[Federal Register Volume 73, Number 192 (Thursday, October 2, 2008)]
[Rules and Regulations]
[Pages 57412-57473]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: E8-22853]
[[Page 57411]]
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Part II
Department of Labor
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Office of Labor-Management Standards
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29 CFR Part 403
Labor Organization Annual Financial Reports for Trusts in Which a Labor
Organization Is Interested, Form T-1; Final Rule
Federal Register / Vol. 73, No. 192 / Thursday, October 2, 2008 /
Rules and Regulations
[[Page 57412]]
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DEPARTMENT OF LABOR
Office of Labor-Management Standards
29 CFR Part 403
RIN 1215-AB64
Labor Organization Annual Financial Reports for Trusts in Which a
Labor Organization Is Interested, Form T-1
AGENCY: Office of Labor-Management Standards, Employment Standards
Administration, Department of Labor.
ACTION: Final rule.
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SUMMARY: The Employment Standards Administration (ESA) Office of Labor-
Management Standards (OLMS) of the Department of Labor publishes this
final rule to establish a form to be used by labor organizations to
file trust annual financial reports (Form T-1) and to provide
appropriate instructions and revise relevant portions of 29 CFR Part 43
relating to such reports. On March 4, 2008, the Department published a
notice of proposed rulemaking setting forth the Department's Form T-1
proposal. Under the proposal, certain labor organizations would file
annual reports about certain trusts to which they contributed money or
otherwise provided financial assistance or over which they exercised
managerial control. This document sets forth the Department's review of
and response to comments on the proposal. This final rule requires that
a labor organization with total annual receipts of $250,000 or more
file a Form T-1 for each trust of the type defined by section 3(l) of
the Labor-Management Reporting and Disclosure Act (LMRDA) and that
meets one of the two following filing triggers: The labor organization,
alone or with other labor organizations, either: Appoints or selects a
majority of the members of the trust's governing board; or makes
contributions to the trust that exceed 50 percent of the trust's
receipts during the trust's fiscal year. This final rule provides five
exemptions to the Form T-1 filing requirements: A political action
committee (PAC) fund, if publicly available reports on the PAC fund are
filed with federal or state agencies; any political organization for
which reports are filed with the IRS under section 527 of the IRS code;
trusts required to file a Form 5500 under the Employee Retirement
Income Security Act (ERISA); federal employee health benefit plans that
are subject to the provisions of the Federal Employees Health Benefits
Act (FEHBA); and any trust for which an independent audit has been
conducted, in accordance with the standards set forth in this final
rule. This final rule will apply prospectively.
DATES: Effective Date: This rule will be effective on December 31,
2008.
FOR FURTHER INFORMATION CONTACT: Denise Boucher, Director, Office of
Policy, Reports, and Disclosure, Office of Labor-Management Standards
(OLMS), U.S. Department of Labor, 200 Constitution Avenue, NW., Room N-
5609, Washington, DC, (202) 693-1185 (this is not a toll-free number).
Individuals with hearing impairments may call 1-800-877-8339 (TTY/TDD).
SUPPLEMENTARY INFORMATION:
I. Statutory Authority
This final rule is issued pursuant to section 208 of the LMRDA, 29
U.S.C. 438. Section 208 authorizes the Secretary of Labor to issue,
amend, and rescind rules and regulations to implement the LMRDA's
reporting provisions. Secretary's Order 4-2007, issued May 2, 2007, and
published in the Federal Register on May 8, 2007 (72 FR 26159),
contains the delegation of authority and assignment of responsibility
for the Secretary's functions under the LMRDA to the Assistant
Secretary for Employment Standards and permits re-delegation of such
authority. This rule implements section 201 of the LMRDA, which
requires covered labor organizations to file annual, public reports
with the Department, disclosing the labor organization's financial
condition and operations during the reporting period. 29 U.S.C. 431(b).
As administratively implemented, section 201 requires a labor
organization to identify its assets and liabilities, receipts, salaries
and other direct or indirect disbursements to each officer and all
employees receiving $10,000 or more in aggregate from the labor
organization, direct or indirect loans (in excess of $250 aggregate) to
any officer, employee, or member, loans (of any amount) to any business
enterprise, and other disbursements. The statute requires that such
information shall be filed ``in such detail as may be necessary to
disclose [a labor organization's] financial conditions and
operations.'' Id.
Section 208 directs the Secretary to issue rules ``prescribing
reports concerning trusts in which a labor organization is interested''
as she ``may find necessary to prevent the circumvention or evasion of
[the LMRDA's] reporting requirements.'' 29 U.S.C. 438. Section 3(l) of
the LMRDA provides:
``Trust in which a labor organization is interested'' means a
trust or other fund or organization (1) which was created or
established by a labor organization, or one or more of the trustees
or one or more members of the governing body of which is selected or
appointed by a labor organization, and (2) a primary purpose of
which is to provide benefits for the members of such labor
organization or their beneficiaries.
29 U.S.C. 402(l).
II. Background
A. Introduction
On March 4, 2008, the Department issued a notice of proposed
rulemaking (73 FR 11754) proposing to establish a Form T-1 to capture
financial information pertinent to ``trusts in which a labor
organization is interested'' (section 3(l) trusts), information that
has largely gone unreported despite the trusts' significant effect on
labor organization financial operations and their members' own
interests. As noted in the proposal, the establishment of the Form T-1
is part of the Department's continuing efforts to better effectuate the
reporting requirements of the LMRDA, which are designed to empower
labor organization members by providing them the means to maintain
democratic control over their labor organizations and to ensure proper
accounting of labor organization funds. Labor organization members are
better able to monitor their labor organization's financial affairs and
to make informed choices about the leadership of their labor
organization and its direction when labor organizations provide
financial information required by the LMRDA. By reviewing the reports,
a member may ascertain the labor organization's priorities and whether
they are in accord with the member's own priorities and those of fellow
members. At the same time, this transparency promotes both the labor
organization's own interests as a democratic institution and the
interests of the public and the government. Furthermore, the LMRDA's
reporting and disclosure provisions, together with the fiduciary duty
provision, 29 U.S.C. 501, which directly regulates the primary conduct
of labor organization officials, operate to safeguard a labor
organization's funds from depletion by improper or illegal means.
Timely and complete reporting also helps deter labor organization
officers or employees from embezzling or otherwise making improper use
of such funds.
The proposal noted that the Form T-1 closes a reporting gap under
the Department's former rule whereby labor organizations were only
required to report on ``subsidiary organizations.'' As noted in the
proposal, labor organizations use section 3(l) trusts,
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which by definition have a primary purpose to provide benefits for the
members of the labor organization or their beneficiaries, 29 U.S.C.
402(l), for a myriad of purposes. Common examples of section 3(l)
trusts include credit unions, strike funds, development or investment
groups, training funds, apprenticeship programs, pension and welfare
plans, building funds, and educational funds. Such trusts may be
administered by trustees appointed by a labor organization(s), either
singly or jointly with other labor organizations, or jointly with an
employer(s). As discussed below, trusts administered jointly by
trustees appointed by labor organization(s) and employer(s) are known
as Taft-Hartley trusts. By requiring that labor organizations file the
Form T-1 for specific section 3(l) trusts, labor organization members
and the public will receive some of the same benefit of transparency
regarding the trust that they now receive under the Form LM-2, thereby
preventing a labor organization from using the trust to circumvent or
evade its reporting obligations.
This final rule takes into account the Department's earlier efforts
in 2003 and 2006 to implement a Form T-1. In fashioning this final
rule, and as discussed in greater detail in the proposed rule, the
Department relies on guidance from the United States Court of Appeals
for the District of Columbia Circuit in its review of the 2003 Form T-1
rule (68 FR 58374, Oct. 9, 2003), American Federation of Labor and
Congress of Industrial Organizations v. Chao, 409 F.3d 377 (DC Cir.
2005) and the District Court for the District of Columbia in its review
of the 2006 Form T-1 rule (71 FR 57716, Sept. 29, 2006), American
Federation of Labor and Congress of Industrial Organizations v. Chao,
496 F. Supp. 2d 76 (D.DC 2007). See 73 FR 11757. Thus, this final rule
limits the labor organization's reporting requirement to those trusts
in which the labor organization has managerial control or financial
dominance, as defined in this rule.
The Department initially provided for a 45 day comment period
ending April 18, 2008. 73 FR at 11754. In response to a number of
requests, the Department published a notice extending the comment
period to May 5, 2008. 73 FR 16611. The Department received 556
comments on the Form T-1 proposed rule. Of these comments,
approximately 88 were unique comments. The remaining comments were form
letters endorsing the proposal. Comments were received from labor
organizations, employer, trade and public interest groups, Taft-Hartley
plans, accounting firms, a Member of Congress and labor organization
members.
B. The LMRDA's Reporting and Other Requirements
In enacting the LMRDA in 1959, a bipartisan Congress made the
legislative finding that in the labor and management fields ``there
have been a number of instances of breach of trust, corruption,
disregard of the rights of individual employees, and other failures to
observe high standards of responsibility and ethical conduct which
require further and supplementary legislation that will afford
necessary protection of the rights and interests of employees and the
public generally as they relate to the activities of labor
organizations, employers, labor relations consultants, and their
officers and representatives.'' LMRDA, section 2(a), 29 U.S.C. 401(a).
The statute creates a comprehensive scheme designed to empower labor
organization members by providing them the means to maintain democratic
control over their labor organizations and ensure a proper accounting
of labor organization funds.
The legislation was the direct outgrowth of a Congressional
investigation conducted by the Select Committee on Improper Activities
in the Labor or Management Field, commonly known as the McClellan
Committee, chaired by Senator John McClellan of Arkansas. In 1957, the
committee began a highly publicized investigation of labor organization
racketeering and corruption; its findings of financial abuse,
mismanagement of labor organization funds, and unethical conduct
provided much of the impetus for enactment of the LMRDA's remedial
provisions. See generally, Benjamin Aaron, The Labor-Management
Reporting and Disclosure Act of 1959, 73 Harv. L. Rev. 851, 851-55
(1960). During the investigation, the committee uncovered a host of
improper financial arrangements between officials of several
international and local labor organizations and employers (and labor
consultants aligned with the employers) whose employees were
represented by the labor organizations in question or might be
organized by them. Similar arrangements also were found to exist
between labor organization officials and the companies that handled
matters relating to the administration of labor organization benefit
funds. See generally, Interim Report of the Select Committee on
Improper Activities in the Labor or Management Field, S. Rep. No. 85-
1417 (1957); see also, William J. Isaacson, Employee Welfare and
Benefit Plans: Regulation and Protection of Employee Rights, 59 Colum.
L. Rev. 96 (1959).
The statute was designed to remedy these various ills through a set
of integrated provisions aimed at labor organization governance and
management. These include a ``bill of rights'' for labor organization
members, which provides for equal voting rights, freedom of speech and
assembly, and other basic safeguards for labor organization democracy,
see LMRDA, sections 101-105, 29 U.S.C. 411-415; financial reporting and
disclosure requirements for labor organizations, their officers and
employees, employers, labor relations consultants, and surety
companies, see LMRDA, sections 201-06, 211, 29 U.S.C. 431-36, 441;
detailed procedural, substantive, and reporting requirements relating
to labor organization trusteeships, see LMRDA, sections 301-06, 29
U.S.C. 461-66; detailed procedural requirements for the conduct of
elections of labor organization officers, see LMRDA, sections 401-03,
29 U.S.C. 481-83; safeguards for labor organizations, including bonding
requirements, the establishment of fiduciary responsibilities for labor
organization officials and other representatives, criminal penalties
for embezzlement from a labor organization, loans by a labor
organization to officers or employees, employment by a labor
organization of certain convicted felons, and payments to employees for
prohibited purposes by an employer or labor relations consultant, see
LMRDA, sections 501-05, 29 U.S.C. 501-05; and prohibitions against
extortionate picketing and retaliation for exercising protected rights,
see LMRDA, sections 601-11, 29 U.S.C. 521-31. As explained in the
Department's 2002 proposal and 2003 rule (67 FR 79280, 79290; 68 FR at
58374), the reporting regimen had hardly changed in the more than 40
years since the Department issued its first reporting rule under the
LMRDA. The original rule was published in 1960. See 25 FR 433, 434
(1960).
Section 201 of the LMRDA requires labor organizations to file
annual, public reports with the Department, detailing the labor
organization's financial condition and operations during the reporting
period, and, as implemented, identifying its assets and liabilities,
receipts, salaries and other direct or indirect disbursements to each
officer and all employees receiving $10,000 or more in aggregate from
the labor organization, direct or indirect loans (in excess of $250
aggregate) to any officer, employee, or member, any loans (of any
amount) to any business enterprise, and other disbursements. 29 U.S.C.
431(b).
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The statute requires that such information shall be filed ``in such
detail as may be necessary to disclose [a labor organization's]
financial conditions and operations.'' Id. This information is reported
on the Form LM-2 by labor organizations that have $250,000 or more in
total annual receipts.
Section 202 of the LMRDA requires all labor organization officials
to annually disclose any income or interests, as there identified, they
have received that pose an actual or potential conflict of interest.
See 29 U.S.C. 432. A labor organization official must also identify any
income paid to, or financial interests held by, the official's spouse
or minor children, if such payment is from or interest is held in a
business or company under circumstances that could give rise to a
conflict of interest. Id. The section 202 information is reported on
the Form LM-30. Section 203 of the Act also requires an employer, with
certain exceptions, to annually file a report showing in detail, the
date and amount of any payment, loan, promise, agreement or arrangement
to any labor organization or representative of a labor organization and
a full explanation of any such transaction. See 29 U.S.C. 433. The
section 203 employer information is reported on the Form LM-10.
With regard to each of these reports, the LMRDA states that the
Secretary of Labor shall ``prescribe the[ir] form and publication * * *
and such other reasonable rules and regulations (including rules
prescribing reports concerning trusts in which a labor organization is
interested) as [it] finds necessary to prevent the circumvention or
evasion of such reporting requirements.'' 29 U.S.C. 438. This final
rule adopts the Form T-1 to require labor organizations to report on
certain section 3(l) trusts so as to provide labor organization members
with an accounting of how funds are invested or otherwise expended by
the trust. The Form T-1 provides transparency of labor organization
finances and effectuates the goals of the LMRDA.
C. Overview of the Form T-1 Final Rule and Reasons for the Rule
This final rule provides that the largest labor organizations,
those with total annual receipts of $250,000 or more, must file a Form
T-1 for those section 3(l) trusts in which the labor organization,
either alone or in combination with other labor organizations, has
management control or financial dominance. For purposes of this rule, a
labor organization must file a Form T-1 for a trust if it alone or in
combination with other labor organizations (1) selects or appoints the
majority of the members of the trust's governing board, or (2)
contributes more than 50 percent of the trust's receipts during the
annual reporting period; contributions made pursuant to a collective
bargaining agreement shall be considered contributions by the labor
organization.
The Form T-1 requires that the labor organization itemize major
transactions of the trust during the annual reporting cycle on two
schedules: Schedule 1, which would separately identify any individual
or entity from which the trust received ``major receipts'' of $10,000
or more, individually or in the aggregate during the reporting period;
and Schedule 2, which would separately identify any entity or
individual that received ``major disbursements'' of $10,000 or more,
individually or in the aggregate, from the trust during the reporting
period. The final rule does not require itemization of receipts by a
trust made pursuant to a collective bargaining agreement or
disbursements made by the trust pursuant to a written agreement that
specifies the detailed basis on which the payments are to be made by
the trust. The Form T-1 includes a Schedule 3 that requires disclosure
of the names of all officers of the trust, all employees of the trust
who receive $10,000 or more during a reporting period, and all direct
or indirect disbursements to each of these officers and employees.
The Form T-1 provides for a number of exemptions or alternative
means of compliance with the reporting requirement. No Form T-1 is
required for any trust that meets the statutory definition of a labor
organization as such trust would already file a separate Form LM-2, LM-
3 or LM-4. An exemption is provided for trusts that are established as
a Political Action Committee (PAC) or as a political organization under
section 527 of the Internal Revenue Code, 26 I.R.C. section 527,
provided timely, complete and publicly available reports are filed with
the appropriate federal or state agency. This final rule includes an
exemption for trusts that constitute a federal employee health benefit
plan subject to the provisions of the Federal Employees Health Benefits
Act (FEHBA), 5 U.S.C. 8901 et seq., and for trusts where the plan
administrator is required to file an annual report under ERISA (Form
5500 exemption). The requirements of the Form 5500 exemption are
discussed more fully below. The final rule also includes an alternative
means of compliance by filing an audit of the trust, provided the audit
is prepared according to standards set forth in the Form T-1
instructions and the audit is filed with a Form T-1 with Items 1-15 and
Items 26 and 27 completed.
This final rule will make it more difficult for a labor
organization, its officials, or other parties with influence over the
labor organization to avoid, simply by transferring money from the
labor organization's books to the trust's books, the basic reporting
obligation that would apply if the funds had been retained by the labor
organization. Labor organization officials and trustees both owe a
fiduciary duty to their labor organization and the trust, respectively,
but the Department's case files reveal numerous examples of
embezzlement of funds held by both labor organizations and their
section 3(l) trusts.\1\ The Form T-1, by disclosing information to
labor organization members, among the true beneficiaries of such
trusts, will increase the likelihood that wrongdoing is detected and
may deter individuals who might otherwise be tempted to divert funds
from the trusts. See Archibald Cox, Internal Affairs of Labor
Organizations Under the Labor Reform Act of 1959, 58 Mich. L. Rev. 819,
827 (1960) (``The official whose fingers itch for a `fast buck' but who
is not a criminal will be deterred by the fear of prosecution if he
files no report and by fear of reprisal from the members if he does'').
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\1\ The fiduciary duty owed by trustees and others to refrain
from taking a proscribed action has never been thought to be
sufficient by itself to protect the interests of a trust's
beneficiaries or a principal. Although a fiduciary's own duty to a
trust's beneficiaries, like the duty owed by an agent to a
principal, include disclosure and accounting components (See
Restatement (Third) of Trusts Sec. 2; Restatement (Third) of Agency
Sec. 8.01 (T.D. No. 6, 2005) et seq.; see also 1 American Law
Institute, Principles of Corporate Governance Sec. 1.14 (1994)),
public disclosure requirements, government regulation, and the
availability of civil and criminal process, complement and help
ensure a trustee's observance of his or her fiduciary duty.
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Because the labor organization's obligation to submit a Form T-1
overlaps with the responsibility of labor organization officials to
disclose payments received from the trust (see 29 U.S.C. 432), the
prospect that one party may report the payment increases the likelihood
that a failure by the other party to report the payment will be
detected. Moreover, given the increased transparency that results from
the Form T-1 reporting, in some instances the Form T-1 reporting may
cause the parties to reconsider the primary conduct that would trigger
the reporting requirement. As discussed above, the LMRDA's primary
reporting obligation (Forms LM-2, LM-3, and LM-4) applies to labor
organizations as institutions;
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other important reporting obligations under the LMRDA apply to officers
and employees of labor organizations (Form LM-30), requiring them to
report any conflicts between their personal financial interests and the
duty they owe to the labor organization they serve, and to employers
who must report payments to labor organizations and their
representatives (Form LM-10). See 29 U.S.C. 432; 29 U.S.C. 433. Thus,
requiring labor organizations to report the information requested by
the Form T-1 rule provides an essential check for labor organization
members and the Department to ensure that labor organizations, their
officials, and employers are accurately and completely fulfilling their
reporting duties under the Act, obligations that can easily be ignored
without fear of detection if reports related to trusts are not
required.
Both historical and recent examples demonstrate the vulnerability
of trust funds to misuse and misappropriation by labor organization
officials and others. The McClellan Committee, as discussed above,
provided several examples of labor organization officials using funds
held in trust for their own purposes rather than for their labor
organization and its members. Additional examples of the misuse of
labor organization benefit funds and trust funds for personal gain may
be found in the 1956 report of the Senate's investigation of welfare
and pension plans, completed as the McClellan Committee was beginning
its investigation. See Welfare and Pension Plans Investigation, Final
Report of the Comm. of Labor and Public Welfare, S. Rep. No. 1734
(1956); see also Note: Protection of Beneficiaries Under Employee
Benefit Plans, 58 Colum. L. Rev. 78, 85-89, 96, 107-08 (1958). In the
most comprehensive report concerning the influence of organized crime
in some labor organizations, a presidential commission concluded that
``the plunder of labor organization resources remains an attractive end
in itself. * * * The most successful devices are the payment of
excessive salaries and benefits to organized crime-connected labor
organization officials and the plunder of workers' health and pension
funds.'' President's Commission on Organized Crime, Report to the
President and Attorney General, The Edge: Organized Crime, Business,
and Labor Unions 12 (1986).
The enactment, administration, and enforcement of ERISA has
ameliorated much abuse, but many section 3(l) trusts are not covered by
ERISA and the annual reporting under ERISA serves a different purpose
than the reporting under the LMRDA. The Department has discovered
numerous situations, as illustrated by the following examples, where
funds held in section 3(l) trusts have been used in a manner that, if
reported, would have been scrutinized by the members of the labor
organization and this Department:
A case in which no information was publicly disclosed
about the disposition of tens of thousands of dollars (over $60,000 on
average per month) by participating locals into a trust established to
provide statewide strike benefits. No information was disclosed because
the trust was established by a group of labor organization locals and
not wholly controlled by any single labor organization.
A case in which a credit union trust largely financed by a
local labor organization had made large loans to labor organization
officials but had not been required to report them because the trust
was not wholly owned by any single local. (One local accounted for 97
percent of the credit union's funds on deposit). Membership in the
credit union was limited to members of three locals; all of the credit
union directors were local officials and employees. Four loan officers,
three of whom were officers of the Local, received 61 percent of the
credit union's loans.
