) holds an interest, a circumstance that will require a report to be filed by the official (Form LM-30).

The Form LM-2, unlike the Form LM-3, requires filers to provide a list of accounts receivable and payable (involving a particular individual or entity in an amount of $5,000 or greater, singly or aggregated) that are past due by more than 90 days. As explained in the 2003 Form LM-2 rulemaking, 68 FR at 58401-02, such itemized disclosure can provide a vital early warning signal of financial improprieties. In the case of an already overdue report, the delinquency demonstrates that such improprieties already may exist.

As discussed in the NPRM, 73 FR at 27354, the Department's enforcement experience has shown that the failure of labor organizations to file the annual Form LM-3 on time and without material deficiencies is often an indicator of larger problems about the way such organizations maintain their financial records, and may be an indicator of more serious financial mismanagement. OLMS review of data indicates that labor organizations that are repeatedly delinquent are more likely than other labor organizations to suffer embezzlement, or related crime. For instance, in one recent case an investigation of a labor organization that was delinquent in its reports for two years showed that the labor organization had been the victim of a serious embezzlement. Its former president pled guilty to embezzling $112,525 and received a prison sentence of 33 months, and was ordered to pay back the money he had stolen. In another case, a former financial secretary of a labor organization that had been delinquent in filing its reports for several years pled guilty to embezzlement and was ordered to pay restitution of $103,248 and also received a sentence including confinement for eight months, home detention for four months, and probation for three years. Many of the reasons that contribute to delinquent filings also result in the filing of reports that omit or misstate material information about the labor organization's finances. The members of a labor organization that fails to correct a material reporting deficiency will also benefit from the increased transparency. For example, the labor organization may delay filing a Form LM-3 to avoid making timely public disclosures about financial improprieties of officers, such as the diversion of funds for personal use. Even if the Department eventually succeeds in encouraging a delinquent labor organization to file the required form, the lack of specificity in Form LM-3 may permit significant problems to remain undetected. The greater detail required by the Form LM-2 makes it more difficult to hide such problems.

As discussed in the NPRM, at 73 FR at 27357, the Department's enforcement experience reveals various reasons for delinquent filings, such as a labor organization's failure to maintain the records required by the LMRDA; inadequate office procedures; frequent turnover of labor organization officials and their often part-time status; uncertainty of first-time officers about their reporting responsibilities under the LMRDA and their inexperience with bookkeeping, recordkeeping, or both; an “inherited bookkeeping mess;” an inattention generally to “paperwork;” overworked or under-trained officers; an officer's unwillingness to question or report apparent irregularities due to the officer's own inexperience or concern about the repercussions of reporting such matters; or a conscious effort to hide embezzlement or the misappropriation of funds by the officers, other members of the organization, or third parties associated with the labor organization. Many of these causes of delinquency highlight the need for more, not less, detailed reporting. The inability to comply with the reporting obligations may be symptomatic of financial management problems, benign or otherwise, within the union. As discussed below, commenters generally agreed with the Department's assessment of why labor organizations are delinquent or deficient in filing the Form LM-3. Some commenters, however, disagreed with the efficacy of additional reporting as a means of detecting fraud or embezzlement. As discussed further below, the Department recognizes that the changes will not eliminate fraud or embezzlement. But the changes should increase the ability of union members, the Department, and the public to identify how the union's finances are being managed. This increased transparency, especially insofar as overdue accounts and major transactions (those valued at $5,000 or greater) are concerned, will increase the prospect that fraud will be uncovered and the fear of detection may deter individuals from engaging in the improper conduct in the first instance.

To implement this procedure and standards for revocation, the Department proposed to modify section 403.4 of its regulations, 29 CFR 403.4, and to amend the instructions to the Form LM-3 in order to fully apprise

filers of the procedure and standards. The Form LM-3 instructions will remain unchanged except for a new paragraph that notes that the privilege to file the Form LM-3 may be revoked under certain circumstances, and refers filers to the standards and procedures set forth in the Department's regulations (29 CFR 403.4).