Under the final rule, each labor organization in these examples
would have been required to file a Form T-1 because each of these funds
is a 3(l) trust. In each instance, the labor organization's
contribution to the trust, including contributions made on behalf of
the organization or its members, made alone or in combination with
other labor organizations, represented greater than 50 percent of the
trust's revenue in the one-year reporting period. The labor
organizations would have been required to annually disclose for each
trust the total value of its assets, liabilities, receipts, and
disbursements. For each receipt or disbursement of $10,000 or more
(whether singly or in the aggregate), the labor organization would have
been required to provide the name and business address of the
individual or entity involved in the transaction(s), the type of
business or job classification of the individual or entity, the purpose
of the receipt or disbursement, its date, and amount. Further, the
labor organization would have been required to provide additional
information concerning any trust losses or shortages, the acquisition
or disposition of any goods or property other than by purchase or sale;
the liquidation, reduction, or write off of any liabilities without
full payment of principal and interest, and the extension of any loans
or credit to any employee or officer of the labor organization at terms
below market rates, and any disbursements to trust officers and to
employees of the trust who received more than $10,000 from the trust.
The need for the Form T-1 is also demonstrated by additional
examples of improper administration and diversion of funds from section
3(l) trusts. Labor organization officials in New York were convicted in
a ``pension-fund fraud/kickback scheme'' where labor organization
officials were bribed by members of organized crime to invest pension
fund assets in corrupt investment vehicles. The majority of the funds
were to be invested in legitimate securities, but millions of dollars
were placed into a sham investment, which was to be used to fund
kickbacks to the labor organization officers, while the return on
investment from the majority of the legitimately invested assets would
cover the amounts lost as kickbacks. U.S. v. Reifler, 446 F.3d 65 (2d
Cir. 2006); see The Final Report of the New York State Organized Crime
Task Force: Corruption and Racketeering in the New York City
Construction Industry (1990) 27-29, 91-92 (describing devices typically
used by labor organization officials and third parties to divert trust
funds for their own enrichment).
In another case, nepotism and no-bid contracts depleted a labor
organization's health and welfare funds of several million dollars. The
problems associated with the fund included, among others, paying the
son-in-law of a board member, a local labor organization official, a
salary of $119,000 to manage a scholarship program that gave out
$28,000 per year; paying a daughter of this board member $111,799 a
year as a receptionist; and paying $123,000 for claims review work that
required only a few hours of effort a week. See Steven Greenhouse,
Laborers' Union Tries to Oust Officials of Benefits Funds, N.Y. Times,
June 13, 2005, at B5. If the Department's proposed rule had been in
place, the members of the affected labor organizations, aided by the
information disclosed in the labor organizations' Form T-1s, would have
been in a much better position to discover the improper use of the
trust funds and thereby minimize the injury to their stake in the
trust. Further, the fear of discovery might have deterred the
wrongdoers from engaging in the offending conduct in the first place.
As the foregoing discussion makes clear, the Form T-1 rule, as set
forth in this final rule, will add necessary safeguards to deter
circumvention and evasion of the LMRDA's reporting
[[Page 57416]]
requirements. It will be more difficult for labor organizations and
complicit trusts to avoid the disclosure required by the LMRDA. Labor
organization members will be able to review financial information they
may not otherwise have had, empowering them to better oversee their
labor organization's officials and finances as contemplated by
Congress.\2\
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\2\ The instructions to the Form LM-2 were published as part of
the 2003 final rule. The instructions contain some information
relating to the Form T-1. The Department will revise the relevant
portions of the Form LM-2 instructions to conform with today's final
rule.
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III. Comments on the Proposal and the Department's Response to the
Comments
A. Determining Management Control and Financial Dominance
The final rule adopts a modified management control and financial
dominance test for determining those trusts for which a labor
organization is required to file the Form T-1.
The Department has clarified the test to better identify how to
determine whether a labor organization's contributions to the section
3(l) trust during a reporting period trigger a reporting obligation. As
a general rule, a labor organization must file a report only if it
alone or in combination with other labor organizations (1) selects or
appoints the majority of the members of the trust's governing board, or
(2) contributes more than 50 percent of the trust's receipts during the
annual reporting period; contributions made pursuant to a collective
bargaining agreement shall be considered contributions by the labor
organization. The Department has also modified two terms used in the
proposed rule in determining whether a labor organization must file a
Form T-1 for a section 3(l) trust by:
Substituting ``receipts'' in place of ``revenues,'' the
term used in the proposal; the change addresses accounting concerns
raised by some commenters; and
Substituting the phrase ``contributions made pursuant to a
collective bargaining agreement shall be considered the labor
organization's contributions'' in place of ``contributions made on
behalf of the labor organization or its members shall be considered the
labor organization's contribution''; this change clarifies that only
contributions by employers that are required under an agreement
negotiated by labor organizations should be counted as labor
organization contributions and that other contributions, including
contributions made by employees themselves should not be counted as
labor organization contributions.
The Department received numerous comments on the proposed
management control and financial dominance test. Most commenters
opposed the proposed test, focusing on its application to Taft-Hartley
trusts.\3\ Commenters asserted that the proposal was contrary to the
decisions in court challenges to the Department's earlier efforts to
establish a Form T-1: AFL-CIO v. Chao, 409 F.3d 377 (DC Cir. 2005)
(2003 final rule); AFL-CIO v. Chao, 496 F. Supp. 2d 76, 90 (D.DC 2007)
(2006 final rule); violated ERISA or at least created unnecessary
burden for section 3(l) trusts subject to ERISA; ignored the legal
status of trusts and the fiduciary duty that trust officials owe to the
trust exclusively, not to the labor organizations or employers
participating in the trust; and mistakenly characterized contributions
by employers on behalf of employees to the trusts as contributions by
or on behalf of the participating labor organizations. Some commenters
expressed concern about practical difficulties associated with the
proposal, including how to differentiate between labor organization
members and others as beneficiaries under the trust and how to measure
the trust's revenues during a reporting period to determine whether
labor organization contributions constitute a majority of such
revenues.
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\3\ Labor organizations hold financial interests in various
types of section 3(l) trusts, some of which they jointly administer
with employers and others that are wholly administered by labor
organizations or a trustee or trustees selected by labor
organizations. Although the Department received numerous comments
about its proposal, none suggested that the test was inappropriate
for trusts other than those operated jointly with employers. The
comments instead focused on the application of the test to ``Taft-
Hartley'' trusts, i.e., joint labor organization and employer trusts
established pursuant to section 302 of the Taft-Hartley Act. 29
U.S.C. 186(c)
It deserves emphasis that the managerial control test will not
trigger a Form T-1 filing requirement for Taft-Hartley funds because
they have boards whose directors are divided equally between
employers and labor organizations. (The managerial control test
requires labor organizations to appoint a majority of the board.)
Thus, only where the labor organization or a combination of labor
organizations are responsible for a majority of the receipts of the
trust (financial dominance test) will a Form T-1 be required for the
trust, and, as discussed later in the text of this preamble, this
will apply in the relatively small number of instances where a Taft-
Hartley fund does not fall within the exemption for entities filing
the Form 5500. Although many commenters asserted, in effect, that
labor organizations should not have to file a Form T-1 for any Taft-
Hartley trust, they fail to acknowledge, as further discussed in the
text of the preamble, that the DC Circuit recognized the
Department's ability to fashion a reporting obligation based either
on managerial control or financial dominance.
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Whether the Management Control and Financial Dominance Test Is
Justified and Consistent With Form T-1 Court Decisions
A Member of Congress expressed a concern--which is representative
of several other comments--that the Department's proposal failed to
heed the instructions provided by the court of appeals and the district
court in the above cited cases. With respect to the 2006 rule, the same
commenter stated:
Without any explanation or justification * * * the 2006 final
rule stated that in order to determine whether unions have financial
domination over a trust, ``contributions by an employer on behalf of
the union members as required by a collective bargaining agreement
are considered to be contributions of the union as are any
contributions otherwise made on the union's behalf.'' Id. at 57,746.
By counting employers' contributions to trusts as union
contributions, the rule continued to require disclosure from the
vast majority of trusts in which unions are interested, since
employers routinely make the majority of contributions to thousands
of multi-employer Taft-Hartley funds that provide pension, health,
and other benefits to union workers.
Another commenter asserted that the Department's proposal ``is
based on a basic misunderstanding of collective bargaining.'' A third
commenter described the Department's proposal as based on the mistaken
basis that ``employers have no interest in how a trust invests and
spends its money.'' The Department disagrees with the assertion that
the determination that a labor organization has financial dominance
based on employer contributions pursuant to a collective bargaining
agreement is either unexplained or unjustified. The ``financial
dominance'' test was developed in response to the DC Circuit's opinion
in AFL-CIO v. Chao. In that case, the court vacated the Department's
2003 Form T-1 final rule (68 FR at 58374) on the ground that the
Department exceeded its authority by ``requiring general trust
reporting.'' Id. at 378-79, 391. As explained in the NPRM, the court
held that ``absent circumstances involving dominant control over the
trust's use of union members' funds or union members' funds
constituting the trust's predominant revenues, a report on the trust's
financial condition and operations would not reflect on the related
union's financial condition and operations.'' 73 FR 11757.
The NPRM further explained:
[T]he court focused its inquiry on the extent of the labor
organizations' relationship
[[Page 57417]]
with section 3(l) trusts and indicia of their management control or
financial domination of the trusts. Id. at 388-89. * * * [T]he
appeals court found that the Secretary had not demonstrated how a
labor organization's contribution of $10,000, an amount that could
be infinitesimal given the trust's other contributions, could be
indicative of the labor organization's ability to exercise any
effective control over the trust.
* * *
Under this proposal, management domination or financial control
is determined by looking at the involvement of all labor
organizations contributing to or managing the trust. As discussed
above, the Department's experience, as noted by the DC Circuit in
its 2005 opinion, demonstrates that participating labor
organizations may ``retain a controlling management role, [even
though] no individual union wholly owns or dominates the trust.''
409 F.3d at 389. This occurs, for example, where a trust is created
from the participation of several labor organizations with common
affiliation, industry, or location, but none alone holds predominant
management control over or financial stake in the trust. Absent the
Form T-1, the contributing labor organizations, if so inclined,
would be able to use the trust as a vehicle to expend pooled labor
organization funds without the disclosure required by Form LM-2 and
the members of these labor organizations would continue to be denied
information vital to their interests. If a single labor organization
may circumvent its reporting obligations when it retains a
controlling management role or financially dominates a trust, then a
group of labor organizations may also be capable of doing so. A rule
directed to preventing a single labor organization from
circumventing the law must, in all logic, be similarly directed to
preventing multiple labor organizations from also evading their
legal obligations.
73 FR at 11761. The NPRM also explained:
[T]ypically the establishment of such trusts and their funding
is set through collective bargaining. Such payments comprise a
portion of the employer's labor expenses, along with salaries,
wages, and employer administered benefits. Thus, the money paid into
the trusts reflects payments that otherwise could be made directly
to employees as wages, benefits, or both, but for their assignment
to the trusts.
Id.
With respect to the Department's current proposal, a Member of
Congress expressed the following opinion:
The Department * * * does not explain how an employer's
contributions to an employee benefit fund (which is jointly
administered by labor and management trustees) on behalf of its
employees could cause a union to exercise such financial domination.
The Department's failure to explain the legal and empirical
justifications for this controversial policy [has] deprive[d]
interested parties of the opportunity to provide meaningful comments
on the proposal and test the Department's analysis. In addition,
because the District Court noted that the question of whether an
employer's trust contributions cause union financial domination of
trusts is an ``empirical'' question, the Department's failure to
present any empirical information makes it very likely that the
District Court will vacate the rule for a third time.
Another commenter stated that the Department relied heavily on a
presumption that employer contributions to jointly-trusteed funds are
tantamount to union contributions for the purposes of establishing
``union domination'' of the trusts, adding that unions cannot
unilaterally compel employers to make contributions.
The NPRM explained the Department's rationale for establishing
employer contributions as indicia of financial control over a trust by
labor organizations. The NPRM sketched the contemporary and historical
instances of the diversion of trust funds to labor organization
officials and third parties working with them, including instances of
trusts funded with employer contributions and theoretically subject to
the control of trustees appointed by labor organizations and employers
and subject to strict fiduciary duties. Trusts that are set up pursuant
to collective bargaining agreements between a labor organization and
the employer, the terms of which, and level of contributions to, are
established in those agreements are subject to considerable influence
by the labor organization.\4\ At the same time, the Department fully
recognizes that labor organizations do not have a free hand in setting
contribution amounts. As several commenters recognized, the amount of
an employer's contributions to such a trust is part of the employer's
total labor costs. How the employer's ``labor outlay'' is allocated is
of relatively greater concern to the labor organization than the
employer, a factor that directly affects the amount of a trust's
funding, especially to the extent that money is allocated on some
basis, such as training, that does not serve equally each particular
individual's interests, such as where there is an across the board
increase in health benefits or in the hourly rate of pay. As such,
contributions paid into the trust by employers provide an effective
gauge of the labor organizations influence over a trust's financial
operations.
---------------------------------------------------------------------------
\4\ In its proposal, the Department noted that in other
contexts, effective, de facto, or practical control is an
appropriate measure of control, explaining that such a standard
would also be consistent with the DC Circuit's opinion. In the
proposal, the Department observed that some legal commenters had
expressed the view that practical control over many Taft-Hartley
trusts had been ceded to labor organizations. 73 FR at 11762. The
Department invited comment on whether this observation was accurate
and, if so, for this reason or other independent reasons, whether
the Department should establish a reporting threshold that is based
on less than predominant labor organization control over a section
3(l) trust. No commenter supports this observation as accurate and
several stated that it was contrary to their experience. As such the
Department has retained the filing thresholds contained in the NPRM
instead of adopting lower thresholds.
---------------------------------------------------------------------------
In order to prevent circumvention or evasion for purposes of
reporting, it is necessary to equate employer payments to the trust on
behalf of employees as contributions by the labor organization, not in
the sense that the contributions are the property of the labor
organization, but rather that the amount of those contributions serves
as a proxy for measuring the labor organization's influence over the
trust. As the D.C. Circuit explained, notwithstanding a trust's funding
by an employer, such trusts are properly regulated by the Department
under 29 U.S.C. 208, because ``[f]or such trusts, the union has used
its bargaining power to establish the trust, to define the purposes for
which funds may be used, to appoint union representatives to the
governing board * * * and to obligate the employer to direct funds to
the trust's account.'' AFL-CIO v. Chao, 409 F.3d 387. Under the
proposed and final rule, in contrast to the 2003 rule, a labor
organization is required to file a Form T-1 only where the labor
organization has predominant managerial control over the trust or the
trust's revenues are ``dominated by union member funds,'' i.e., funds
contributed on their behalf by an employer. See 403 F.3d at 391.
Inasmuch as Taft-Hartley trusts by definition are funded by
employer payments under these agreements, the commenters' assertion, in
essence, is reduced to the proposition that Taft-Hartley trusts cannot
be subject to the Form T-1 reporting obligation given the source of
their funding. This position, however, ignores the D.C. Circuit's
rejection of this theory. 409 F.3d at 387 (``[Section 3(l)'s] terms do
not dictate a narrow conception of union financial operations such that
as the AFL-CIO maintains, Taft Hartley * * * plans funded by employer
rather than union contributions * * * would be beyond the reach of [the
Department's] authority under section 208''). Moreover, this position
also lacks support under the district court's decision in AFL-CIO v.
Chao, 496 F. Supp. 2d 76 (D.D.C. 2007) (vacating the 2006 Form T-1
Final Rule on procedural grounds). That decision simply noted that the
AFL-CIO had asserted that the Department's determination to include
employer contributions as part of a labor organization's financial
stake in a trust lacked an ``empirical basis.'' See 496 F.
[[Page 57418]]
Supp. 2d at 90. The court did not suggest that it agreed with the
assertion. Id. This result is consistent with D.C. Circuit's
recognition of the Department's authority to require labor
organizations to report on the financial operations of Taft-Hartley
trusts and the Court's acknowledgment of the Department's finding that
a joint training fund (Taft-Hartley trust) could be required to file a
Form T-1. See 409 F.3d at 387. As observed by the district court,
``[t]he DC Circuit's 2005 decision * * * left the Secretary ample
discretion in fashioning a new rule'' and that ``included within the
bounds of that discretion * * * was the decision to equate employer
contributions made pursuant to a collective bargaining agreement with
contributions from the unions themselves.'' 496 F. Supp. 2d at 87.
Additionally, as discussed above, the Department's position fully
recognizes that the funding of section 3(l) trusts is dependent upon
collective bargaining. Because the amount of the contributions to a
trust is tied directly to the collective bargaining agreement, it is
entirely appropriate to use the payments made by an employer pursuant
to that agreement as a proxy for measuring the influence of the labor
organization over the trust. Where those contributions comprise a
majority of the trust's receipts, it is also entirely appropriate to
require labor organizations to file a Form T-1.
Under the final rule, management control or financial dominance is
determined by looking at the involvement of all the labor organizations
contributing to or managing the trust. As noted by the D.C. Circuit,
the Department's experience demonstrates that participating labor
organizations may ``retain a controlling management role, [even though]
no individual union wholly owns or dominates the trust.'' 409 F.3d at
389. This occurs, for example, where several labor organizations with
common affiliation, industry, or location, participate in a trust, but
none alone holds predominant management control over or dominates the
trust financially. Absent the Form T-1, the contributing labor
organizations, if so inclined, would be able to use the trust as a
vehicle to expend pooled labor organization funds without the
disclosure required by Form LM-2, thereby denying members of the
participating labor organizations information vital to their interests.
If a single labor organization may circumvent its reporting obligations
when it retains a controlling management role or financially dominates
a trust, then a group of labor organizations may also be capable of
doing so.
Whether the Management Control and Financial Dominance Test Is
Necessary in Light of, and Can Be Reconciled With, Other Regulatory
Regimes
Commenters asserted that the proposal exceeds the Department's
authority under the LMRDA and ignored ERISA's effectively exclusive
regulation of Taft-Hartley trusts.
Some commenters stated that Congress did not intend the Department
to regulate employee benefit trusts under the LMRDA, and instead sought
to regulate these trusts, mandate disclosure, and prevent misconduct
through ERISA and the Welfare and Pension Plans Disclosure Act of 1958
(WPPDA), the pension law that preceded ERISA.\5\ Accordingly, the
commenters assert that the Department should withdraw its proposed
financial dominance test, which has the primary effect of imposing
LMRDA reporting requirements on ERISA plans.
---------------------------------------------------------------------------
\5\ A commenter asserted, without elaboration, that the
Department's proposal violates section 302(c) of the LMRA. The
Department disagrees with this statement. As evinced by section 208
of the LMRDA, Congress expressly recognized the Department's
authority to require labor organizations to report on the financial
interests of section 3(1) trusts. Moreover, there is a clear
distinction between the reporting requirements of the LMRDA and the
substantive requirements of section 302(c); that section strictly
limits payments by employers to trusts in which labor organization
have an interest without indicating that these requirements would
``preempt'' reporting requirements of the LMRDA or ERISA.
---------------------------------------------------------------------------
Most of the commenters objected to the financial dominance test on
the ground that the trustees of a Taft-Hartley trust owe an absolute
duty of loyalty to the trust--to the exclusion of any duties to either
the labor organization or the employer. They explained that the funding
of the trust by agreement between the labor organization and the
employer does not evince labor organization (or management) control
over the trust.
There is no merit to the claim that ERISA was intended to supplant
the LMRDA insofar as requiring labor organizations to report on the
financial interests of trusts in which they hold management control or
financial dominance. Section 514(d) of ERISA states: ``Nothing in this
subchapter shall be construed to alter, amend, modify, invalidate,
impair, or supersede any law of the United States [with exceptions not
here pertinent] or any rule or regulation issued under any such law.''
29 U.S.C. 1144(d). The WPPDA contained a similar provision, casting
doubt on the assertion that these Acts constrain the Department's
authority under the LMRDA. See WPPDA section 10(b) (72 Stat. at 1003
(1958) (WPPDA does not exempt any person from any duty under any
present or future federal law affecting the administration of employee
welfare or pension benefit plans)). In the Department's view, the LMRDA
and ERISA serve complementary purposes. There also is an evident
similarity between the duty labor organizations officials owe to their
labor organization and the duty trust officials owe to their trust.
Contrary to an implicit premise underlying many of the comments
that ERISA and the LMRDA are co-extensive insofar as labor
organization-related trusts are concerned, ERISA applies to only a
subset of the section 3(l) trusts. Some section 3(l) trusts are not
covered at all by ERISA. Title I of ERISA covers only pension and
``employee welfare benefit plans'' established or maintained (1) by any
employer engaged in commerce or in any industry or activity affecting
commerce; or (2) by any employee organization or organizations
representing employees engaged in commerce or in any industry or
activity affecting commerce; or (3) both. 29 U.S.C. 1003(a). While
there is considerable overlap between section 3(l) trusts and ERISA
``employee welfare benefit plans,'' some funds in which labor
organizations participate fall outside ERISA coverage, including strike
funds, recreation plans, hiring hall arrangements, and unfunded
scholarship programs. 29 CFR 2510.3-1. Other section 3(l) trusts that
are subject to ERISA are not required to file the Form 5500 or file
only abbreviated annual reports. See, e.g., 29 CFR 2520.104-20 (welfare
plans with fewer than 100 participants); 29 CFR 2520.104-26 (unfunded
dues financed welfare plans); 29 CFR 2520.104-27 (unfunded dues
financed pension plans). See also Reporting and Disclosure Guide for
Employee Benefit Plans, U.S. Department of Labor (2004 ed.), available
at http://www.dol.gov/ebsa/pdf/rdguide.pdf.
Several commenters stated that section 302 of the Labor Management
Relations Act (Taft-Hartley Act) contains structural requirements
designed to avoid any possibility of labor organization dominance,
including a requirement that payments must be held in trust for the
sole and exclusive benefit of employees and their dependents, and a
requirement of an annual audit. They assert that section 302 was
enacted precisely ``to ensure that the funds in such a trust are not
used as a labor organization `war chest'.'' NLRB v. Amax Coal Co., 453
[[Page 57419]]
U.S. 322 (1981). By definition, therefore, they argue that trusts that
are subject to section 302 cannot be subject to labor organization
dominance and therefore pose no risk of ``circumvention or evasion'' of
the LMRDA's reporting requirements. In the NPRM, the Department
explicitly recognized the fiduciary duties that apply to trustees under
ERISA. Nothing in the proposal suggested that trustees routinely ignore
these duties and put the interests of their labor organizations or
their own interests ahead of their obligation to the trust. The
Department recognizes that most trustees faithfully observe their
duties. Nonetheless, it cannot be doubted that there are also instances
where those duties are ignored with the attendant loss of funds held in
trust for the labor organization and its members.
This rule is prophylactic; as such, of necessity it must require
reporting even where trustees faithfully observe their duties. At the
same time, its reach is necessary to empower labor organization members
to determine whether transactions between the trust and other
individuals and entities are proper. In many instances, the rule also
allows labor organization members and this Department to determine
whether transactions by or with the trust created a reciprocal
reporting obligation on labor organization officials and employers who
have separate reporting obligations under the LMRDA. As stated in the
NPRM, ``[b]ecause a labor organization's obligation to submit a Form T-
1 overlaps with the responsibility of the labor organization officials
[pursuant to 29 U.S.C. 432] to disclose payments received from the
trust, the prospect that one party may report the payment increases the
likelihood that a failure by the other party to report the payment will
be detected.''
As an additional benefit, the transparency provided by the rule may
have the salutary benefit of deterring individuals from engaging in
improper or illegal transactions. Neither as proposed nor modified in
this final rule does the reporting obligation interfere with ERISA.
Indeed, given that labor organizations now have no obligation to file
Form T-1 for many if not most trusts subject to ERISA, the arguments
against the proposal on this basis lose much of their force.
Where trusts are not subject to ERISA or not required to file the
annual reports required of most ERISA-regulated trusts, the Form T-1
reporting obligation provides labor organization members their first
opportunity, in most instances, to receive an annual report on the
financial operations of their labor organization's section 3(l) trusts.
Whether the Management Control and Financial Dominance Test Creates
Unwarranted Compliance Difficulties
Some commenters expressed concern about the practical difficulty of
determining whether a trust beneficiary was a labor organization member
or not. Some commenters noted that although the trusts have records
distinguishing between contributions submitted pursuant to collective
bargaining agreements--as distinct from contributions submitted on
behalf of non-bargaining unit groups, the trusts do not have records
permitting them to differentiate employer contributions made on behalf
of labor organization members from contributions made on behalf of non-
labor organization employees. These commenters stated that in order to
provide such data labor organizations would be required to ask
participating employers to take on an additional reporting obligation
to the plans. A commenter explained that in order to determine whether
the 50% revenue threshold was met, the trust and the labor organization
would have to exchange records to identify trust participants who are
members of the labor organization, a task that would require
significant time.
These concerns are based upon a simple misunderstanding of the
proposal and are easily resolved. As discussed in the NPRM, 73 FR
11758-61, the labor organization exercises effective control over a
trust if it directly contributes the trust's funds or if it negotiates
with an employer for employer funding of the trust. Whether the
individuals on whose behalf contributions are made pursuant to a
collective bargaining agreement are themselves members of the labor
organization is irrelevant. Thus, it is not necessary to determine how
many beneficiaries of the trust are members or non-members of the labor
organization to determine whether the threshold has been met; instead
the relevant factor for making this determination is the amount of
receipts contributed pursuant to the collective bargaining agreement,
whether made on behalf of members or non-members.
Contributions made pursuant to a collective bargaining agreement by
an employer will be considered contributions of the labor organization
(as, of course, would contributions by the labor organization itself).
The instructions and regulation have been revised accordingly.
Consequently, the phrase ``contributions made on behalf of the labor
organization or its members shall be considered the labor
organization's contribution'' has been revised to read ``contributions
made pursuant to a collective bargaining agreement shall be considered
the labor organization's contributions.''
Contributions received by the trust on behalf of persons
represented by the labor organization but who are not members of the
labor organization (such as agency fee payers) would thus be included
within the definition of ``receipts.'' The test is whether the
contributions are made pursuant to a collective bargaining agreement.
The test is not whether the beneficiaries of the trust are labor
organization members.
Whether Financial Dominance Should Be Measured by ``Receipts'' or by
``Revenue''
Several commenters asked the Department to clarify how to determine
whether the labor organization's contributions comprised a majority of
the trust's revenues during the reporting period. In the NPRM, the
Department, as noted above, framed its financial dominance test in
terms of a labor organization's contributions (more than 50%) of the
trust's revenues during the annual reporting period. The term
``revenue'' was used by the D.C. Circuit in discussing how the
Department could properly fashion a reporting obligation where a labor
organization or labor organizations financially dominated a trust. See
AFL-CIO v. Chao, 409 F.3d at 390. The court did not define this term,
nor suggest that its usage was to limit the Department to an approach
constrained by the technical meaning ascribed to the term by
accountants.
Some commenters noted that the term ``revenue'' has a different
meaning than ``receipts.'' One commenter, noting that accounting
professionals use slightly different interpretations of what
constitutes ``revenue,'' proposed the following as included within its
reach--contributions, interest and liquidated damages charged for
delinquent contributions, all investment income, realized gains,
grants, rents, reimbursements and other income, grants and employee
elective deferrals to 401(k) and cafeteria plans. Some commenters
asserted that if ``revenue'' is defined in such a way as to include
income such as capital gains, interest, dividends and the like, then
many trusts will fall in and out of Form T-1 coverage depending on
market returns. They explained that this could result in a lack of
disclosure in good financial years, and conversely, could require
reporting in poor financial years. The resulting shifting reporting
requirements
[[Page 57420]]
would lead to a lack of consistent reporting on these trusts and create
confusion for labor organization members. Thus, for example, if
``revenue'' includes all amounts received from the sale of securities,
even when promptly reinvested or ``rolled over,'' the amount of
``revenue'' attributable to the trust could easily dwarf any other
source of income or receipts, reducing the number of Form T-1 reports
filed.
The Department agrees that the rule should be clarified. To address
these concerns, the Department has adopted for this purpose the
``receipts'' test used in the Form LM-2. Thus, the instructions to the
Form T-1 now provide that ``receipts'' means anything actually received
by the labor organization within that fiscal year, with the one
exception being sales of investments that are promptly reinvested. In
that situation, only the capital gain is counted toward the gross
receipts figure.
For purposes of the Form T-1, the term ``receipts'' will include
cash, interest, dividends, realized short and long term capital gains,
rent, royalties and other receipts of any kind.
It will exclude investment proceeds that are promptly reinvested.
Generally, ``promptly reinvested'' means reinvesting (or ``rolling
over'') the funds in a week or less without using the funds for any
other purpose during the period between the sale of the investment and
the reinvestment. This change lessens the likelihood that market
fluctuations will move the trust in and out of coverage in a given
fiscal year. Market performance volatility will be less likely to
affect reporting requirements because receipts will not be registered
until gains from the sale of securities are realized.
A commenter pointed out that labor organization members have an
interest in the governance of the trusts that extends beyond the fiscal
year in which particular contributions were made, suggesting that the
financial dominance test should look to a multi-year period to
determine Form T-1 coverage. While the Department believes there is
some merit to the suggestion, the Department believes that a multi-year
approach is unworkable. The key factor to showing financial dominance
is the position of the labor organization as an entity that bargains
with employers and is thus in a position to exert control over the
contributions to the trust. If there are no contributions made in a
particular fiscal year it is difficult to show that a labor
organization is in a position to financially dominate these trusts.
Furthermore, outside the Taft-Hartley trust context, a labor
organization is more likely to be required to file a Form T-1 because
it has managerial control over a trust and not because of financial
dominance.
Two commenters stated that the Department's test would require
reports from single employer trusts (whose contributions are not
established pursuant to a collective bargaining agreement) that have
equal (labor organization and employer) representation on their
governing boards. One of these commenters also stated that some single
employer plans, established pursuant to a collective bargaining
agreement, are administered without any labor organization involvement.
The Department has determined that these plans, and other such trusts
that are employer created and employer administered, do not fall within
the scope of section 3(l).
Whether Elective Deferrals Are Considered in Determining Financial
Dominance
One commenter, a 401(k) plan multiemployer defined contribution
pension plan, receives payments from employees who have the option to
defer a portion of their wages to the plan. Employees have the
opportunity, in addition, to control how their funds are invested. The
commenter expressed uncertainty over whether these elective deferrals
made by the employees themselves are considered labor organization-
derived payments that establish financial dominance, arguing that they
should not be so treated. The Department agrees that employee-directed
payments to the trust should not be treated as labor organization
contributions.
Managerial Control and Taft-Hartley Funds
The Department received few comments on the managerial control test
it proposed. These comments were in the context of trustees appointed
to the board of directors of a Taft-Hartley fund. The boards of these
funds are allocated half to employer representatives and half to labor
organization representatives. As such no Taft-Hartley fund would ever
meet the managerial control trigger for filing the Form T-1 as the
trigger requires the labor organization to appoint or select a majority
of the board before filing is required. However, as discussed above,
Taft-Hartley funds could be subject to the financial dominance test.
B. Applicability of the Form T-1 Reporting Requirement to Smaller Labor
Organizations
The Department proposed a reporting threshold based solely on the
size of the labor organization; labor organizations with total annual
receipts of at least $250,000 must file a Form T-1 for a section 3(l)
trust, if the labor organization alone or with other labor
organizations exercises management control or financial dominance over
the trust. The Department received no comments regarding this aspect of
its proposal. This final rule maintains this reporting threshold and
the Form T-1 reporting requirement only applies to those labor
organizations with total annual receipts of at least $250,000. The
Department believes that limiting the Form T-1 reporting requirement to
the largest labor organizations responds to concerns that the Form T-1
would impose a substantial burden on smaller labor organizations. By
requiring a Form T-1 to be filed only by a labor organization with
annual receipts of at least $250,000, the proposed rule is consistent
with the reporting threshold for Form LM-2. The $250,000 reporting
threshold ensures that labor organizations required to file Form T-1
will be better prepared to meet the recordkeeping burden, having
already had experience with the recordkeeping and reporting software
utilized for the filing of Form LM-2.
C. Elimination of Threshold Requirements in Prior Rules
In addition to limiting reporting to labor organizations with at
least $250,000 in annual receipts, the 2003 and 2006 final rules
conditioned reporting on a two-part threshold ($10,000 or greater
contribution threshold for the reporting labor organization and a
$250,000 or greater receipts threshold for the trust). In the NPRM, the
Department proposed eliminating these thresholds and this final rule
does not include a contribution threshold for the reporting labor
organization or a receipt threshold requirement for the trust.
Several commenters objected to the removal of the $10,000
contribution threshold for reporting labor organizations and stated
that the threshold should be maintained. Commenters stated that the
$10,000 contribution threshold represented a reasonable determination
by the Secretary of the appropriate balance of benefit and burden, i.e.
the burden of filing the Form T-1 on labor organizations contributing
less than $10,000 outweighed the marginal
[[Page 57421]]
increase in transparency. Commenters asserted that it would be hugely
disproportionate to impose the burdensome cost of Form T-1 compliance
when a small amount of labor organization funds are at stake. A
commenter questioned whether the management control and financial
dominance requirements for filing a Form T-1 would alleviate the
difficulty in obtaining information from the trusts. Two commenters
asserted that the proposed rule did not offer a reasoned basis for the
removal of the $10,000 labor organization contribution threshold. The
commenters further noted that there has been no evidence of changed
facts or circumstances that would warrant the departure from the
threshold requirements of previous proposed Form T-1 rules.
As noted in the NPRM the $10,000 contribution threshold was
included in the 2003 and 2006 final rules in response to concerns about
a labor organization's ability to obtain the required information from
trusts in which they did not have a substantial stake. The Department
believes that limiting the trust reporting requirement to trusts in
which a labor organization exercises management control or financial
dominance, as discussed above in section A, addresses this concern.
Moreover, the Department believes that under the LMRDA labor
organization members have an interest in financial transparency related
to trusts to which their labor organizations contribute regardless of
the amount of the contribution.
The recordkeeping and reporting burdens correspond to the size of
the trust. Smaller trusts have smaller burdens in these areas than do
large trusts. A member's interest in knowing the details of financial
dealings is not diminished simply because the trust is smaller. Even in
smaller trusts, members are likely to be interested in the nature and
purpose of the trust, the spending decisions of the trust, the money
directed to the trust as compared to the wages or wealth of the
members, and the extent of the labor organization's control and
domination of the trust. The Department's proposal to require reporting
by labor organizations with annual receipts of at least $250,000 tracks
the mandatory filing threshold for the Form LM-2. Requiring the filing
of a Form T-1 on the same basis as the filing of the Form LM-2 ensures
that labor organizations required to file Form T-1 will be better
prepared to meet the recordkeeping burden having had experience with
the recordkeeping and reporting software utilized for filing the Form
LM-2.
The Department was persuaded to change to a filing requirement
based on the size of the labor organization rather than amount of
contribution to a trust by comments in connection with the 2002 NPRM.
Many commenters during the 2002 rulemaking expressed the view that the
relative size of a labor organization, as measured by its overall
finances, would affect its ability to comply with the proposed Form T-1
reporting requirements.
In proposing to eliminate the $250,000 receipts threshold for
trusts, the NPRM noted that the Department's review of section 3(l)
trusts revealed that a number of trusts do not have substantial annual
receipts yet still hold large amounts of labor organization derived
money. One building trust held $802,323 in assets, yet had less than
$200 in receipts. Another trust reported $434,501 in assets, only
$45,285 in receipts, and rental expenses of $75,483 resulting in net
receipts of -$29,198. Removing the $250,000 annual receipts threshold
provides for the disclosure of significant financial information. As
noted in the NPRM, by not including a receipts threshold for trusts
labor organization, members will have greater transparency and access
to information relating to trusts that hold large amounts of labor
organization derived money yet do not receive a significant amount of
annual receipts.
Commenters objected to the removal of the $250,000 receipts
threshold for trusts because they argued that it may result in Form T-1
reporting of trusts with insubstantial receipts or assets and result in
a burden that may outweigh the benefit of disclosure. Commenters also
stated that the proposed rule did not offer enough evidence or a
reasoned basis for the removal of the $250,000 threshold. Specifically,
a commenter questioned the Department's examples of building trusts
that have significant labor organization derived assets but do not
receive significant receipts. A commenter further noted that there has
been no evidence of changed facts or circumstances that would warrant
the departure from the threshold requirements of previous proposed Form
T-1 rules. A labor organization commented that the $250,000 receipts
threshold limited Form T-1 reporting to significant trusts. The
commenter asserted that the occurrence of a trust with significant
assets but no significant receipts was rare and that the benefits of
including such trusts were outweighed by the burden of filing reports
on trusts that are insignificant.
After considering the comments in opposition, the Department has
concluded that the final rule will not include the $250,000 receipts
threshold for trusts. Eliminating the $250,000 in annual receipts
threshold for the trust operates to provide information about trusts to
labor organization members whose labor organizations have a substantial
investment in a trust notwithstanding the absence of significant annual
receipts by the trust during the reporting period. The two examples of
such trusts provided in the NPRM are illustrative of the problem and
were not intended to be an exhaustive list. Like all the examples in
the NPRM, they point to the need for disclosure.
The removal of the reporting thresholds will substantially increase
labor organization financial transparency and decrease the evasion and
circumvention of the LMRDA requirements. Due to the application of the
management control and financial dominance thresholds set forth in this
rulemaking, the Department believes that the $10,000 contribution
threshold and the $250,000 annual receipts threshold are unnecessary.
The Department also sought comments on whether it would be
appropriate to establish a threshold based on the amount of assets held
by a trust, and if so, what amount would be appropriate. Only one
comment responded to the Department's question. A labor organization
proposed creating such a threshold and setting the threshold at no less
than $250,000 for trust assets, in order to minimize the burden on
small trusts. In the absence of significant comment on this point and
the Department's further consideration of this alternative proposal,
the Department believes the better approach is to continue without an
asset threshold. The Department believes that a member's interest in
the details of the labor organization's financial dealings is not
diminished by the amount of trust assets. A member's interest is more
likely to be based on the nature and purpose of the trust, the spending
decisions of the trust, the money directed to the trust as compared to
the wages or wealth of the members, and the extent of the labor
organization's control and domination of the trust. Based on these
factors, in this final rule the Department has not established a
reporting threshold based on assets held by a trust.
D. Itemization of Receipts and Disbursements
The Department proposed that the Form T-1 include two itemized
schedules for ``major'' transactions: Schedule 1, which would
separately identify any individual or entity from
[[Page 57422]]
which the trust received ``major receipts'' of $10,000 or more,
individually or in the aggregate, during the reporting period; and
Schedule 2, which would separately identify any entity or individual
that received ``major disbursements'' of $10,000 or more, individually
or in the aggregate, from the trust during the reporting period. The
final rule retains the itemization and aggregation requirements, but no
longer requires the itemization of receipts by a trust made pursuant to
a collective bargaining agreement or benefit payments made by the trust
pursuant to a written agreement specifying the detailed basis on which
such payments are to be made. By exempting labor organizations from
filing a Form T-1 for those trusts required to file the Form 5500, as
discussed below, the Department has substantially reduced the burden
associated with this aspect of the rule. Additionally, the Department
has clarified some particular reporting requirements, as suggested by
commenters.
As stated in the NPRM:
Itemization is an essential component of Form LM-2 and also is
integral to Form T-1 as a means to prevent circumvention or evasion
of the reporting obligations imposed on labor organizations and
labor organization officials. Itemization not only provides members
with information pertinent to the trusts, but allows them to better
monitor the other reporting obligations of their labor organization
and its officials under the LMRDA and to detect and thereby help
prevent circumvention or evasion of the LMRDA's reporting
requirements. Among other requirements under this proposal, Form T-1
requires a labor organization to identify:
The names of all the trust's officers and all employees
making more than $10,000 in salary and allowances and all direct and
indirect disbursements to them;
Disbursements to any individual or entity that
aggregate to $10,000 or more during a reporting period and provide
for each individual or entity their name, business address, type of
business or job classification, and the purpose and date of each
individual disbursement of $10,000 or more; and
Any loans made at favorable terms by the trust to the
labor organization's officers or employees, the amount of the loan,
and the terms of repayment.
73 FR 11763. Where certain payments from a business that buys,
sells or otherwise deals with a trust in which a labor organization is
interested are made to a labor organization officer or employee or his
or her spouse, or minor child, the LMRDA imposes on the labor
organization officer or employee a separate obligation to report such
payments (Form LM-30, as required by 29 U.S.C. 432). Thus, the Form T-1
operates to deter a labor organization official from evading this
reporting obligation.
The proposed $10,000 figure is an outgrowth of the earlier
rulemaking efforts and is shaped by the concerns there expressed and
the Department's accommodation to those concerns. This amount is a
higher amount than the itemization threshold provided for the Form LM-2
($5,000). The Department will continue to monitor this threshold, as
well as all other thresholds established by this rule, in order to
ensure that the information reported is meaningful. See 68 FR at 58389.
The Form T-1 will identify the trust's significant vendors and
service providers, i.e., those who make or receive payments of $10,000
or greater during the one-year reporting period. Labor organization
members will be able to utilize the advantages of computer technology
to review Form T-1s (and other documents required to be filed under the
LMRDA). Electronic filing permits the reviewer to use a search engine
to guide the inquiry, allowing review of a potentially large number of
itemization reports with relative ease compared to review of the same
documents in hard copy. Among other uses, a labor organization member
who is aware that a labor organization official has a financial
relationship with one or more of these businesses will be able to
determine whether the business and the labor organization official have
filed the required reports (concerning their relationship as required
by sections 202 and 203 of the LMRDA, 29 U.S.C. 432 and 433).
The Department proposed that the itemization threshold for major
receipts and disbursements be set at $10,000 in the aggregate. No
exceptions were proposed; however, a special procedure was provided for
reporting sensitive information. Therefore, filers would report all
trust receipts from any source that aggregate to $10,000 or more, as
well as any disbursements from the trust to any source that aggregate
to $10,000 or more during the trust's fiscal year. One commenter urged
the Department to increase the threshold for larger employee benefit
plans, and instead base it upon a percentage of assets at the beginning
of the year. This commenter also urged the entire elimination of
itemization of disbursements for benefit payments, because of the many
participants who receive in excess of $10,000. This commenter also
questioned the value of requiring the reporting of disbursements to
service providers and payments to parties-in-interest, which are both
reported on the Form 5500. Others opposed the proposed threshold as
being too high, and instead would lower it to $5,000, which, in their
view, would increase transparency and align the Form T-1 with the Form
LM-2.
The Department adopts the $10,000 threshold requirement for
itemization in Schedules 1 and 2. This amount, in the Department's
view, represents a substantial transaction that would be of interest to
labor organization members. For that same reason, a percentage
threshold would be inappropriate, as it would deny information about
substantial transactions to members of labor organizations with
considerable assets, information about transactions that might have a
significant impact on the labor organization's finances. A percentage-
based threshold that is subject to annual fluctuation would lack
predictability and complicate a year-to-year comparison of reports. If
a percentage test was used based upon a percentage of assets at the
beginning of the year, information concerning large trusts would be
disclosed in much higher dollar amounts and information from smaller
trusts would be reported in smaller amounts. For example, if there are
two trusts, one with $100,000 in assets at the beginning of its fiscal
year and the other with $10,000,000 at the beginning of its fiscal year
and the itemization threshold was 1 percent, then the first trust would
report any receipts and disbursements that aggregate to $1,000 or more
while the second trust would only report receipts and disbursements
that aggregate to $100,000 or more.
Because knowledge about significant transactions by the trust is an
essential element of transparency, the size of the trust should not
affect the members' ability to obtain this information. Therefore, the
Department adopts a flat dollar threshold of $10,000 for itemization
purposes in order to ensure a uniform level of disclosure regardless of
the size of the trust. Additionally, in the Department's view, the
difference between the reporting threshold for itemized transactions
under the Form LM-2 ($5,000) and the threshold under Form T-1 ($10,000)
is appropriate because it reduces the reporting burden and because the
finances of a trust are less likely to directly impact labor
organization members than the expenditures by the labor organization
itself. Finally, as the Department said in the NPRM (See 73 FR at
11763-64), the Department will continue to monitor this threshold and
may make future adjustments based on experience and economic
conditions.
For itemization and reporting purposes, the Department proposed
that
[[Page 57423]]
a labor organization aggregate the trust's receipts from, or
disbursements to, a particular entity or individual during the
reporting period. The Department explained that aggregation provides a
more accurate picture of a trust's receipts and disbursements because
it focuses on the total amount of money received from or paid to an
entity or individual, rather than only on individual receipts or
disbursements. The Department further explained its view that insofar
as such payments are of interest to a labor organization member, there
is no difference between a single $10,000 (or more) receipt or
disbursement from one source and several receipts or disbursements from
one source totaling $10,000 or more. Furthermore, aggregation reduces
the incentive to break up a ``major'' disbursement to a single entity
or individual in order to avoid itemizing the payment and thereby
circumvent the Form T-1 reporting requirements.