Where there appear to be grounds for revoking a labor organization's privilege to file the Form LM-3, such as where the labor organization has failed to timely file the Form LM-3, or files a Form LM-3 that lacks material information,

20

the Department will conduct an investigation to confirm the facts relating to the delinquency or other possible ground for revocation. The depth of the investigation will depend upon the particular circumstances. For example, where OLMS has no record of receiving a timely Form LM-3, the investigation may be limited to confirming that the labor organization did not timely submit the report. In other circumstances, an investigation may be needed to review the labor organization's books, to review documents, and to interview subjects and obtain statements from individuals with knowledge about a labor organization's finances and their reporting to determine whether or not the deficiencies on the Form LM-3 are material.

20

OLMS will notify a filer whose Form LM-3 is materially deficient by letter, advising in what respects the filing is deficient and providing a date by which the filer must submit a corrected Form LM-3. Ordinarily, the filer will be allowed not less than 30 days from the date of the letter to submit a corrected Form LM-3.

If the Department finds grounds for revocation after the investigation, the Department will send the labor organization a notice of the proposed Form LM-3 revocation stating the reason for the proposed revocation and explaining that revocation, if ordered, will require the labor organization to file the more detailed annual financial report, Form LM-2.

21

The letter will also provide notice that the labor organization has the right to a hearing if it chooses to challenge the proposed revocation; and that the hearing will be limited to written submissions due within 30 days of the date of the notice. The submissions and any supporting facts and argument must be received by OLMS at the address provided in the notice within 30 days after the date of the letter proposing revocation. The letter will also advise that the labor organization's failure to timely respond within 30 days will waive such labor organization's opportunity to request a hearing and the proposed revocation shall take effect automatically unless the Secretary in his or her discretion determines otherwise.

21

The Department anticipates that the new rule will provide ample incentive for labor organizations to fulfill timely their Form LM-3 filing responsibilities. If the rule has that salutary effect, the number of unions potentially subject to revocation of their Form LM-3 privilege will be relatively small. Should this not be the case, available resources may limit the ability of the Department to pursue revocation in all cases where it may be warranted. In such instances, the Department will exercise, fairly and impartially, its enforcement discretion in deciding where revocation should be pursued.

In its written submission, the labor organization must present relevant facts and arguments that address whether: (1) The report was delinquent or deficient or other grounds for the proposed revocation exist; (2) whether the deficiency, if any, was material; (3) whether the circumstances concerning the delinquency or other grounds for the proposed revocation were caused by factors reasonably outside the control of the labor organization; and (4) any factors exist that mitigate against revocation. Factors reasonably outside the control of a labor organization could include, for example, natural disasters that destroyed the records necessary to complete a Form LM-3, or the death or serious illness of the labor organization's president or treasurer while the form was being prepared for filing. Mitigating factors could also include, for example, that the form was timely completed but was mailed to an incorrect address or an attachment was inadvertently omitted from the filing.

After review of the labor organization's submission, the Secretary (or her designee who will not have participated in the investigation) will issue a written determination, stating the reasons for the determination, and, as appropriate based on neutral criteria, informing the labor organization that it must file the Form LM-2 for such reporting periods as he or she finds appropriate. Where a labor organization has failed to timely respond to the notice of proposed revocation, the Secretary will notify the labor organization in writing that its privilege has been revoked (or in an exercise of his or her discretion that revocation is unnecessary). The determination by the Secretary shall be the Department's final agency action on the revocation.

The revocation of the Form LM-3 filing privilege will ordinarily only apply to the fiscal year for which the labor organization was delinquent or failed to file a properly completed amended report after notification of a material deficiency and the fiscal year during which the revocation determination is issued, but in no event will a labor organization be required to submit a Form LM-2 for any past fiscal year for which the labor organization already has properly and timely filed a Form LM-3. If the revocation is for a longer period of time, the Department's reasons will be included in its written determination. Labor organizations that are required to file a Form LM-2 because their Form LM-3 filing privilege has been revoked will not be required to submit the Form LM-2 electronically.

2. Discussion of Comments Received

A few commenters addressed the authority of the Secretary to make the proposed changes. One commenter noted that the Secretary has the statutory authority to revoke the simplified reporting privilege and doing so will promote greater transparency. The commenter also noted that the revocation procedure will act as an effective deterrent to deliberately inaccurate or late reporting of financial information. Others, however, argued that Congress intended revocation under section 208 to be limited to situations where the simplified report would not accurately reflect the finances of a small labor organization,

i.e.

, where filing the simplified form would permit

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