Several commenters objected to the aggregation requirement. One
commenter suggested that the Department remove this requirement because
it requires labor organizations and trusts to tally relatively small
amounts with no additional benefit. After considering the comments, the
Department has decided to retain the ``aggregation'' standard for
itemization on Schedules 1 and 2. The Department believes that multiple
payments to or from the same individual or entity that, combined,
surpass $10,000 in any single reporting year, require separate
identification as much as one payment of such amount. The benefit of
such ``aggregation'' is that the labor organization member or other
viewer of the Form T-1 will receive a more accurate picture of the
financial activity of the trust. The additional burden imposed on the
trust and labor organization in tracking these multiple payments is
offset by the increased transparency that enables members to know that
the trust has made ``major'' disbursements or has received ``major''
receipts, whether in the aggregate or in a single instance.
Several commenters opposed the itemization of a trust's receipts.
They asserted that it imposed unnecessary administrative burden on the
trust without corresponding benefit of disclosure to the labor
organization members and the public. Others expressed concerns over
potential business competition problems caused by labor organization
reporting individual employer contributions to trusts, such as
disclosure of detailed manpower information and other business
information. Some commenters opposed itemization of certain kinds of
transactions such as receipts of pension funds or the sale of
investments because they provided no information of value to members,
plan participants, or the public.
Several commenters opposed itemization of disbursements by trusts.
They asserted that it imposed unnecessary administrative burden on the
trust without corresponding benefit of the disclosure to the labor
organization members and the public. Several commenters also opposed
itemization of particular types of transactions, as they argued that
this reporting would offer nothing of value to members and the public.
In their view, the Department should exclude, among other items, the
purchase of investments and benefit payments, particularly pension
benefits from Internal Revenue Service (IRS) tax qualified plans.
After carefully considering the comments, the Department continues
to believe that Form T-1 should separately identify major receipts and
disbursements of the trust. Based on the comments received, however,
the Department has made a number of changes to the rule that should
ameliorate, if not eliminate altogether, many of the concerns
identified by the commenters.
First, the Department agrees with those commenters who questioned
the advantages of reporting customary, bona fide contributions to and
payments from pension funds and other benefit plans to participants and
their beneficiaries. Thus, the Department has changed the instructions
to except such contributions and payments from itemization, if made
pursuant to a collective bargaining agreement or pursuant to a written
agreement specifying the detailed basis on which such payments are to
be made, as explained in more detail below. The Department believes
that information about these transactions that are constrained by basic
governing documents of the trust--collective bargaining agreements and
written agreements specifying the detailed basis on which such payments
are to be made--is unnecessary for members to monitor the operation of
the trust. As a result, labor organizations are only required to report
such plan contributions made pursuant to a collective bargaining
agreement and beneficiary payments made pursuant to a written agreement
specifying the detailed basis on which such payments are made in the
aggregate as part of Items 23 and 24.
Second, the Department has made several other changes that it
believes will reduce the burden of reporting itemized receipts and
disbursements: the reinstatement of a modified Form 5500 exemption; the
clarification that investments that are promptly reinvested are not
receipts and disbursements for itemization purposes; the explicit
recognition that payments related to the Health Insurance Portability
and Accountability Act of 1996 (HIPAA) are confidential information not
to be reported; and the explanation that filers do not have to itemize
benefit payments made to officers and employees of the trust on
Schedule 3 of the Form T-1. These changes are discussed in more detail
below.
Several commenters opposed the itemization of the sale of
investments as a burden on the trust and filer. The Department
concludes that excluding proceeds from the sale of investments that are
promptly reinvested from individually identified receipts will
alleviate much of this burden. The clarification regarding the
reporting of ``rolled over'' investments will reduce many of these
receipts below the $10,000 threshold. This will reduce burden on the
trust and the labor organization.
The reinstatement of the Form 5500 exemption has significantly
reduced the number of section 3(l) trusts that will file the Form T-1.
As discussed in section G(3) of this preamble, labor organizations are
not required to file a Form T-1 for their section 3(l) trusts that are
required to file the Form 5500. The remaining trusts for which a Form
T-1 must be filed, i.e., those trusts that are not required to file a
Form 5500, will primarily consist of building trusts, strike funds, and
apprenticeship and training funds. Unlike pension and health plans,
many of these trusts will have comparatively fewer disbursements,
receipts, officers, and employees. For example, strike funds are likely
to have few, if any, disbursements unless the labor organization's
members are on strike.
The Department believes that there is significant benefit to
disclosure to labor organization members of the receipts and
disbursements remaining within the scope of the itemization
requirement. Specifically, information related to the nature and
purpose of transactions in which a trust engages will enable members to
actively participate in the governance of their labor organization.
Without itemization, members would be denied information critical to
monitoring the trust's finances. For example, without itemization,
members
[[Page 57424]]
would be unable to know the value of the final sale and initial
purchase of investments by the trust, as well as the service providers
it hires to perform functions of the trust. This separately identified
information is important to labor organization members, in part,
because they elect the officers who run their labor organization, who
in turn will affect the labor organization's funding and operations of
the trust over which the labor organization has management control or
financial dominance. The financing of these trusts can be used to
circumvent or evade the labor organization's reporting requirement and
this specified information will empower members to monitor whether or
not the trusts are properly investing their money and fulfilling their
goals.
Trusts are already tracking most receipts, disbursements, and
payments to officials and employees in the regular course of business.
However, they may not be currently tracking the information in the
detail or structure required by Form T-1 reporting. Therefore, covered
section 3(l) trusts may opt to make changes to their accounting systems
to track the relevant information in a format that can be provided to
the interested labor organization(s) to complete the Form T-1. The
Department is not requiring trusts to establish a particular accounting
or other system to accomplish this goal. As indicated elsewhere in the
document, the labor organization may need to request access to the
trust's books and records in order to obtain the information necessary
to report information on the Form T-1 in the required detail and
structure. Further, as also indicated elsewhere in this document, the
Department's Employee Benefits Security Administration (EBSA) advised
that it would not consider a plan fiduciary to have violated ERISA's
fiduciary duty or prohibited transaction provisions by providing
officials of a sponsoring labor organization with financial and other
information from the plan's books and records as needed to complete the
Form T-1, provided the plan is reimbursed for any material costs
incurred in collecting and providing the information to the labor
organization officials. Consistent with that conclusion, EBSA further
advised that fiduciaries may be able to prudently conclude that it is
more efficient and less disruptive of normal plan operations to make
adjustments to the plan's information management or accounting software
so that the plan can provide information contained in its books and
records at a particular level of detail or in a particular structure,
provided the labor organization reimburses the plan for any material
costs incurred in making such adjustments. Although some section 3(l)
trusts may need to contact their third party recordkeepers to collect
information requested by labor organizations for the schedules, this
burden should be ameliorated as much of required information will
already be kept in the normal course of their businesses. And, for
labor organizations whose section 3(l) trusts are required to file the
Form 5500, there is no Form T-1 to be filed and therefore no LMRDA
reporting burden whatsoever.
E. Disbursements to Officers and Employees
The Department proposed that labor organizations would disclose on
Schedule 3 of the Form T-1 the names and titles of all officers of the
trust and report all direct and indirect disbursements to them as well
as to all employees of the trust who received $10,000 or more during
the reporting period. The Department adopts Schedule 3 as proposed with
clarifications discussed below.
Commenters asked the Department to clarify the meaning of the terms
``trust officer'' and ``trust employee,'' including whether the
trustees are considered ``officers'' of the trust, and how the terms
will be applied to the trust administrator and individuals working
under his or her control who might be employed by an entity other than
the trust.
The Department has added clarifications to the definitions of
``trust officer'' and ``trust employee'' on the Form T-1 Instructions
for Schedule 3. The definition of trust officer is adapted from the
LMRDA's definition of ``officer.'' Section 3(n) of the LMRDA states in
pertinent part: `` `Officer' means any constitutional officer [of and],
any person authorized to perform the * * * executive functions * * * of
a labor organization, and any member of its executive board or similar
governing body.'' 29 U.S.C. 402(n). The instructions to the Form T-1
now provide that for Form T-1 purposes, a ``trust officer'' means ``any
person designated as an officer in the trust's governing documents, any
person authorized to perform the * * * executive functions * * * of the
trust, and any member of its executive board or similar governing
body.'' The language is purposefully broad so that it will include the
officials of each trust's governing board, and any other individuals
conferred with executive authority under the trust's governing
documents. Typically, this will include the trustees of each trust,
and, depending upon the particular trust, may include the trust
administrator and other individuals.
Similarly, the definition of a ``trust employee'' is adapted from
the LMRDA's definition of this term. Section 3(f) states that ``
`[e]mployee' means any individual employed by an employer.'' 29 U.S.C.
402(f). Thus, for Form T-1 purposes, an ``employee'' means ``any
individual employed by an employer'' that constitutes a section 3(l)
trust. These definitions will require a fact-specific inquiry by filers
to determine whether trustees, the trust administrator, and other
individuals performing service to the trust under its control or the
trust's administrator's control are officers or employees of the trust.
In most instances, the determination will be resolved without any
significant difficulty. Where such individuals are trust officers, or
trust employees who received more than $10,000 from the trust during
the reporting period, payments to them, unless otherwise exempted, are
required to be reported in the aggregate in Item 24 and by their names
in Schedule 3. Where such individuals are not officers or employees,
payments to them, unless otherwise exempted, must be reported in the
aggregate in Item 24 and separately itemized in Schedule 2 if they
aggregate to $10,000 or more.
Two commenters expressed concern over the heavy burden of reporting
disbursements to their trusts' officers and employees. Commenters said
that this information is disclosed on the Form 5500. The Department
notes that no Form T-1 will be required on behalf of trusts that are
required to file a Form 5500. The Department acknowledges that this
requirement may impose some increased burden on labor organizations
and, where requested by the labor organization, on the remaining
section 3(l) trusts, but the Department believes that modern
developments in electronic recordkeeping (such as software that assists
in tracking financial transactions rather than the costly and time-
consuming paper records used in the past) have greatly reduced the
burden on labor organizations and trusts in terms of overall reporting
and disclosure, and that trusts already keep records on their officers
and employees for purposes of reporting under other statutes and for
internal purposes. Furthermore, labor organization members could
benefit from this information to ensure that their labor organization
is not, for example, providing undisclosed additional
[[Page 57425]]
compensation to labor organization officials.
Commenters also asked the Department to clarify how to report
``indirect'' disbursements to health care providers, such as hospital
and surgery costs, on behalf of trust officers or employees.
The Department has amended the Instructions for Schedule 3, Column
(E), Other Disbursements, as well as the definition of ``indirect
disbursement,'' to clarify that benefits payments to the trust officers
and employees are not of the type required to be reported in Schedule 3
if made pursuant to a written agreement specifying the detailed basis
on which such payments are to be made. Rather, these payments should be
reported in Item 24, and in Schedule 2 to the extent that all trust
payments to a particular source, in the aggregate, must be separately
identified. For example, if a trust makes, in the aggregate, $10,000 in
payments to a particular health care provider on behalf of all of its
officers and employees, then the filer would report this aggregate
amount separately in Schedule 2 and include it within the disbursement
total in Item 24. This clarification should eliminate any concerns
related to the potential misleading nature of Column (E), particularly
as it relates to protecting the confidentiality under HIPAA of health
care provider payments.
F. Protection of Sensitive Information
In proposing this rule, the Department recognized the need to
balance the legitimate privacy interests of individuals receiving
payments from section 3(l) trusts and the right of labor organization
members to transparency in the financial operations of such trusts. See
73 FR 11764. The Department was particularly concerned about protecting
the identity of individuals receiving payments for medical-related and
similar expenses of a highly personal nature. The final rule
strengthens these protections by eliminating the need to itemize any
payments--medical or otherwise--customarily made under and in
accordance with the trust's governing documents. This point is
addressed in the instructions to the Form T-1 and the regulatory text
(revising 29 CFR 403.8). This reporting exclusion, coupled with the
availability of the rule's reporting exemption for those trusts that
are required to file the Form 5500 (which does not require such
itemization), substantially reduces the disclosure of individual-
specific information on the Form T-1.
Many commenters expressed concerns relating to the itemization of
disbursements, most on privacy or security grounds, or both. Some
expressed concern that the posting of such information on the
Department's Web site would be intrusive and heighten the possibility
of identity theft. They asserted that plan participants and
beneficiaries have an ``expectation of privacy'' and that the trustees
of benefit and pension plans are obliged to protect their privacy under
ERISA and other state and federal laws. Several commenters referred to
the regulations issued by the Department of Health and Human Services
(45 CFR 160-164) pursuant to HIPAA, prohibiting the disclosure of
``Protected Health Information.'' Other commenters argued for an
exemption of all payments made pursuant to the terms of an employee
benefit plan. Another suggested that the Department include in the
final rule an exception akin to that provided in the Department's Form
LM-30 rule. The commenter noted that the Form LM-30 excepts from
reporting benefit payments to officers and employees from a trust that
are provided pursuant to a specific written agreement covering such
payments. Others expressed doubt about the value of requiring the
reporting of routine payments to or by section 3(l) trusts, especially
given the voluminous number of such payments by large trusts,
notwithstanding the $10,000 threshold for itemization. Some commenters
expressed concern that reporting of employer contributions to trusts
could reveal the extent of its business operations to competitors and
unnecessarily affect its business interests.
The Department has carefully considered these comments. As noted,
the Department crafted the proposed rule with an eye toward protecting
the privacy interests of plan participants. The Department has been
persuaded that additional protections are appropriate. As discussed in
the preamble section relating to itemization, the Department has
established a broad exemption for reporting customary payments to and
by the trust made in accord with a collective bargaining agreement in
the case of payments to the trust or the trust's governing documents in
the case of benefits payments by the trust. Thus, for purposes of
Schedule 1, Individually Identified Receipts, labor organizations are
not required to separately identify any individual or entity from which
the trust receives receipts of $10,000 or more, individually or in the
aggregate, during the reporting period, if the receipts derived from
pension, health, or other benefit contributions are provided pursuant
to a collective bargaining agreement covering such contributions.
Similarly, for purposes of Schedule 2, Individually Identified
Disbursements, the labor organization is not required to itemize
benefit payments from the trust to an individual plan participant or
beneficiary, if ``the detailed basis on which such payments are to be
made is specified in a written agreement.'' See 29 U.S.C. 186(c). These
exceptions apply to all section 3(l) trusts, whether jointly
administered or not. This will ameliorate concerns about the adverse
impact on an employer whose payments into a trust may reveal
confidential business information. Where such payments to and by the
trust are undertaken in conformance with governing documents, there is
less opportunity for improper diversion of funds and evasion of the
Act's reporting requirements than where the trust's discretion is less
constrained such as approving the sale and purchase of investments,
making payments to service providers, and arranging disbursements to
parties-in-interest and other third parties. This is true of
information regarding receipts as well, as there may be multiple
employers who contribute to the trust pursuant to a collective
bargaining agreement. Moreover, such information about transactions
that are not made pursuant to a specific written agreement is not
likely to pose the same danger of jeopardizing private and confidential
information or violating laws designed to prevent such occurrence. As a
result, labor organizations are only required to report such plan
contributions made pursuant to a collective bargaining agreement and
beneficiary payments pursuant to a written agreement specifying the
detailed basis on which such payments are to be made, in the aggregate
as part of Items 23 and 24.
The Department believes that the addition of an exception
pertaining to beneficiary payments made pursuant to a written agreement
specifying the detailed basis on which such payments are to be made
will also reduce the administrative burden on trusts and reporting
labor organizations. Trusts will not have to compile information
pertaining to the potentially thousands of beneficiaries, nor will it
have as many complications with existing privacy and other state and
federal laws. While the burdens of contacting service providers for
those transactions not governed by such an agreement and of
reprogramming computer systems to capture this data will still exist,
the Department believes that many trusts
[[Page 57426]]
already have this information as a result of their normal business
practices.
As an additional protection, the Department has clarified the rule
to ensure that information maintained by the trusts relating to HIPAA-
protected payments, subject to a non-disclosure provision in a
settlement agreement, specifically protected against disclosure by
state or federal law, or that potentially endangers the health or
safety of an individual is not available to labor organization members
under the LMRDA's ``just cause provision.'' See ; . Notwithstanding
these exceptions, as explained in the instructions, the labor
organization is required to describe generally the nature of any
payments that have not been itemized, e.g., ``disbursement of payments
on insurance claims,'' in Item 25 of the Form T-1 (Additional
Information) and to include the payments in the total amount reported
in Item 23 (Receipts) or Item 24 (Disbursements) of the form.
In the NPRM, the Department proposed to provide labor organizations
the same reporting option available under the Form LM-2 for reporting
certain major transactions in situations where a labor organization,
acting in good faith and on reasonable grounds, believes that reporting
the details of the transaction would divulge information relating to
the labor organization's prospective organizing strategy, the
identification of individuals working as ``salts,'' or its prospective
negotiation strategy. The Department further sought comments on whether
the confidentiality exception from the itemized reporting requirement
should be narrowed, clarified, or removed from the Form T-1. Under the
proposed special procedures, the labor organization could choose not to
report the information in itemized form provided the filer identified
in Item 25 (Additional Information) the general types of information
excluded. The Department outlined this procedure in the Form T-1
Instructions for Schedules 1 and 2.
As under the LM-2 instructions, the proposal in the NPRM recognized
that a labor organization member has a statutory right ``to examine any
books, records, and accounts necessary to verify'' the labor
organization's financial report if the member can establish ``just
cause'' for access to the information. 29 U.S.C. 431(c); 29 CFR 403.8.
Aggregation of transactions by a labor organization under the Special
Procedures for Confidential Information constitutes a per se
demonstration of ``just cause for access to the information'' and thus
the information must be available to a member for inspection. 73 FR
11764. The Department invited comments on whether to narrow, clarify or
remove this confidentiality exemption from the Form T-1 instructions.
Several commenters specifically addressed the Special Procedure for
Reporting Confidential Information, as set forth in the proposed rule
and instruction. Two commenters opposed these procedures, arguing that
agents (i.e., the labor organization and trust officials) cannot
withhold ``secret records'' or engage in ``secret transactions,'' but
rather the principals (i.e., the labor organization members) have a
right to see this information. These commenters argued that the
proposed procedure allowed labor organizations greater leeway in
withholding information than is permitted under the discovery rules of
federal civil procedure or the National Labor Relations Board (NLRB)'s
application of those rules. One commenter raised concerns over the
reporting of job targeting/market recovery fund disbursements,
identifying instances where, in its view, unions were improperly using
the special procedure to shield from disclosure any itemized
disbursements relating to their job targeting program, not merely those
that arguably would be covered by the special procedure. One commenter
supported the confidential information exception because it protects
organizing strategies.
The Department's review of Form LM-2 data has indicated that the
confidentiality exception is not used by the majority of Form LM-2
filers. However, the Department has found that in some cases where the
confidentiality exception is used, large portions of the labor
organizations' disbursements are not itemized. For example, one labor
organization treated $360,308.00 in disbursements as confidential
information and entered this amount on line 5 of Schedule 17. The
$360,308.00 accounted for 45% of the labor organization's total
disbursements. A midsized local labor organization treated
$1,011,863.00 as confidential. This accounted for 49% of the labor
organization's total disbursements. Finally, a large local labor
organization treated $5,931,513.00 as confidential. This accounted for
46% of the labor organization's total disbursements. Thus, an
undisciplined use of the special procedures in many cases could result
in the non-itemization of disbursements of millions of dollars.
The Department understands that labor organizations have an
interest in maintaining confidentiality in situations where disclosure
would expose an ongoing or planned organizing or representational
campaign. However, this interest must be balanced with the LMRDA's
general reporting requirements. Depriving members of information about
almost half of their labor organization's disbursements does not
promote transparency.
In the 2003 final rule promulgating the Form T-1, the Department
recognized that the commenters believed that a confidentiality
exemption was needed to protect information on certain transactions
from immediate public disclosure. Thus the Department provided an
exemption from the normal itemization requirement for reporting of
information that would harm an organizing drive or contract negotiation
and also provided that, absent unusual circumstances, this exemption
should not be applied to information related to transactions for past
organizing campaigns or negotiations. The Department in this final rule
is not changing the decision that a labor organization should not be
required to disclose information that would harm the organization's
prospective organizing campaigns or negotiations, by disclosing
strategy that would otherwise be confidential. However, the Department
reiterates that labor organizations may not shield such information
from full disclosure after the organizing or negotiations have
concluded. Thus, the final instructions for the Form LM-2, and the
instructions for the Form T-1, provide that ``[a]bsent unusual
circumstances information about past organizing drives should not be
treated as confidential.''
For the reasons discussed, the Department adopts the Special
Procedures for Reporting Confidential Information as presented in the
NPRM, but reiterates that the procedures require itemized reporting of
transactions related to organizing campaigns and negotiations after the
confidentiality interest giving rise to the exemption from itemized
reporting in these categories has ended. Labor organizations will
continue to be able to use the confidentiality procedures to withhold
itemized information ``that would expose the reporting union's
prospective organizing strategy.'' If the strategy becomes public, the
confidentiality privilege no longer applies to the information. Once
the organizing campaign or negotiations have concluded, the
confidentiality privilege is lifted absent unusual circumstances where
disclosure of itemized information would harm an ongoing or prospective
organizing campaign or negotiations. As provided, in part, in the Form
LM-2 instructions,
[[Page 57427]]
under the proposal, labor organizations are permitted to withhold from
itemization information that would ``expose the reporting union's
prospective organizing strategy'' or would ``provide a tactical
advantage to parties with whom the reporting union or an affiliate
union is engaged or will be engaged in contract negotiations.'' The
instructions direct that information should be disclosed unless the
labor organization could demonstrate that its disclosure would cause
harm to the organizing drive or contract negotiations; the instructions
also advise that absent unusual circumstances information about past
organizing drives or contract negotiations should not be treated as
confidential.
The Department has considered the suggestion by some commenters
that the proposed procedure should be eliminated because of its
perceived misuse by some Form LM-2 filers. The commenter's examples
indicate that some labor organizations may have used, or will be
tempted to use, the special procedure to hide disbursements that--
either at the time they occurred or at the time that the Form LM-2 was
filed--posed no danger to the labor organization's organizing or
negotiating strategies.
The Department believes that there is reason to be concerned that
the procedures may be misused by some labor organizations. Thus,
although, the Department is retaining the Special Procedure for
Reporting Confidential Information, the Department reemphasizes that
this procedure is to be used sparingly and only in the limited
circumstances for which it is provided. The Department will continue to
review and monitor the use of the Special Procedures for Reporting
Confidential Information. Because of the substantial interest in
financial transparency that is compromised if certain information that
should be disclosed is kept confidential, the Department will give
priority in investigations of violations of the trust reporting rules
to those reports in which the exemption is claimed. This will be done
to insure that the exemption is not abused. The Department will
continue to examine the use of the Special Procedure and, if evidence
and experience indicate that it is being abused, may propose to
eliminate or narrow it. The Department further notes that the provision
of a confidentiality exemption for the Form T-1 does not affect other
reporting duties under the LMRDA or other laws.
G. Exemptions and Alternative Means of Compliance
The Department proposed an exemption from the Form T-1 reporting
requirement for a trust established as a political action committee
(PAC) or an organization established pursuant to Internal Revenue Code
section 527 provided that the trust files timely, complete and publicly
available reports with federal or state agencies, as required by
federal or state law. The Department also proposed a partial exemption
where an independent audit of the trust has been conducted in
accordance with proposed standards discussed below and the audit is
filed with the Department along with a fully completed page 1 of Form
T-1. Each of these alternative methods for meeting the labor
organization's Form T-1 obligation provides significant, timely
financial information about the trust that is updated on a regular
basis (for PAC and section 527 reports, typically more frequently than
the Form T-1) and requires the itemization of receipts and
expenditures. The proposed rule did not include an exemption for trusts
that filed timely and complete Form 5500 reports under ERISA; the
Department explained that the information reported on the Form 5500 was
not designed to capture information for LMRDA purposes and that many
section 3(l) trusts were not subject to ERISA or its reporting
requirements.
This final rule, like the proposal, includes the exemptions for
trusts that constitute a PAC or a section 527 organization provided
that the trusts file timely, complete and publicly available reports as
required by federal and state law and includes the partial exemption
for those trusts where an independent audit has been conducted as set
forth in the instructions. This final rule, unlike the proposal,
contains an exemption for those trusts required to file a Form 5500
report, as defined in this rule.
1. Exemption for PAC and 527 Funds
In proposing to exempt labor organizations from filing a Form T-1
for trusts that constitute a PAC or a section 527 organization, the
Department explained that the purpose of limiting the filing
requirements in this way was to minimize any overlapping obligations
that apply to such entities where other statutes required the filing of
publicly available reports that contain information roughly comparable
to that required by the Form T-1. The Department received no comments
on the proposed exemption for a trust established as a PAC or
established under section 527 of the Internal Revenue Code. Thus, the
final rule retains the exemption for a trust established as a PAC or an
organization exempt under Internal Revenue Code section 527, provided
that the trust files timely, complete and publicly available reports
with federal or state agencies, as required by federal or state law.
2. Audit Exemption
Under this final rule, a labor organization may use the audit
exemption provided the audit meets the requirements described in the
Form T-1 Instructions. The audit requirement in this exemption is
modeled after section 103 of ERISA, 29 U.S.C. 1023 and 29 CFR 2520.103-
1 (relating to annual reports and financial statements required to be
filed under ERISA). As noted in the NPRM, the Department recognizes
that the audit option may not provide the same level of detail required
by the Form T-1. The Department nonetheless believes that this approach
is an acceptable trade-off for reducing the overall reporting burden on
the labor organization and the section 3(l) trust. Under the audit
alternative, a labor organization need only complete the first page of
the Form T-1 (Items 1-15 and the signatures of the organizations'
officers) and submit a copy of an audit of the trust that meets all the
following standards:
The audit is performed by an independent qualified public
accountant, who after examining the financial statements and other
books and records of the trust, as the accountant deems necessary,
certifies that the trust's financial statements are presented fairly in
conformity with Generally Accepted Accounting Principles or Other
Comprehensive Basis of Accounting.
The audit includes notes to the financial statements that
disclose:
[ssbox] Losses, shortages, or other discrepancies in the trust's
finances;
[ssbox] The acquisition or disposition of assets, other than by
purchase or sale;
[ssbox] Liabilities and loans liquidated, reduced, or written off
without the disbursement of cash;
[ssbox] Loans made to labor organization officers or employees that
were granted at more favorable terms than were available to others; and
[ssbox] Loans made to officers and employees that were liquidated,
reduced, or written off.
The audit is accompanied by schedules that disclose:
[ssbox] A statement of the assets and liabilities of the trust,
aggregated by categories and valued at current value, and the same data
displayed in
[[Page 57428]]
comparative form for the end of the previous fiscal year of the trust;
and
[ssbox] A statement of trust receipts and disbursements aggregated
by general sources and applications, which must include the names of
the parties with which the trust engaged in $10,000 or more of commerce
and the total of the transactions with each party.
The Department invited comments on the utility and workability of
the proposed audit exemption. As with many other aspects of the
proposed rule, most of the comments on this issue came from Taft-
Hartley trusts. These commenters generally opposed the 90-day filing
deadline for the audit exemption because the deadline in most instances
would expire before they completed the audits that they are required to
perform in order to satisfy their ERISA reporting requirements to file
a Form 5500. Under ERISA the annual reports are generally not due until
at least 210 days after the close of the ERISA plan year. One commenter
stated that because of the complexity of any audit required of trust
funds, only in the rarest of instances would an auditor be able to
timely satisfy the requirements of the proposed alternative to file the
Form T-1. Commenters also stated that the proposal failed to reduce the
overall reporting and recordkeeping burden because the Form T-1
itemization requirements are not normally part of audits prepared for
these funds.
The Department has partially resolved these concerns by exempting
labor organizations from any Form T-1 responsibilities for trusts that
are required to file an annual report under ERISA, as discussed below.
The availability of this exemption means that most of the commenters
will not be obliged to provide information necessary to complete the
Form T-1 and thus will be unaffected by the audit requirements that
otherwise would remain a concern. For those trusts that are not
required to file the Form 5500, the Department has decided to retain
this filing exemption as an alternative means of compliance with the
rule. The remaining types of entities that will be required to file a
Form T-1 under this rule are typically less complex than the trusts
required to file a Form 5500 and will have fewer transactions to
itemize. Further, the concerns about the itemization burden are
addressed because this final rule excepts from the itemization
requirement any receipts by a trust made pursuant to a collective
bargaining agreement and any benefit payments where a written agreement
specifies the detailed basis on which such payments are to be made. As
such, the Department anticipates that the burden imposed by using this
filing exemption, while similar to that required for filing the full
Form T-1, will nonetheless provide a less burdensome alternative for
some filers. This audit exemption is not meant to be the primary means
of compliance with the final rule, but rather, is meant as an
alternative for those entities that have an audit performed that meets
the standards set forth in this final rule. For these reasons, the
Department's final rule adopts without change the audit exemption as
proposed.
3. ERISA Covered Plans Required To File a Form 5500
Under the 2003 and 2006 Form T-1 final rules, a labor organization
was not required to file a Form T-1 for a section 3(l) trust if the
trust was an employee benefit plan that filed a complete and timely
annual report pursuant to ERISA. These rules also stated that ``a
notice filed with the Secretary of Labor pursuant to an exemption from
reporting and disclosure does not constitute a complete annual
financial report.''
The Department proposed to remove this exemption in the NPRM. The
proposal noted that the focus of the financial reporting required on
the Form T-1 and the Form 5500 are not identical and therefore the Form
5500 was an unsatisfactory substitute for the reporting required under
the LMRDA. The NPRM noted that not all section 3(l) trusts are subject
to ERISA and thus, under the exemption as provided in the 2003 and 2006
final rules, labor organizations, the public and OLMS investigators
would have to spend considerable time and resources to determine
whether a section 3(l) trust complied and timely filed the Form 5500.
73 FR 11765. The Department also cited the difference in who was
required to sign the Form T-1 and the Form 5500 and the difference in
the timing for filing as reason to omit the exemption. 73 FR 11766. The
NPRM invited comments on a number of questions related to the removal
of the Form 5500 exemption.
The Department received a significant number of comments concerning
the Form 5500 and whether the Department should allow an exemption
where a section 3(l) trust files a Form 5500. Several commenters
asserted that the Form T-1 is duplicative of information already
available to labor organization members on the Form 5500.
After consideration of the comments, the Department has decided to
include a Form 5500 exemption in the final rule. The Department
recognizes that the Form 5500 may not provide certain details required
by the Form T-1. In an effort to respond to concerns of commenters and
to meet the objectives of the LMRDA, the Department has fashioned an
exemption that differs in some respects from the exemption set forth in
the 2003 and 2006 rules. The ERISA annual reporting requirements for a
section 3(l) trust that is an ERISA-covered plan are generally
satisfied where the section 3(l) trust files the Form 5500 Annual
Return/Report of Employee Benefit Plan and any required attachments.\6\
Under this final rule, labor organizations will not file a Form T-1 for
any section 3(l) trust that is required under ERISA and applicable
Departmental regulations to file a Form 5500.
---------------------------------------------------------------------------
\6\ The Form 5500 and governing regulations applicable beginning
with plan years beginning in 2009 were modified on November 16,
2007. 72 FR 64710 (final rule); 72 FR 64731 (notice of adoption of
revisions to annual return/report forms). The final rule adopted
changes to the Form 5500 and created the Form 5500-SF.
---------------------------------------------------------------------------
For purposes of this Form T-1 exemption only, a trust is ``required
to file a Form 5500'' if a plan administrator is required to file an
annual report on behalf of the trust under 29 U.S.C. sections 1021 and
1024. The Form T-1 exemption, however, does not apply where an ERISA
covered section 3(l) trust is eligible for an exemption from filing a
Form 5500 or Form 5500-SF under Department of Labor regulations. This
includes those section 3(l) trusts that may file a notice or statement
with the Secretary of Labor in lieu of an annual report pursuant to an
exemption from, or as an alternative method of complying with, the
annual reporting obligation, even if it does file a Form 5500 or Form
5500-SF. The following sections of title 29 of the Code of Federal
Regulations identify the types of ERISA plans that under this final
rule would be treated as not required to file a Form 5500 for purposes
of the Form T-1 filing requirement: Sec. 2520.104-20 (small unfunded,
insured, or combination welfare plans), Sec. 2520.104-22
(apprenticeship and training plans), Sec. 2520.104-23 (unfunded or
insured management and highly compensated employee pension plans),
Sec. 2520.104-24 (unfunded or insured management and highly
compensated employee welfare plans), Sec. 2520.104-25 (day care center
plans), Sec. 2520.104-26 (unfunded dues financed welfare plans
maintained by employee organizations), Sec. 2520.104-27 (unfunded dues
financed pension plans maintained by employee organizations), Sec.
2520.104-43 (certain small welfare plans participating in group
insurance arrangements), and Sec. 2520.104-44 (large
[[Page 57429]]
unfunded, insured, or combination welfare plans; certain fully insured
pension plans). Therefore, a labor organization must file a Form T-1
for any ERISA-covered section 3(l) trusts that are eligible under these
regulations.
All the labor organization and trust commenters objected to the
Department's decision to depart from the position it had taken in
earlier Form T-1 rulemakings whereby a labor organization was not
required to file a Form T-1 for a trust that filed a timely and
complete Form 5500. The commenters raised the following points in
support of their position: (1) Title II of the LMRDA is not intended to
regulate employee benefit plans covered by ERISA; (2) information
reported on the Form T-1 is already available on the Form 5500; (3) the
benefit of Form T-1 reporting does not exceed the burden it places on
labor organizations and trusts; and (4) the Department has failed to
show how entities that file the Form 5500 have used these trusts to
circumvent LMRDA reporting. A number of the commenters offered
alternatives to the complete exclusion of the Form 5500 exemption.
Commenters reviewed the history of legislation governing employee
benefit plans, stating their view that Congress never intended to apply
the LMRDA's reporting and disclosure requirements to employee benefit
plans. They cited section 302 of the LMRA in support of their
contention that employee benefit plans are insulated from labor
organization control. As related by these commenters, section 302
permits employer payments to an employee benefit plan only if: (1) Such
payments are made to a separate trust fund established for the purpose
of providing medical or hospital care, pension or retirement benefits,
insurance, or for other enumerated purposes; (2) such payments are held
in trust for the sole and exclusive benefit of employees; (3) the
detailed basis for such payments is set forth in a written agreement
with the employer; (4) management and labor are equally represented in
the trust's administration; and (5) an annual audit of the fund's
assets is conducted by an independent auditor.
Commenters also noted that Congress saw no need to include the
transactional details that the proposed Form T-1 requires because it
did not include them in the recent Pension Protection Act of 2006 which
substantially amended ERISA. A number of commenters suggested that the
Department drop the Form T-1 and work with the IRS and the Employee
Benefits Security Administration (EBSA) to revise the Form 5500 as
necessary to address any concerns.
The Department has reviewed and considered the concerns expressed
about the relationship between the LMRDA reporting requirements and
ERISA. By adopting an exemption for section 3(l) trusts that are
required to file a Form 5500 the Department has recognized that ERISA
is the primary statute for regulating section 3(l) trusts that are
covered under that statute. The Form 5500 helps ensure that employee
benefit plans are operated and managed in accordance with certain
prescribed standards and that participants and beneficiaries, as well
as regulators, have sufficient information to protect the rights and
benefits of participants and beneficiaries. While not identical in
purpose to the Form T-1, the Form 5500 provides information on assets,
liabilities, losses or shortages of funds or other property,
acquisition or disposal of goods or property in a manner other than
purchase or sale, liquidations, reductions, and write-offs.\7\ More
importantly, the general ERISA regulatory and enforcement regime,
through its civil and criminal provisions, reduces (although it does
not eliminate the risk entirely) the ability of labor organizations to
use employee welfare or pension plans to circumvent their LMRDA
reporting obligations.
---------------------------------------------------------------------------
\7\ The Department does not agree that the Form T-1 is entirely
duplicative of the information available on the Form 5500. While
both forms seek financial information about trusts, among other
differences, a Form 5500 does not include the itemization of
disbursements or receipts required by the Form T-1 and the persons
requires to sign the Form T-1 and Form 5500 are not identical. Under
the Form T-1, the form must be signed by the president and
treasurer, or corresponding principal officers, of the labor
organization. By comparison, the Form 5500 filed by a section 3(1)
trust is signed by the plan's ``administrator,'' as defined in
section 3(16) of ERISA. By requiring the labor organization's
principal officers to certify the accuracy of the financial report,
individuals who may be in a position to use the trust to circumvent
their union's reporting requirements will be required to vouch under
penalty of perjury to the accuracy of the trust report. The
officers' incentive to use the trust to circumvent the LMRDA filing
requirements is thereby reduced. Notwithstanding these differences,
however, the Department, for the reasons discussed in the text, has
determined that the Form 5500 exemption as set forth in the final
rule is appropriate.
---------------------------------------------------------------------------
This is a change from the 2003 and 2006 Form T-1 final rules which
allowed for an exemption so long as the trust had filed a complete and
timely annual report pursuant to ERISA. However, framing the exemption
as was done in 2003 and 2006 puts the burden on OLMS to determine
whether the Form 5500 is complete and timely in order to determine
whether the labor organization has complied with the Form T-1
requirement.
The Department has not extended the Form 5500 exemption to all
trusts that are required to file an annual report under ERISA. Rather,
the Form T-1 5500 filing exemption will be available to only those
section 3(l) trusts that are required to file the Form 5500. Thus,
where ERISA or Department of Labor regulations exempt or allow the plan
administrator to take an exemption from filing a Form 5500 or 5500-SF,
the labor organization would need to file a Form T-1 for that trust. A
Form T-1 would be required even if the plan administrator of such a
fund does not take advantage of the opportunity to obtain an exemption,
and does, in fact, file a Form 5500 or Form 5500-SF.
The Department believes that the Form 5500 exemption as set forth
in this final rule balances the concerns of commenters about burden and
duplication between the Form 5500 and the Form T-1 with the
Department's concerns regarding the enforcement difficulties associated
with the Form 5500 exemption as set forth in the 2003 and 2006 Form T-1
final rules. An exemption that is available to trusts that can choose,
year-by-year, whether to file a Form 5500 creates significant
enforcement burdens for the Department. Because of differing deadlines
for filing the forms, it may be difficult for the Department to
determine whether a trust that is not required to file a Form 5500 has,
in fact, determined that it will file one for the relevant time period.
Moreover, the Department would be required not only to determine
whether the relevant trust may be exempt from the Form 5500
requirement, but also would be required to determine whether such
trust, in fact, filed anyway before determining whether the labor
organization was required to file a Form T-1. In contrast, an exemption
that covers only trusts that are required to file a Form 5500 is
relatively easy to enforce. The obligation to file a Form 5500 depends
on the characteristics of the trust, which can be objectively
determined. As such, it is a relatively easy matter to determine
whether a trust is required to file a Form 5500. Both OLMS and EBSA
would have an interest in correctly identifying trusts required to file
a Form 5500, and EBSA has considerable expertise in this area.
In contrast, a trust that may elect to exempt itself from the Form
5500 filing requirements creates an entirely different problem. Only
the trust will know whether it will file a Form 5500. Until it files a
notice that it is taking the Form 5500 exemption, or its time for
[[Page 57430]]
doing so has expired, there are no objective measurements to determine
whether a Form 5500 will be filed. As an enforcement matter, therefore,
OLMS will regularly be unable to predict by objectively determinable
measures whether such a trust will be reported on a Form T-1 or not.
This creates difficulty in providing compliance assistance to labor
organizations and trusts, and, more significantly, responding to
questions and requests from labor organization members about trust
reporting. Similarly, labor organizations will not be faced with
uncertainty about those trusts for which they must file the Form T-1.
The labor organizations' reporting obligation will not be contingent on
the choice a plan administrator makes about filing a Form 5500. Under
the Form 5500 exemption as adopted by the Department in this final
rule, a labor organization will be able at the beginning of its fiscal
year to know with certainty whether it should prepare to file the Form
T-1 for a particular trust.
The Form T-1 filing exemption for filers who are required to file a
Form 5500 responds to concerns about duplication of effort, redundant
filing requirements, increased burden, and the discrete roles of the
LMRDA and ERISA. The Form 5500 filing exemption adopted in this final
rule comports with ERISA, properly takes into account the complimentary
roles served by each statute, and reduces reporting burden while
providing labor organization members and the public with core
information that will help to prevent the circumvention or evasion of
the LMRDA's reporting requirements.
H. Public Sector Funded Trusts
As discussed above this final rule requires Form T-1 reports to be
filed by labor organizations with receipts of at least $250,000 that
have an interest in a section 3(l) trust, and alone, or in combination
with other labor organizations, (1) selects or appoints the majority of
the members of the trust's governing board, or (2) contributes more
than 50 percent of the trust's receipts during the annual reporting
period; contributions made pursuant to a collective bargaining
agreement shall be considered contributions by the labor organization.
The Department's NPRM provided no exemption from this reporting
requirement for any specific type of section 3(l) trust, other than for
political action committees and section 527 trusts that file timely and
complete reports with appropriate government agencies. As a result, the
rule as detailed in the NPRM required that Form T-1 be filed by LMRDA-
covered labor organizations with an interest in a section 3(l) trust
that provides a benefit plan for the labor organizations' members
employed in the public sector, and which, in some cases, is also made
available for wider participation by public sector employees who can
join the labor organization and enroll in its benefit plan as a result
of their public sector employment. Based on comments received in
response to the proposed coverage of such plans, the Department has
decided, for the reasons that follow, to provide a specific exemption
to the Form T-1 reporting requirements for those labor organizations
with a reportable interest in a section 3(l) trust that is covered by
the FEHBA. However, as explained below, this exemption applies only to
FEHBA-covered trusts, and does not extend to labor organization-
sponsored benefit plans not otherwise regulated by the federal
government in which state, county, special district or municipal
employees may participate.
Two commenters addressed the NPRM's coverage of trusts established
to provide employee benefits to public sector employees. The first
comment is from a national labor organization representing primarily
federal sector postal employees, which sponsors a health benefit plan
that is established, administered, funded and maintained by contract
between the labor organization and the federal government's Office of
Personnel Management (OPM) pursuant to FEHBA. Under FEHBA, the federal
government makes an employer contribution to cover the majority of the
premium costs of the plan, 5 U.S.C. 8906, and the remainder is paid by
employee contributions. The FEHBA health benefits plans offer hospital,
medical, surgical and other health benefits to enrollees and their
covered dependants. In accordance with FEHBA, only members of a labor
organization may enroll in that labor organization's health benefits
plan. Therefore, the plan's enrollees are federal employees who are
members of the labor organization or associate members who have become
members of the labor organization in order to enroll in the health
benefit plan sponsored by the labor organization.
The labor organization with a FEHBA-governed plan argues that an
exception to coverage under this rule is warranted because FEHBA plans
are already subject to significant federal oversight and reporting
requirements. In particular, the commenter argues, the oversight is
equivalent to, and perhaps more than, the federal reporting
requirements, oversight, and government regulations than are applicable
to other entities, such as political action committees or section 527
organizations, that were specifically exempt from compliance in the
proposed rule. According to the commenter, FEHBA plans are subject to
stringent requirements contained in the contracts with OPM, which are
reviewed and approval on an annual basis. In addition, FEHBA plans must
file detailed financial reports with OPM on a quarterly and annual
basis, and are subject to annual auditing requirements as well as
periodic audits by OPM and the OPM Office of the Inspector General in
order to ensure the plan's compliance with contract requirements and
federal law.
The Department finds persuasive these reasons offered by the first
commenter for an exception to compliance with this rule for FEHBA-
covered plans. The Department concludes that the interest of members of
labor organizations in having access to meaningful information
regarding the trusts in which their labor organization has an interest
is served by the rigorous federal oversight already in place under
FEHBA, without need for additional compliance with this rule. So long
as the interests of labor organization members who want to be familiar
with the investments and expenditures of their labor organization's
trust is satisfied, the Department may reduce the potentially
overlapping regulatory burden to covered entities by creating this
exception for FEHBA-covered plans. The exception is noted both in the
instructions for filing the Form T-1 and the regulatory text (revising
29 CFR 403.8).
The second comment received on this subject was from a local labor
organization that represents municipal employees employed by the City
of New York. This labor organization sponsors several supplemental
employee benefits plans, which were established over the course of
several decades pursuant to collective bargaining agreements with the
municipal employers. Although the commenting labor organization
represents a small number of employees employed in the private sector,
the participants of the labor organization's employee benefits funds
are only employees of the municipal employers.
Like the first commenter, the local labor organization indicates
that its employee benefit funds in which New York City municipal
employees participate are already subject to extensive government
oversight and control by the Comptroller of the City of New York. Also
like the first commenter, this local labor organization
[[Page 57431]]
argues that this existing oversight scheme established under local law,
including annual audits of which a condensed version is transmitted to
the membership of the funds, is sufficient to accommodate any party
interested in gathering financial information about the labor
organization's employee benefits trusts. However, the Department notes
that the information required by local law appears only to be required
to be distributed to plan participants, and not labor organization
members who belong to the labor organization sponsoring the plans and
whose interests are at the heart of this rule. In addition, although
the commenter's benefit plans are clearly subject to some governmental
oversight, it is infeasible for the Department to examine every state
or local oversight scheme to determine whether it requires the
reporting and distribution of information sufficient to satisfy the
Department's purpose in protecting the members of labor organizations
sponsoring such plans. Because each state or municipality may establish
differing oversight schemes with differing reporting requirements,
which are subject to periodic revision by those state and local
governments, it is impracticable for the Department to review this
patchwork of regulation to assure the continued protection of the
interests of labor organization members. For these reasons, the
Department declines to create a broader exception to this rule, beyond
the exception noted above for FEHBA plans, for employee benefit plans
sponsored by labor organizations for the benefit of public sector
employees.
I. Applicability to Multiple Labor Organizations Participating in a
Single Section 3(l) Trust
The Department proposed that each labor organization meeting the
reporting threshold will have to submit a Form T-1 to the Department,
even though the labor organization's interest in the trust may
represent only a relatively small portion of the total contributions
made to the trust by labor organizations. The Department received no
comments on this aspect of the rule, which is set forth in this final
rule without change.
In the NPRM, the Department explained that it had received comments
on its 2002 proposal to establish a Form T-1 relating to the
participation by multiple labor organizations in a single trust. In
response to the 2002 proposal, an international labor organization
explained that it was not uncommon for several locals to participate in
an apprenticeship and training fund that would be funded by payments
from employers pursuant to negotiated agreements providing for ``a-
cents-per-hour'' contribution for hours worked by each of their
employees. As an example, the labor organization discussed a fund with
annual contributions over $300,000 in which seven locals participated.
The contributions from, or on behalf of, each local ranged from about
$10,000 to about $100,000. The fund had four employer and four labor
trustees; three from different locals contributing to the trust and a
fourth from the labor organizations' parent organization.
The labor organization also explained that it was common for local
labor organizations in different crafts (affiliated with different
parent bodies) to participate in a fund. It explained that in these
instances, it would be unusual for a single craft or local to represent
a majority of the labor organization trustees. It stated that in such
circumstances it is unrealistic to suggest that any single labor
organization or craft controls the trust. It has also been the
Department's experience that is not uncommon for multiple labor
organizations to participate in a section 3(l) trust without any single
labor organization contributing a majority of the trust's revenues. In
some trusts, such as strike funds, labor organizations may be the sole
contributors to the fund; in others, such as Taft-Hartley trusts, the
trust will be funded by employers, but such funds are established
through collective bargaining agreements, and the employer
contributions are made for the benefit of the employees working within
the bargaining units represented by the participating labor
organizations or the employees' beneficiaries. Working from this
understanding, the Department crafted its 2003 and 2006 Form T-1 final
rules and the proposal set forth in the NPRM to require each labor
organization participating in the trust (i.e., those meeting the
reporting thresholds) to submit a report on the trust's financial
operations.
As noted, the contributions to trusts in which several labor
organizations participate typically will consist solely of funds that
are contributed on behalf of their members. In other situations, the
funds will be contributed by employers on behalf of employees working
for these employers who are represented by the participating labor
organizations. In many instances, none of the participating labor
organizations, by themselves or by virtue of the employers'
contributions pursuant to a collective bargaining agreement,
contributes a majority of the trust's receipts during a reporting
period. As the Department explained in the NPRM, unless a reporting
obligation is imposed on one or more of the labor organizations on some
basis other than majority contributions, no labor organization members
would receive information on the trust's finances. In its 2002
proposal, the Department illustrated the need for reporting on section
3(l) trusts with four examples in which labor organizations had evaded
their reporting obligations through their involvement with such trusts.
One of these examples involved the improper diversion of money from a
strike fund in which no single labor organization held a controlling
interest. The absence of any reporting obligation facilitated the
improper disposition of thousands of dollars (over $60,000 per month)
from the strike fund. As this example also demonstrates, disbursements
from a trust of pooled labor organization funds affects the
contributing labor organizations' financial conditions and operations
as clearly as disbursements from a trust funded by a single labor
organization. A rule directed to preventing a single labor organization
from circumventing or evading the law should not permit the same
conduct when it is undertaken by more than one labor organization.
In fashioning this rule, the Department considered two
alternatives: fixing the obligation on the labor organization with the
greatest stake in the trust; or allowing one of the participating labor
organizations to voluntarily take on this responsibility. Either of
these approaches would create difficulties in enforcement. As the
Department explained in the NPRM, determining which labor organization
has the greatest stake in a trust is an uncertain inquiry. There are
several ways that this could be calculated, such as percentage of
contributions, gross amount of contributions over the life of the
trust, number of members receiving benefits, etc. Further, a rule
allowing one labor organization to volunteer to file the form (and thus
the others to file nothing) would complicate the Department's ability
to enforce the reporting requirement when no labor organization has
filed a report. In addition, the reporting labor organization may not
be the labor organization that is, in fact, using the trust to
circumvent or evade its reporting requirement. Finally, this reporting
gap could allow some labor organizations and individuals to evade their
reporting obligations under the LMRDA.
For these reasons, the Department has determined that where
multiple labor organizations appoint a majority of the
[[Page 57432]]
members of the trust's governing board, or their contributions
constitute greater than 50 percent of the trust's annual receipts, each
will be required to file a Form T-1. In making this determination, the
Department recognizes that the section 3(l) trust, not the reporting
labor organizations, will be the source of most of the necessary
information and that this information, in large part, will be identical
for each participating labor organization. This will allow for
allocation of information collection costs among the labor
organizations, as determined by the trust, and will keep all of the
reporting labor organization's total costs only marginally higher than
if a Form T-1 were required to be filed by only one of the
participating labor organizations.
J. Labor Organization's Ability To Obtain Information From Trusts To
File the Form T-1
Under this final rule, a labor organization is required to file a
Form T-1 if it alone or in combination with other labor organizations
(1) selects or appoints the majority of the members of the section 3(l)
trust's governing board, or (2) contributes more than 50 percent of the
section 3(l) trust's receipts during the annual reporting period.
A number of comments were received expressing concern that it would
be difficult for labor organizations to obtain the information
necessary to complete the Form T-1 from the section 3(l) trust. One
commenter recommended that the Department include a safe harbor
provision in the final rule providing that if a labor organization made
a demand in writing to the trust for the Form T-1 information and the
trust failed to provide the information this would relieve the labor
organization of the obligation to file the Form T-1. The Department
believes that limiting the Form T-1 reporting requirement to those
trusts over which the labor organization has managerial control or
financial dominance, as defined in this rule, makes it unlikely that
any participating labor organization will have difficulty in obtaining
from the trust the information needed to complete the Form T-1. As a
result, the Department does not believe a general safe harbor provision
is necessary.
However, to address those rare instances where a section 3(l) trust
balks at providing the necessary information, which was expressed in
many comments, the labor organization may request that the Department
use its available investigatory authority to assist the reporting labor
organization to obtain information necessary to complete the Form T-1.
The Department expects that labor organizations and labor
organization officials will take timely, reasonable, and good faith
actions to obtain the necessary information from section 3(l) trusts
and, where they have done so, the Department will not assert a willful
and knowing violation of the filing requirement against the labor
organization, its president, or its treasurer.
Many section 3(l) trusts and labor organizations commented that
providing the information required for labor organizations to complete
the Form T-1 raised significant concerns regarding a breach of the
trust's fiduciary duties owed to participants and beneficiaries,
including concerns that individual privacy rights may be violated. With
regard to privacy concerns, a pension fund commenter was particularly
concerned about the required disclosure of individual benefit
recipients by name and address and the subsequent listing of those
individuals online. The commenter believed it would be inconsistent
with ERISA section 404, 29 U.S.C. 1104, to provide this information to
the labor organization so that the labor organization could forward it
to the Department for posting on the Internet. A second commenter added
concerns that this information could be used for identity theft. As
noted above in section D, in this final rule the Department has
modified the instructions to the Form T-1 so that itemization is no
longer required for benefits disbursements made pursuant to a written
agreement specifying the detailed basis for making the payments. The
Department believes that this will alleviate the concerns about privacy
and identity theft.
A labor organization commenter addressed the potential breach of
the trust's fiduciary duties, stating that under ERISA section
404(a)(1)(A), 29 U.S.C. 1104(a)(1)(A), a fiduciary is required to
discharge his duties with respect to an ERISA plan solely in the
interest of the participants and beneficiaries and ``for the exclusive
purpose of providing benefits to participants and their beneficiaries;
and defraying reasonable expenses of administering the [ERISA] plan.''
The commenter indicated that having ERISA plans prepare information for
labor organizations so that labor organizations can meet their
reporting obligations raises concerns as to whether the fiduciary is
using ERISA plan assets exclusively for the benefit of participants and
whether preparing this information actually would interfere with the
normal operations and administration of such ERISA plans.
In addition to the ERISA section 404 concerns, a number of comments
also pointed out that ERISA section 406(b), 29 U.S.C. 1106(b),
prohibits a fiduciary and a labor organization trustee who is a labor
organization official from acting in an ERISA plan transaction,
including providing services, involving his or her labor organization.
Further, they noted that a labor organization participating in an ERISA
trust fund is a party-in-interest to that plan under ERISA. The
commenters agreed that ERISA plans may enter into certain transactions
with a party-in-interest if the transaction is necessary for the
operation or administration of the ERISA plan and does not involve
fiduciary self-dealing. However, they believed it unlikely that most
ERISA plan fiduciaries would conclude that gathering and furnishing the
type of information necessary for a labor organization to complete a
Form T-1 would be necessary to operate or administer the ERISA plan.
Some commenters suggested that the prohibited transaction issue could
be avoided by requiring the labor organization to reimburse the ERISA
plan for all expenses connected with the gathering of Form T-1
information but commented that reimbursing the ERISA plan for the Form
T-1 expenses would not eliminate the concerns relating to a violation
of ERISA section 404.
As a means of resolving these concerns, the Department presents two
safeguards. First, in this final rule the Department has included a
Form 5500 exemption for those ERISA plans required to file a Form 5500
(Form 5500 T-1 exemption), as discussed in section G(2) above. The
Department's inclusion of the Form 5500 T-1 exemption means that most
of the commenters who raised concerns about sections 404 and 406 of
ERISA will not be required to file a Form T-1, dramatically reducing
the number of trusts from which labor organizations will need
information. Second, EBSA has reviewed this rule and specifically
advises that it would not consider a plan fiduciary to have violated
ERISA's fiduciary duty or prohibited transaction provisions by
providing officials of a sponsoring labor organization with financial
and other information from the plan's books and records as needed to
complete the Form T-1, provided the plan is reimbursed for any material
costs incurred in collecting and providing the information to the labor
organization officials. EBSA explained that the sharing of information
in this manner is consistent with ERISA's text and purposes, and a
contrary construction is disfavored because it would impede compliance
[[Page 57433]]
with the LMRDA and the achievement of its purposes. The Department
expects that trusts will routinely and voluntarily comply in providing
such information to reporting labor organizations.
K. Scope of LMRDA Section 3(l) in General
The Department received a few comments that requested a
clarification of the scope of section 3(l) of the LMRDA. One commenter
requested that the Department clarify that section 3(l) trusts must be
limited to ``trusts that are established for the primary purpose of
providing benefits to members of such labor organization or their
beneficiaries (for example, strike funds, credit unions, building funds
or trust funds established pursuant to a labor organization's
constitution to provide death benefits to members).'' This comment
suggested that a review of the documents that establish each trust
would help to determine whether the trust was established to benefit
the members of a labor organization or to benefit the employees. The
comment requested that the Department exclude from the coverage of
section 3(l) all trusts, even if funded pursuant to a collective
bargaining agreement, that in the documents creating the trust,
specifically note that the trust is created for the benefit of
employees.
Section 3(l) provides that a ``trust in which a labor organization
is interested'' is a trust:
(1) Which was created or established by a labor organization, or
one or more of the trustees or one or more members of the governing
body of which is selected or appointed by a labor organization, and
(2) a primary purpose of which is to provide benefits for the
members of such labor organization or their beneficiaries.
29 U.S.C. 402(l). The Department agrees that trust documents are
critical to making a determination regarding a trust's status as a
section 3(l) trust. These documents must be considered along with the
actual operation of the trust in determining whether they will give
rise to a Form T-1 reporting obligation. Each labor organization must
consider the particular circumstances of a trust in evaluating whether
the trust satisfies the definition of a section 3(l) trust and then
must determine whether the labor organization is required to file a
Form T-1 pursuant to this rulemaking. Though the Department is prepared
to offer compliance assistance to labor organizations, a thorough
review by the Department of all documents that may create a section
3(l) trust is impracticable. Therefore, the Department declines to
adopt this suggestion.
With regard to the commenter's implicit conclusion that a trust
document stating that the trust is created for the benefit of employees
would require the conclusion that the trust would not be a section 3(l)
trust, it is the Department's view that such a statement alone would
not resolve the question. Section 3(l) requires an inquiry as to
whether ``a primary purpose * * * is to provide benefits for the
members of [a] labor organization or their beneficiaries.'' Thus, a
trust may have more than one primary purpose. The commenter's statement
does not provide sufficient information to either determine whether the
trust in question is a section 3(l) trust under the LMRDA or whether a
trust created by the labor organization for the benefit of employees of
an employer would fall outside the scope of section 3(l). Although the
Department does not resolve this question, the statement that a trust
is created for the benefit of employees by itself would not deny
section 3(l) status to the entity in question. Therefore, the
Department declines to adopt this suggestion.
A bank submitted comprehensive comments, arguing, in part, that (1)
it does not come within the scope of section 3(l) because, in its view,
section 3(l) is limited to ``health benefits, pension benefits, life-
insurance benefits or other similar kinds of concrete and individual
benefits, and * * * not to * * * intangible collective benefits,'' as
it characterizes the benefits it provides to the labor organizations
creating the bank; and (2) requiring labor organizations to submit a
Form T-1 regarding the bank's financial operations would place an
unfair burden on the bank relative to its competitors. The bank stated
that it believes itself to be ``the last union owned commercial bank in
the United States,'' explaining that it was established by a labor
organization and that almost 60% of the voting common shares of the
bank are owned by a national labor organization subject to the LMRDA.
The bank markets itself as ``America's Labor Bank'' and provides a one
percentage point discount on interest rates for loans to union members.
It also explained that labor organizations are no longer permitted to
own banks, but that its apparently unique status exists by virtue of a
grandfather provision in the Bank Holding Act of 1956. See 12 U.S.C.
1843.
The Department is persuaded that the bank's status is indeed unique
and, for the reasons that follow, will except labor organizations from
submitting a Form T-1 about the bank's financial operations. The bank,
apart from its status as a labor organization-created bank, differs in
no material respect from other commercial, for profit banking
institutions. Given the nature of its operations, it engages in a much
larger number of potentially reportable transactions than all but a
few, if any, section 3(l) trusts. Like other financial institutions, it
is subject to strict state and federal regulation that tempers somewhat
the need for reporting obligations. The bank's commercial lending
business is predominantly conducted with non-labor organization
entities, a result of the bank's competitive position in the
marketplace. Similarly, the majority of the bank's customers are not
labor organization members. Credit unions often serve a narrower
customer base, which, in the section 3(l) trust context, may consist
predominantly of members of the sponsoring labor organization. While
the bank does share some characteristics with other section 3(l)
trusts, especially credit unions, the bank's customer base is drawn
from a broader market, and its investment portfolio is more varied and
diverse than a typical credit union. For these reasons the bank's
operations are subject to greater market scrutiny than typically would
be the case for a labor organization-established credit union.
Moreover, as an employer, the bank is subject to the LMRDA's reporting
provision for employers, 29 U.S.C. 433, that require it to report any
payments to labor organization officials other than those made in the
regular course of business. Thus, the bank will be required to disclose
on Form LM-10 the kinds of payments that would be of the greatest
interest to labor organization members, notwithstanding that labor
organizations participating in this trust are excepted from filing the
Form T-1 about the bank's financial operations. In connection with this
matter, two additional points must be noted. First, the Department is
not persuaded by the bank's argument that it does not constitute a
section 3(l) trust, however, the Department does not reach this
question in excepting labor organizations from reporting on the bank's
financial operations. Second, the bank stated in its comments that in
addition to its regular banking commercial services, it ``also engages
in a large institutional trust business providing custody and
investment management services to Taft Hartley and other employee
benefit plans.'' By not requiring labor organizations to file a Form T-
1 about the bank's financial operations, the Department does not modify
in any way the filing obligations
[[Page 57434]]
of any labor organizations with section 3(l) trusts that utilize the
bank for services in administering such trusts.
L. Format of the Form T-1, Schedules, and Instructions and Electronic
Submission of the Form
Form T-1, as proposed and adopted by this final rule, is shorter
and requires less information than the Form LM-2, the annual financial
report filed by labor organizations with at least $250,000 in annual
receipts. It includes: 15 questions on page 1 (Items 1-15) that
basically identify the trust; five yes/no questions (Items 16-20)
covering issues such as whether any loss or shortage of funds was
discovered during the reporting year (Item 16), the disposition of
property by other than market sale (Item 17), the liquidation of debts
(Item 18), and whether the trust made any loans to officers or
employees of the labor organizations at terms below market rates (Item
19); and statements (Items 21-24) regarding the total amount of assets,
liabilities, receipts and disbursements of the trust. Item 25 requires
additional detail if a filer checks ``Yes'' to any of the yes/no
questions in Items 16 through 20.
The Department proposed that filers submit the Form T-1
electronically to the Department using software provided by the
Department and available on the OLMS Web site. As proposed, a Form T-1
filer will be able to file a report in paper format only if it applies
for and is granted a continuing hardship exemption of up to one year,
but a paper format copy may be submitted initially if the filer asserts
a temporary hardship and files electronically within 10 days
thereafter. The Department proposed a procedure in the Form T-1
Instructions for applying for a continuing hardship exemption, which
was identical to that of the Form LM-2. The proposed procedure whereby
forms must be submitted electronically with limited exceptions received
no substantive comment and the Department adopts this procedure in this
final rule.
The Department received no comments about several specific items on
the proposed form, schedules, and instructions. Thus, except as noted
below, the final form, schedules, and instructions contain no
substantive change from those published in the NPRM. The comments
received on particular aspects of the form, schedules, and instructions
are identified below. Some of these comments have been addressed in
more detail in other sections of the preamble.
In the NPRM, the Department specifically invited comments on
whether the trust's employer identification number (EIN) should be
reported on the first page of the Form T-1. The Department stated that
the number could be used by members to cross-check the information on
the Form T-1 with other reports submitted by the trust, such as its
filings with the IRS. As discussed below, the Department has decided to
require this information, which will be reported in Item 11. As
proposed, Item 11 required filers to report the tax status of the
trust; this information need not be reported under the final rule. The
Department has concluded that disclosure of the tax status of the trust
is of less utility to members than is the EIN and as such is requiring
disclosure of the EIN in place of tax status.
Two commenters expressed support for requiring labor organizations
to provide the trust's EIN. In their view, this information will
``facilitate better cross-referencing between reporting forms''
increasing the form's usefulness, and help ensure against fraud or
mistake. One commenter opposed including the EIN, arguing that cross-
referencing could lead to confusion if users were to compare Form T-1
submissions with reports filed under ERISA by the same trusts.
The Department adopts the requirement that the labor organization
must supply the trust's EIN. Item 11 of the form and the corresponding
instructions have been modified accordingly. This modification imposes
no additional burden on the trust or labor organization beyond what the
proposal required, and it does not violate any privacy or
confidentiality of the parties, plan participants, or their
beneficiaries. Without the disclosure of the EIN on the Form T-1, labor
organization members and the public could encounter difficulty finding
this information, leaving them unable to easily cross-reference the
Form T-1 with other reporting and disclosure forms, thus reducing the
form's utility. The Department believes that users will recognize that
the Form T-1 and any other reports filed by the trust, such as reports
under the Internal Revenue Code (Form 990) do not report identical
information. The Department expects that any potential confusion will
be minimal and, in any event, is outweighed by the utility of comparing
the information reported on the various forms. The ability to cross-
reference the Form T-1 with the Form 990 and other disclosure forms,
and check for any anomalies, will help reduce the ability of labor
organization officials to use a trust to circumvent other LMRDA
reporting requirements.
Item 16 of the form requires a labor organization to report the
trust's losses, shortages, or other discrepancies in the trust's
finances. Three commenters opposed Item 16's requirement of reporting
whether the trust discovered a loss or shortage of funds or other
property during the reporting period. One expressed concern over
reporting delinquent contributions from employers as well as
overpayment of benefits, such as payments to ineligible dependants,
individuals who have coverage through a spouse, or when the fund does
not know of a participant's death. This commenter also argued that
reporting a health fund's losses would violate the fund's privacy
obligations under HIPAA, as well as require additional work by the
fund's staff. Additionally, this comment stated that the definition of
``loss'' in the instructions is too vague to know what information to
send to the labor organization. Finally, a commenter also questioned
the lack of an adequate definition of ``loss'' or ``shortage'' in the
instructions, which may lead to excessive and irrelevant reporting of
transactions.
The Department has clarified Item 16, by defining ``a loss or
shortage of funds or other property.'' The Department has defined the
term to exclude delinquent contributions from employers, delinquent
accounts receivable, losses from investment decisions, and overpayments
of benefits. Financial transparency enables members to monitor the
affairs of their labor organization and its officers, including the
operations of a section 3(l) trust that is dominated by the labor
organization. While a financial loss or shortage does not, by itself,
indicate that the trust is mismanaged or that fraudulent activity is
occurring, it provides useful information to members regarding the use
of their labor organization's assets and the actions of its officers.
Item 17 of the form requires a labor organization to report the
trust's acquisition or disposition of assets. One commenter suggested
that it could require tracking ``thousands'' of such transactions
annually, including all write-offs of all fixed assets (with the basis
of those assets), all settlements or write-offs of employer
contribution obligations (even when de minimis interest obligations are
waived or reduced), and would require maintaining every invoice for
furniture or equipment until disposed. Although the Department believes
that this claim may be overstated, it has clarified the instructions in
a way that will largely alleviate any burden. The instructions have
been revised to apprise filers that
[[Page 57435]]
they may group similar acquired or disposed assets together, in a
larger category, as well as grouping multiple assets acquired from or
disposed of to the same source, which will reduce the ``expansive''
nature of this reporting requirement. For example, if a trust acquired
various types of office equipment as a donation, these assets may be
grouped together for purposes of the description in Item 25.
Item 19 of the form requires a labor organization to report loans
to labor organizations officers or employees made below market rates.
No commenters objected to this provision and it is adopted as proposed.
Items 23 and 24 of the form require a labor organization to report
the trust's total receipts and disbursements, respectively. Recognizing
that these terms call for reporting on a cash rather than an accrual
basis, in contrast to the manner in which some ERISA-regulated trusts
prepare their financial statements, one commenter expressed concern
that the Department was effectively requiring trusts to establish a
second recordkeeping system. The Department is not requiring section
3(l) trusts to establish a cash basis accounting system. As is the case
with the Form LM-2, the Department permits filers the choice of how to
maintain their recordkeeping system. If section 3(l) trusts for which a
labor organization files a Form T-1 choose to prepare their financial
statements on an accrual basis, however, labor organizations may need
to request access to the trust's books and records in order to obtain
the information necessary to report on the Form T-1 the amount of cash
and liabilities on hand at the start and close of each reporting
period. See 68 FR 58374, 58380-81 (2003) (preamble to Form LM-2 final
rule). The Department believes that it is easier for labor organization
members to understand the trust's finances if this basic information is
provided for their labor organization's section 3(l) trusts. In this
regard, the Department notes that most ERISA-regulated trusts will have
no Form T-1 reporting obligation where they submit the annual
disclosure statements required of them under ERISA.
One commenter sought clarification regarding the reporting of
receipts and disbursements where employers submit contributions to
related plans on a single check to one trust. The commenter explained
that in such instances the trust typically acts as the depository and
the contributions are promptly allocated to the other trusts based on
each trust's contribution rate. The Department requires Form T-1 to
include the total receipts and disbursements of the trust during its
fiscal year. Therefore, Item 23, Receipts, includes all funds received
by the trust from any employer or any other source. If a trust acts as
a depository and promptly reallocates these receipts to other trusts,
then such reallocation must be reported in Item 24 as a disbursement.
M. Effective Date and Reporting Deadlines
The Department proposed that the final rule would take effect no
less than 30 days after its publication in the Federal Register. Thus,
under the proposal no report would be due until 15 months after the
rule's effective date.
Although the Department proposed that the rule could take effect on
the 31st day after its publication, this final rule will take affect 90
days after its date of publication and it shall apply only to labor
organizations whose fiscal years begin on or after January 1, 2009. The
effect of this change is to provide a small amount of additional time
over and above that provided under the proposal before the start of the
fiscal year for which an initial report will be due. The Department
believes that this lead time is sufficient for affected trusts and
labor organizations to adapt to the proposed disclosure requirements
and make any necessary adjustments to their recordkeeping and reporting
systems.
As proposed and as adopted in this final rule, the Form T-1 must be
filed within 90 days after the end of the labor organization's fiscal
year and must cover the section 3(1) trust's most recent completed
fiscal year, i.e., the fiscal year ending on or before the closing date
of the labor organization's own fiscal year. This requirement is
mandated by the LMRDA's requirement that a labor organization file its
financial reports within 90 days after the close of the labor
organization's fiscal year. 29 U.S.C. 437(b). By permitting a labor
organization to file the Form T-1 within 90 days after the labor
organization's fiscal year ending date, rather than requiring it to be
filed within 90 days after the trust's fiscal year ending date, the
Department has eased the reporting burden for both the trust and the
labor organization. The instructions to Form T-1 provide examples of
when the Form T-1 must be filed.
Many labor organization expressed concern about their ability to
file a Form T-1 within 90 days after the end of the labor
organization's fiscal year in those instances where the trust and the
reporting labor organization had the same fiscal year. The trust
community and labor organizations also expressed concern about their
ability to timely provide information and submit the reports,
respectively, under those time constraints. Most of the concerns were
contingent on the Department's proposal that only a relatively small
number of section 3(l) trusts would be excluded from the reporting
requirement. Other commenters expressed concern about the ability of
multi-employer health and welfare plans to timely provide required
information. They stated that insurance carriers and providers, not the
trust, have the data needed for the Form T-1, which would complicate
and delay the receipt of required information. Others stated that plans
that have Medicare D coverage do not receive the Medicare reimbursement
for 90 to 120 days from the date a request for reimbursement is filed.
Further, some commenters asserted that compiling information for the
Form T-1 would interfere with and delay the completion of their duties
under other statutes.
The Department has carefully considered the comments, but it
retains the view that the rule as proposed provides sufficient time for
labor organizations to timely submit reports. The Department's position
is based in substantial part on the significant changes to the
proposal. As discussed in preceding sections of the preamble, the
Department has adopted a reporting exemption that will affect most
Taft-Hartley trusts. Where the trust is required to file a Form 5500
under ERISA, labor organizations participating in the trust are not
required to file a Form T-1. Additionally, as discussed earlier in this
preamble, the Department has established an exception to the
itemization requirement for any payments to a trust pursuant to a
collective bargaining agreement and any benefits payments made by the
trust pursuant to a written agreement specifying the detailed basis on
which such payments are made.
As a result of these changes, the number of trusts for which a Form
T-1 must be filed has been substantially reduced as has the number of
transactions for which itemization is required. Many of the largest
trusts with potentially the greatest number of receipts and
disbursement to itemize are unaffected by the Form T-1 requirements.
Additionally, trusts that were concerned that they would be faced with
twice the reporting obligation (Form 5500 and Form T-1) no longer face
this dual obligation. A trust that is required to file a Form 5500 will
seldom, if ever, be asked by a participating labor organization to
[[Page 57436]]
compile information for the submission of a Form T-1.\8\
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\8\ The Department understands that plans that have Medicare D
coverage will not receive the Medicare reimbursement until 90 to 120
days from the date a request for reimbursement is filed. Such trusts
typically will not be asked to provide information to labor
organizations because such are required to file a Form 5500,
eliminating any Form T-1 reporting obligation by the labor
organization. However, assuming for purposes of discussion that a
trust had to compile information for this purpose, a filer would not
have to delay the report for the receipt of the Medicare
reimbursement because the Form T-1 requires the reporting of
receipts and disbursement on a cash basis. Thus, it need report
Medicare reimbursements received as of the close of the fiscal year.
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A number of trusts (those with fiscal years that coincide with the
labor organizations' fiscal years) that are not required to file a Form
5500 or are eligible for a Form 5500 exemption, are required to
generate and deliver financial information to the labor organization(s)
in sufficient time for the labor organization to prepare and file the
Form T-1 within 90 days after the close of the fiscal year. These
trusts will not be faced with the time-consuming task of filing a Form
5500 and will have more resources to devote to providing Form T-1 data.
Thus, the filing deadline, even for this small subset of trusts (those
not required to file the Form 5500 and that have fiscal years
coinciding with the labor organization's), will be reasonable and will
not interfere with the trust's compliance with other non-LMRDA
statutory and regulatory requirements. Further, the Department notes
that the most complex and large labor organizations are required to
compile, and have proven themselves capable of compiling, financial
data for reporting within 90 days after the close of the fiscal year.
The Form T-1 requires less information and information of less
complexity than required of a large labor organization in filing the
Form LM-2.
Regulatory Procedures
Executive Order 12866
This rule has been drafted and reviewed in accordance with
Executive Order 12866, section 1(b), Principles of Regulation. The
Department has determined that this rule is not an ``economically
significant'' regulatory action under section 3(f)(1) of Executive
Order 12866. Based on an analysis of the data, the rule is not likely
to: (1) Have an annual effect on the economy of $100 million or more or
adversely affect in a material way the economy, a sector of the
economy, productivity, competition, jobs, the environment, public
health or safety, or state, local, or tribal governments or
communities; (2) create a serious inconsistency or otherwise interfere
with an action taken or planned by another agency; (3) materially alter
the budgetary impact of entitlements, grants, user fees, or loan
programs or the rights and obligations of recipients thereof, or (4)
raise novel legal or policy issues. As a result, the Department has
concluded that a full economic impact and cost/benefit analysis is not
required for the rule under section 6(a)(3) of the Executive Order.
However, because of its importance to the public, the rule was treated
as a significant regulatory action and was reviewed by the Office of
Management and Budget.
Unfunded Mandates Reform
For purposes of the Unfunded Mandates Reform Act of 1995, this rule
does not include a federal mandate that might result in increased
expenditures by state, local, and tribal governments, or increased
expenditures by the private sector of more than $100 million in any one
year, adjusted by the rate of inflation between 1995 and 2008 ($130.38
million) per 2 U.S.C. 1532(a).
Executive Order 13132 (Federalism)
The Department has reviewed this rule in accordance with Executive
Order 13132 regarding federalism and has determined that the proposed
rule does not have federalism implications. Because the economic
effects under the rule will not be substantial for the reasons noted
above and because the rule has no direct effect on states or their
relationship to the federal government, the rule does not have
``substantial direct effects on the States, on the relationship between
the national government and the States, or on the distribution of power
and responsibilities among the various levels of government.''
Analysis of Costs for Paperwork Reduction Act and Regulatory
Flexibility Act
In order to meet the requirements of the Regulatory Flexibility Act
(RFA), 5 U.S.C. 601 et seq., Executive Order 13272, and the Paperwork
Reduction Act (PRA), 44 U.S.C. 3501 et seq., and the PRA's implementing
regulations, 5 CFR Part 1320, the Department has undertaken an analysis
of the financial burdens to covered labor organizations associated with
complying with the requirements contained in this final rule. The focus
of the RFA and Executive Order 13272 is to ensure that agencies
``review rules to assess and take appropriate account of the potential
impact on small businesses, small governmental jurisdictions, and small
organizations, as provided by the [RFA].'' Executive Order 13272, Sec.
1. The more specific focus of the PRA is ``to reduce, minimize and
control burdens and maximize the practical utility and public benefit
of the information created, collected, disclosed, maintained, used,
shared and disseminated by or for the Federal government.'' 5 CFR
1320.1.
Compliance with the requirements of this rule involve essentially
information recordkeeping and information reporting tasks, and the one-
time, non-recurring expenses associated with modifying information
systems to capture and report the required information. Therefore, the
overall impact to covered labor organizations, and in particular, to
small labor organizations that are the focus of the RFA, is essentially
equivalent to the financial impact to labor organizations assessed for
the purposes of the PRA. As a result, the Department's assessment of
the compliance costs to covered labor organizations for the purposes of
the PRA is used as a basis for the analysis of the impact of those
compliance costs to small entities addressed by the RFA. The
Department's analysis of PRA costs, and the quantitative methods
employed to reach conclusions regarding costs, are presented here
first. The conclusions regarding compliance costs in the PRA analysis
are then employed to assess the impact on small entities for the
purposes of the RFA analysis, which follows.
Paperwork Reduction Act
This statement is prepared in accordance with the Paperwork
Reduction Act of 1995, 44 U.S.C. 3501. As discussed in the preamble,
this rule implements an information collection that meets the
requirements of the PRA in that: (1) The information collection has
practical utility to labor organizations, their members, other members
of the public, and the Department; (2) the rule does not require the
collection of information that is duplicative of other reasonably
accessible information; (3) the provisions reduce to the extent
practicable and appropriate the burden on labor organizations that must
provide the information, including small labor organizations; (4) the
form, instructions, and explanatory information in the preamble are
written in plain language that will be understandable by reporting
labor organizations; (5) the disclosure requirements are implemented in
ways consistent and compatible, to the maximum extent practicable, with
the existing reporting and recordkeeping
[[Page 57437]]
practices of labor organizations that must comply with them; (6) this
preamble informs labor organizations of the reasons that the
information will be collected, the way in which it will be used, the
Department's estimate of the average burden of compliance, the fact
that reporting is mandatory, the fact that all information collected
will be made public, and the fact that they need not respond unless the
form displays a currently valid OMB control number; (7) the Department
has explained its plans for the efficient and effective management and
use of the information to be collected, to enhance its utility to the
Department and the public; (8) the Department has explained why the
method of collecting information is ``appropriate to the purpose for
which the information is to be collected''; and (9) the changes
implemented by this rule make extensive, appropriate use of information
technology ``to reduce burden and improve data quality, agency
efficiency and responsiveness to the public.'' 5 CFR 1320.9; see also
44 U.S.C. 3506(c).
A. Issues Raised in Public Comments Related to the Department's Cost
Estimates
As the Department has done with the final rule, the NPRM employed
the cost conclusions derived in the PRA analysis in order to assess
burdens to small labor organizations for the purposes of the RFA
analysis. As a result, for the most part, the comments received by the
Department on its costs analysis did not indicate whether they were
specifically addressing the PRA analysis, the RFA, or both. Because of
the interrelationship between the analyses, and because the RFA
specifically requires the Department to address comments related to its
burden analysis,\9\ the Department has construed all comments received
regarding its assessment of costs to the regulated community as
comments related to both the PRA and the RFA analysis. Therefore, the
introduction to the PRA analysis below is a complete recitation of the
significant issues raised by the comments, the Department's response
thereto, and changes made to both the PRA and RFA analyses as a result
of those comments.
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\9\ The RFA requires that an agency's final regulatory
flexibility analysis include ``a summary of the significant issues
raised by the public comments in response to the initial regulatory
flexibility analysis, a summary of the assessment of the agency of
such issues, and a statement of any changes made in the proposed
rule as a result of such comments.'' 5 U.S.C. 604(a)(2).
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As noted above, the Department received a number of comments
related to its analysis of the financial costs to covered labor
organizations associated with compliance with this rule. The vast
majority of these comments raised generalized concerns regarding the
Department's conclusions relating to costs of compliance.
Representative of these generalized comments is one from a
representative of approximately 100 jointly sponsored Taft-Hartley
trusts asserting that ``[t]he costs of compliance [stated in the NPRM]
are grossly underestimated. Initially, review of the cost estimates is
necessarily difficult due to the lack of sufficient detail regarding
the reportable items. * * * The estimates * * * significantly under
report the number of hours involved in these complex reporting
obligations.'' In addition to general criticism regarding the
Department's cost estimates, many comments on the subject of costs came
from trusts asserting that the compliance costs will be borne by trusts
rather than labor organizations, the entities with the legal obligation
to file the Form T-1. Representative of these comments was a statement
from a labor organization-sponsored multiemployer benefit fund, which
noted its concern ``about the time and effort that would have to be put
into preparing the information for the union's T-1 filing. [The trusts]
would have to reprogram [their] computer systems, and additional staff
time would be required to complete many of the details. The hours of
time [the Department] suggest[s] would be needed to perform these tasks
[is] significantly underestimate[d].'' A small number of cost-related
comments challenged the rule based on an assessment of compliance costs
as balanced against the benefits of the rule: ``Even a cursory review
of the reporting requirements imposed by the Proposed Rule indicates
that the compliance burden will be significantly greater. The Proposed
Rule does not offer Fund participants and beneficiaries any increased
value in terms of transparency or available information concerning the
Funds beyond that which is already available to participants and
beneficiaries.''
In response to these general comments, the Department notes that
the final cost analysis undertaken in this rule presents a more refined
methodology than was performed in the NPRM, as noted in the discussion
below, which has significantly improved the Department's estimates of
overall costs of compliance with this rule by covered labor
organizations. In addition, in response to those comments that assert
that the Department failed to account for costs borne by trusts in
which a labor organization has a reporting obligation, the Department
has indicated elsewhere in this rule that labor organizations must
reimburse trusts for the trust's costs for implementation and
maintenance of recordkeeping and for information transmission. Thus,
the Department's analysis below expects that while some trusts may
perform some of the recordkeeping and other tasks related to reporting
required by the rule, those costs will ultimately be borne by labor
organizations with the reporting obligations contained in this rule.
Finally, in response to those comments that call for a more traditional
cost-benefit analysis of this rule, the Department notes that neither
the PRA nor the RFA compels such a study.
In addition to the general comments related to cost under-
estimation and burdens on trusts, the Department received more specific
comments containing alternate estimates suggested for inclusion in the
Department's assessment of the costs of compliance. For instance, a
number of commenters stated that it would not be uncommon for even a
modest-sized local labor organization to have multiple T-1 Forms to
file. In addition, comments from trusts and third-party administrators
concurred that they would have to reprogram their reporting and
recordkeeping systems to compile the necessary information for the Form
T-1, and one administrator estimated that it would require
approximately 300 hours to compile the necessary information. A
national pension fund estimated that its programmers would spend 55
hours reprogramming the current system and staff would spend 120 hours
compiling the necessary information. Two commenters estimated that it
would cost, on average, anywhere from $15,000 to $18,147.81 per filer
to comply with the Form T-1 reporting requirements. A third commenter
concluded that compliance costs would fall in a range between $45,000
and $82,500. Most of the alternate calculations offered by commenters
for various data points appeared to be approximations without much, or
any, analysis to support the figures.
One comment was much more substantial, however. This commenter
challenged the methodology used by the Department to arrive at its
conclusions regarding costs, and also offered alternate methodology.
The commenter's methodological objections were adopted by reference in
several other comments. The commenter's critique identifies four
separate but interrelated steps in the Department's analysis of
compliance costs in the
[[Page 57438]]
NPRM, and argues that each step contains methodological errors that
result in serious underestimations of costs. According to the
commenter, the first step--the identification of tasks needed to
complete a Form T-1 and the amount of time each task takes to
complete--is flawed because the Department failed to capture in
sufficient detail all tasks that the Form LM-2 filer and a trust must
complete, failed to specify which person or job classification would
complete the identified tasks, and failed to provide a clear
methodology for how it arrived at the time values needed to accomplish
the identified tasks. In challenging the Department's assumptions as to
these data points, the commenter conducted an on-line survey of section
3(l) trusts, which was responded to by 40 multiemployer plans. Among
other things, the survey asked whether any information required by Form
T-1 was currently tracked by plans, and the approximate number of
receipts, disbursements and payments to officers and employees that
would be reported. A number of plans indicated that they were not
capable of providing the required information on receipts,
disbursements, and payments to officers and employees because they
could not track the name, address, or purpose of the receipt or
disbursement. Of those plans currently capable of reporting the
required Form T-1 information, on average they estimated that in the
first year it would take 54.5 hours to generate receipt information,
56.0 hours to generate disbursement information, and 26.1 hours to
generate the required information on payments to officers and
employees, for an overall total of 136.6 hours to compile required
reportable information. This figure is almost twice (71.7 hours) the
amount of time the Department allocated to costs of reporting and
recordkeeping in the first year. See NPRM, 73 FR 11775, Table 3.
The commenter also found flaws with the Department's data in the
second part of the cost analysis--estimating the number of Form LM-2
filers that have one or more trusts to report. Regarding this piece of
the analysis, the commenter criticized the Department's estimates that
10% of Tier I filers, 25% of Tier II filers, and 100% of Tier III
filers would have trusts to report, and instead relied on actual data
contained in the Form LM-2 reports in the Department's e.LORS
database.\10\ Based on data contained in e.LORS databases from the 2006
Form LM-2 reports, the commenter claimed that 2,279 filers indicated
that they had at least one reportable section 3(l) trust, whereas the
Department's estimates regarding percentages of filers with at least
one reportable trust resulted in a number of filers less than half of
the commenter's figure.
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\10\ As indicated in the NPRM, the Department's analysis
segregated labor organizations into three ``tiers,'' based on size
of annual receipts. Tier I labor organizations are those with annual
receipts between $250,000 and $499,999; Tier II labor organizations
are those with annual receipts between $500,000 and $6.5 million;
and Tier III labor organizations are those with annual receipts over
$6.5 million.
---------------------------------------------------------------------------
The third step in the analysis--estimating the average number of
Form T-1s that would be filed by Form LM-2 filers indicating an
interest in at least one trust--the commenter argued is flawed because
the Department makes ``undocumented assumptions'' about the number of
trusts each Form LM-2 filer would need to report. The NPRM assumed
that, on average, Tier I filers would need to file reports on one
trust, Tier II filers would need to file reports on two trusts, and
Tier III filers would file four reports. NPRM, 73 FR 11774. Rejecting
those assumptions, the commenter instead randomly selected a subset of
118 Form LM-2 filers of the 2,279 filers he found that indicated an
interest in at least one trust based on a search of e.LORS data with
2006 Form LM-2 filing information. Of these 118 randomly selected
filers, the commenter calculated that, on average, Tier I filers
actually reported an interest in two trusts, Tier II filers actually
reported an interest in 3.5 trusts, and Tier III filers actually
reported an interest in 5 trusts. Based on this sample, the commenter
extrapolates the data to conclude that in 2006, 2,279 Form LM-2 filers
had an interest in 7,486 trusts, which is over three times as many Form
T-1 trusts as the Department's NPRM estimates. See NPRM, 73 FR 11774,
Table 2.
Finally, the commenter asserted that the fourth part of the
Department's analysis--estimating the total burden cost--is flawed for
several reasons. First, in assigning a value to the hours undertaken to
complete the Form T-1 filing, the Department used only hourly wage
rates and did not employ total compensation figures, which include
costs associated with health insurance, pension contributions and other
non-wage compensation and which increase wage rates by 30% generally.
Second, the commenter contended that the Department's analysis lacked
specificity in stating which employees in which job categories would
perform the tasks identified as necessary to file the Form T-1. Third,
the commenter stated that the Department's estimates do not consider
the costs of equipment or data transfer, or amounts that trusts may
charge labor organizations for preparing and supplying information
required by the Form T-1. Finally, the commenter argued that the wage
rates employed in the NPRM lack credibility, and he asserted that he
was unable to confirm them because the Department did not indicate
which National Compensation Survey was used in the analysis.\11\
---------------------------------------------------------------------------
\11\ The Department notes that it specifically cited the
National Compensation Survey: Occupational Wages in the United
States, June 2006 (BLS July 2007, p. 5) in the NPRM. See 73 FR 11776
n.17.
---------------------------------------------------------------------------
The Department thoroughly analyzed the commenter's critique of the
methods used in the NPRM to assess costs associated with compliance
with this rule. The commenter's analysis employed several improvements
in the methods used by the Department in the NPRM, and the analysis
provided the Department with insights about revisions that could be
made to the quantitative analysis of compliance costs. However, because
of some fundamental flaws in the commenter's analysis, the Department
declines to adopt the commenter's methods in whole, and, as a result,
declines to adopt the commenter's ultimate conclusions regarding costs
of compliance with this rule. For instance, a sample size of 118 Form
LM-2 filers is insufficient to make generalizations about a population
of 2,279 filers. Nor can a portion of the 118 filers be used to make
generalizations about the individual tiers without accepting a very low
confidence level. Further, the commenter focused on section 3(l) trusts
in general, not trusts for which labor organizations would be required
to file the Form T-1. At least some of the listed section 3(l) trusts
would not meet the financial dominance or control elements of the Form
T-1. At best, the commenter's estimate can be seen as the maximum
possible number of Form T-1s required to be filed by the 118 labor
organizations studied. Therefore, the Department cannot rely on the
commenter's analysis to determine the number of Form T-1s that will be
filed each year. Similarly, while the online survey of trusts provides
an interesting snapshot of multiemployer plans, no general assumptions
can be drawn from 40 self-selected multiemployer plans. This survey,
like all self-selecting surveys, is subject to self-selection bias. In
this case, it is likely that the participants' decision to participate
is correlated with a high number of hours needed to provide the
information to complete the Form T-1, making the participants a non-
representative sample. Further, no general assumptions
[[Page 57439]]
can be made about multiemployer plans or section 3(l) trusts from a
sample size of 40 without accepting a very low confidence level.
Finally, even if the sample size is accepted the information collected
from multiemployer plans cannot be used to make general assumptions
about all section 3(l) trusts. Multiemployer plans are one of the most
complicated types of section 3(l) trusts. One plan can cover hundreds
to thousands of employees working for two or more employers. Therefore,
these trusts will have the greatest number of receipts, disbursements,
and employees. The Department cannot rely on the commenter's analysis
to calculate the estimated burden.
Based upon careful consideration of the commenter's cost estimates
and the methods employed to arrive at cost estimates, the Department
has made adjustments to its quantitative methods and therefore to its
burden estimates. As reflected in the analysis that follows, the
Department has, among other things:
Relied on data reported from Form LM-2 filers in 2006
contained in the Department's e.LORS database to estimate more
accurately the number of Form T-1s that a covered labor organization
may file;
Analyzed a randomly selected, statistically reliable
sample of the 2,292 Form LM-2 filers in 2006 that indicated an interest
in at least one trust in order to better estimate the number of trusts
about which a labor organization may need to file Form T-1s;
Disaggregated the tasks associated with completing the
Form T-1 in a more detailed fashion so that the number of hours
estimated as necessary to prepare the Form T-1 is more accurate; and
Employed a total compensation figure to estimate the costs
to a labor organization in preparation of the Form T-1.\12\
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\12\ The NPRM indicated that the Department's initial PRA
analysis employed wage rate data adjusted to reflect total
compensation. 73 FR 11776. The use of total compensation figures is
more apparent in this final cost analysis because, as noted in the
discussion that follows, wage figures are adjusted upward by a
factor of 30% to account for total compensation, and that upward
adjustment is specifically shown in Table 4 below.
---------------------------------------------------------------------------
As a result of these improvements to the Department's
methodological approach, the estimates of costs to labor organizations
for compliance with this rule have been revised upward.\13\ Those
figures are reported in the analyses that follow.
---------------------------------------------------------------------------
\13\ This upward revision occurred despite the fact that this
final rule reinstated the exemption for section 3(l) trusts that are
required to file a Form 5500 under ERISA. That exemption realized a
reduction in overall compliance costs for covered labor
organizations, but the methodological improvements in the cost
analysis offset those savings.
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Pursuant to the PRA, the information collection requirements
contained in this final rule were submitted to OMB and received
approval on September 29, 2008 under OMB control number (1215-0188).
The approval will expire on September 30, 2011. The Form T-1 and its
instructions, which are modified to reflect the new filing criteria,
are published as an appendix to this final rule.
B. Summary of the Rule: Need and Economic Impact
This final rule implements the Form T-1 Trust Annual Report
required to be filed by the largest labor organizations for trusts in
which they are interested, under conditions prescribed by the Secretary
of Labor. See 29 U.S.C. 402(l); 431(b); 438.
As discussed in the preamble, members have long been denied
important information about labor organization funds that were being
directed to other entities, presumably for the members' benefit, such
as joint funds administered by a labor organization and an employer
pursuant to a collective bargaining agreement, educational or training
institutions, credit unions, and redevelopment or investment groups.
The Form T-1 is necessary to close this gap, prevent certain trusts
from being used to evade the Title II reporting requirements, and
provide labor organization members with information about financial
transactions. Trust reporting is necessary to ensure, as intended by
Congress, the full and comprehensive reporting of a labor
organization's financial condition and operations, including a full
accounting to labor organization members whose work obtained the
payments to the trust. It is also necessary to prevent circumvention
and evasion of the reporting requirements imposed on officers and
employees of labor organizations and on employers.
The form is designed to take advantage of technology that makes it
possible to increase the detail of information that is required to be
reported, while at the same time making it easier to file and publish
the contents of the reports. Labor organization members thus will be
able to obtain a more accurate and complete picture of their labor
organization's financial condition and operations without imposing an
unwarranted burden on respondents. Supporting documentation need not be
submitted with the forms, but labor organizations are required,
pursuant to the LMRDA, to maintain, assemble, and produce such
documentation in the event of an inquiry from a labor organization
member or an audit by an OLMS investigator.
The Department's NPRM in this rulemaking contained an initial PRA
analysis, which was also submitted to OMB. Based upon careful
consideration of comments received regarding the Department's estimate
of costs in the NPRM, the Department made methodological revisions
which resulted in adjustments to its burden estimates in this final
rule. The costs to the Department also were adjusted. Federal
annualized costs are discussed after the burden on the reporting labor
organizations is considered.
Based upon the analysis presented below, the Department estimates
that the total first year burden to comply with Form T-1 will be
423,913.74 hours for all covered labor organizations. The total first
year compliance costs associated with this burden is estimated to be
$15.19 million for all covered labor organizations. Both the burden
hours and the compliance costs associated with Form T-1 decline in
subsequent years. The Department estimates that the total burden
averaged over the first three years for all covered labor organizations
to comply with the Form T-1 to be 345,736.92 hours per year. The total
compliance costs associated with this burden averaged over the first
three years are estimated to be $10.51 million for all covered labor
organizations.\14\
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\14\ The compliance costs for all covered labor organizations
for the first year, and the compliance costs averaged over the first
three years--$15.19 million and $10.51 million, respectively--are
well below the $100,000,000 threshold that would make this rule
economically significant under Executive Order 12866. Therefore, as
noted earlier, the Department has determined that this rule is not
an ``economically significant'' regulatory action under section
3(f)(1) of Executive Order 12866.
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C. Overview of Form T-1
The Form T-1 in this rule is identical to the form promulgated at
73 FR 11779, with the exception of the addition of an item requiring
the reporting of the trust's EIN and the deletion of an item requiring
the listing of the trust's tax status. However, as discussed in the
preamble, the scope of the reporting requirement has been narrowed in
order to conform the rule with the DC Circuit's decision in AFL-CIO v.
Chao, 409 F.3d 377 (2005). This final rule provides that no Form T-1
will be required if the trust files a report pursuant to 26 U.S.C. 527,
or is required to file a Form 5500 pursuant to the requirements of
ERISA (if the trust can elect to exempt itself from filing a Form
[[Page 57440]]
5500 then it must file a Form T-1 regardless of whether it takes the
exemption or not), or if the organization files publicly available
reports with a Federal or state agency as a PAC. Additionally, a labor
organization may substitute an audit that meets the criteria set forth
in the Form T-1 Instructions for the financial information otherwise
reported on a Form T-1.
Form T-1 consists of 15 questions on page 1 that generally identify
the labor organization and trust; five yes/no questions covering issues
such as whether any loss or shortage of funds was discovered during the
reporting year and whether the trust had made any loans to officers or
employees of the labor organizations at terms below market rates; four
summary numbers for total assets, liabilities, receipts, and
disbursements; a schedule for itemizing all receipts of $10,000 or
more, individually or in the aggregate, from any entity or individual;
a schedule for itemizing all disbursements of $10,000 or more,
individually or in the aggregate, to any entity or individual; and a
schedule for listing all officers of the trust and payments to them and
all employees of the trust who received more than $10,000 from the
trust.\15\
---------------------------------------------------------------------------
\15\ The NPRM contained an inadvertent error stating that page 1
of the Form T-1 contained 14 questions and 6 yes/no questions. 73 FR
11773. These errors have been corrected here.
---------------------------------------------------------------------------
Form T-1 and its instructions, which are modified to reflect the
changes made to the proposal, are published as an appendix to this
final rule. A more complete discussion of the form is set forth at
section II.L. of the preamble.
D. Methodology for the Burden Estimates
As an initial matter, it should be noted, as was noted in the NPRM,
that some of the numbers included in both this PRA analysis and the
preceding regulatory flexibility analysis will not add perfectly due to
rounding.
1. Number of Form T-1s Filed
The Department started by determining the population affected by
the Form T-1. Form LM-2 Item 10 asks the reporting labor organization
to indicate whether it created or participated in the administration of
a trust or other fund or organization, as defined in the Form LM-2
instructions, which provides benefits for members or their
beneficiaries. If the labor organization indicates that it did have one
or more section 3(l) trusts, it must list the trusts, including name,
address, and details about the trust, in Form LM-2 Item 69. The
Department determined that 2,292 Form LM-2 filers indicated on their
2006 report that they had at least one section 3(l) trust.
In order to improve the estimates concerning the number of trusts
about which covered labor organizations would be required to provide T-
1 reports, the Department sampled a randomly selected subset of the
2,292 Form LM-2 2006 filers that indicated an interest in at least one
trust. The Department first calculated the appropriate sample size.
Consistent with commonly accepted statistical practices, the Department
determined that a level of precision or sample error of 6%, a
confidence interval of 90%, and a degree of variability of 50% (maximum
variability) was acceptable for the Form T-1 final burden analysis. The
Department concluded that it needed to examine Item 69 on the reports
of 174 of the 2,292 labor organizations to determine the average number
of section 3(l) trusts per Form LM-2 filers that answered Item 10
``Yes,'' indicating that it had at least one section 3(l) trust. The
sample size of 174 LM filers was then increased by 20% to 210, in order
to ensure an appropriate sample size was maintained throughout the
analysis.
To improve estimates of means, the Department used a proportionate
stratified sample, which ensured that neither large nor small labor
organizations were overrepresented in the sample and permitted the
final cost figures to be reported without regard to ``tier'' or size,
as was done with the NPRM. The population was arranged into three
strata based on annual receipts:
Strata I ($250,000-$499,999 receipts): 380 Form LM-2
filers with section 3(l) trusts
Strata II ($500,000-$49.9 mil receipts): 1,863 Form LM-2
filers with section 3(l) trusts
Strata III ($50 mil and higher receipts): 49 Form LM-2
filers with section 3(l) trusts
The proportion of each strata to the population was then
determined:
Strata I ($250,000-$499,999 receipts): 16.58%
Strata II ($500,000-$49.9 mil receipts): 81.28%
Strata III ($50 mil and higher receipts): 2.14%
Finally, the sample size from each strata was drawn proportionately
to its representation in the population:
Strata I ($250,000-$499,999 receipts): 210 x 16.58% = 35
Strata II ($500,000-$49.9 mil receipts): 210 x 81.28% =
171
Strata III ($50 mil and higher receipts): 210 x 2.14% = 4
Each labor organization that answered Form LM-2 Item 10
affirmatively was assigned a random number. A random number generator
was then used to select 35 labor organizations from strata I, 171 labor
organizations from strata II, and 4 labor organizations from strata
III. After a careful analysis of the Form LM-2 of each of those labor
organizations, the Department determined that of the 210 labor
organizations studied, five labor organizations (all from strata II)
were non-responsive, i.e., either they did not list any trusts in Item
69 or the information provided in Item 69 did not accurately indicate
the number of section 3(l) trusts. These five labor organizations were
removed from the sample and the burden analysis proceeded based on the
remaining 205 labor organizations.
Information on each trust listed in Item 69 in the sampled Form LM-
2s, including name, address, EIN, and other information, was entered on
a worksheet. The final worksheet listed 663 trusts, including welfare
benefit plans, building trusts, strike funds, and pension plans. The
information was uploaded and compared to the EBSA database to determine
which of these 663 section 3(l) trusts filed a Form 5500 in either 2004
or 2005. It was determined that 383 or 57.77% filed a Form 5500 in
either 2004 or 2005. A Form T-1 will not have to be filed for these
entities because of the reinstated Form 5500 exemption. Therefore, the
383 trusts that filed Form 5500 were removed from the sample.
It should be noted that inconsistencies in the information reported
in Item 69 in the sampled Form LM-2s made it difficult in some
instances to determine whether a Form 5500 was filed by the trust. Many
of the labor organizations did not include the trust's EIN number.
Others did not provide the necessary detail, including incomplete or
incorrect names, to determine whether or not a Form 5500 was filed by
the trust. The Department surmises that at least some of the remaining
280 trusts filed a Form 5500 in 2006, but cannot calculate the
magnitude of the overlap because of insufficient information on the
Form LM-2s reviewed. Further, the Department cannot determine which of
the section 3(l) trusts meet the financial dominance or managerial
control test based on the limited information in the Form LM-2s.
Therefore, a Form T-1 will not have to be filed for at least some of
the remaining 280 section 3(l) trusts because they do not meet either
of the above tests. As a result, the Form T-1 filing estimate
calculated in this study
[[Page 57441]]
should be seen as a high estimate, if not a maximum.
The Department assumed that the 205 sampled labor organizations
will be required to file a Form T-1 for the remaining 280 trusts.
Therefore, based on the 2006 data, each labor organization that
indicated it had a section 3(l) trust will file, on average, 1.37 Form
T-1s each year after the implementation of this rule:
280 (number of trusts reported by sampled labor organizations)/205
(number of labor organizations in sample) = 1.37 average number of Form
T-1s filed each year by all labor organizations
which, based on extrapolation of the 2006 data, results in the
expectation that a total of 3,130.54 Form T-1s will be filed yearly by
all labor organizations:
1.37 (average number of Form T-1s filed each year per labor
organization) x 2,292 reporting labor organizations = 3,130.54 yearly
Form T-1s.
2. Hours To Complete and File Form T-1: Recurring and Nonrecurring
Reporting and Recordkeeping
The Department estimated burden hours for the nonrecurring (first
year) recordkeeping and reporting requirements, the recurring
recordkeeping and reporting burden hours, and a three-year annual
average for the additional nonrecurring and recurring burden hours
associated with the final rule.\16\
---------------------------------------------------------------------------
\16\ As discussed previously, some labor organizations may
request section 3(1) trusts to provide information needed by labor
organizations to comply with their Form T-1 reporting olbligations.
A labor organization must pay for any expenses incurred by the trust
in providing information to the labor organization or in assisting
with other tasks associated with the Form T-1 requirements.
---------------------------------------------------------------------------
a. Hours To Complete Page 1
The Department estimates that, on average, labor organizations will
expend 1.83 reporting hours each year completing page 1 of the Form T-
1, which is broken out as follows. To complete the first page of the
Form T-1 the labor organization will have to train new staff on the
reporting software, enter trust information, answer Items 9, 14, and
15, provide additional information (if necessary), and sign the report.
Items 1, 2, and 4-8 will be automatically filled by the reporting
software when the Form T-1 is downloaded. The remaining information
provided on the first page of the Form T-1 is very similar to the
information provided on the first page of the Form LM-3 (10 items that
identify the labor organization and one yes/no question addressing
whether or not the organization's records are kept at its mailing
address). Experience with the Form LM-3 has indicated that Form LM-3
filers expend approximately 15 minutes each year training new staff on
how to fill out the first page of the Form LM-3. Additionally, Form LM-
3 filers spend approximately 5 minutes on each item on the Form LM-3.
Therefore, the Department has determined that Form T-1 filers will
spend 50 minutes filling out the trust information and 15 minutes
answering the 3 yes/no questions on page 1. If additional information
is required, the Department has determined that the labor organization
should be able to fill out the address(es) where the records of the
trust and labor organization are maintained in 10 minutes. Finally, the
labor organization president and treasurer will be able to sign the
Form T-1 in 20 minutes once they have reviewed the report. The
president and treasurer will already have the electronic signature
software available for signing the Form LM-2, so in most cases it will
be a matter of a click on the signature field on Form T-1 to apply the
signature.
There is no recordkeeping burden associated with the first page of
the Form T-1, because the labor organization should already keep
records on the labor organization and trusts in which it is interested
to complete the Form LM-2, including the trust's name, address,
purpose, and EIN. Further, neither the trust nor the labor organization
will have to make any changes to their accounting systems to report the
information required on page 1 of the Form T-1.
b. Hours To Complete Page 2
The Department estimates that, on average, labor organizations will
expend 1.33 reporting hours each year completing page 2 of the Form T-
1, broken out as follows. The labor organization will have to train new
staff, answer five questions, enter the total assets, liabilities,
receipts, and disbursements, and enter additional information as
necessary. Like the first page of the Form T-1, the second page is
relatively straightforward. The Department has determined that it will
take, on average, 15 minutes for labor organizations to train staff to
complete the second page of the Form T-1. The majority of the reporting
burden is attributable to Items 16 through 20. Although rare, the types
of losses and transactions captured by Items 16 through 20 are of
significant importance to both labor organizations and trusts. Each of
these losses or transactions should be tracked closely by the trust to
ensure that the trust is properly managed and free from preferential
insider transactions. Therefore, the trust should be able to easily
identify and provide details on any loss or transaction that falls
within Items 16 through 20. The Department has determined that the
trust can provide the labor organization with answers to Items 16
through 20 in 25 minutes, 5 minutes per question. Further, the
Department has determined that the labor organization will spend
approximately 30 minutes entering the required details in Item 25 for
the items that are answered affirmatively. Due to the rare nature of
these transactions, the Departments estimates that, on average, trusts
will have one transaction that must be described in Item 25. Finally,
the Department has determined that it will take 10 minutes to find and
enter the total receipts, disbursements, assets, and liabilities in
Items 21, 22, 23, and 24.
There is no recordkeeping burden associated with the second page of
the Form T-1. The answers to Items 16 through 20 are tracked by the
trust along with receipts and disbursements. Therefore, the
recordkeeping burden associated with Items 16 through 20 has been
included in the recordkeeping burden for the receipts and disbursements
schedules. Further, there is no recordkeeping burden associated with
Items 21 through 24. Information provided in Items 21, total assets,
and 22, total liabilities, are kept in the normal course of the trust's
recordkeeping. Items 23, total receipts, and 24, total disbursements,
are easily accessible from records maintained by the trust in the
regular course of business. There is no recordkeeping burden associated
with Items 23 and 24 as information about receipts and disbursements is
already required for their individual schedules.
c. Hours To Revise Information Systems and Train Personnel To Collect
Required Information
Working from information provided by the trusts labor organizations
will be able to utilize information systems and personnel now used by
labor organizations in fulfilling their Form LM-2 obligations. In 2003,
Form LM-2 filers had to change their accounting systems to capture
information very similar to the information reported on the Form T-1.
Experience with the Form LM-2 indicates that, on average, Form T-1
respondents will expend 5.50 hours on each schedule or 16.51 total
hours changing their accounting systems in the first year (non-
recurring recordkeeping burden) and 4.25 hours
[[Page 57442]]
on each schedule preparing the systems to report the information (non-
recurring reporting burden), including developing, testing, and
reviewing revisions to the accounting software; preparing the download
methodology (converting data into a format for submission to the
Department); and training personnel on each of the schedules.
d. Hours To Complete Receipts, Disbursements, and Officers and
Employees Schedules
The reinstatement of the Form 5500 exemption has significantly
reduced the variability of types of section 3(l) trusts for which the
Form T-1 will need to be filed. A careful analysis of the non-exempt
trusts, used in the analysis above, indicates that many if not most of
the Form T-1s will be filed for building trusts, strike funds, and
apprenticeship and training funds. Unlike pension and health plans,
these trusts, on average, will have few disbursements, receipts,
officers, and employees. For example, strike funds are likely to have
no disbursements unless the labor organization is striking. Further,
many of these trusts, including building trusts, are closely associated
with the labor organization and function in a similar fashion.
Therefore, the Department has estimated the number of disbursements,
receipts, officers, and employees listed on the Form T-1 based on the
2006 Form LM-2 data.
The Department estimates that, on average, Form T-1 filers will
expend 5.43 hours a year on recordkeeping to document the information
necessary to complete the Form T-1 receipts schedule. Based on the
sample outlined above, Form LM-2 filers, on average, itemize 11
receipts on Schedule 14 (other receipts). The remaining receipts are
reported as aggregates in 12 separate categories: dues, per capita tax,
fees, sales of supplies, interest, dividends, rents, sales of
investment and fixed assets, loans, repayment of loans, receipts held
on behalf of affiliates for transmission to them, and receipts from
members for disbursement on their behalf. The average number of
itemized receipts listed on Form LM-2 Schedule 14, 11 itemized
receipts, was multiplied by 10 to capture all itemized receipts on the
Form T-1. The Department did not increase the number of itemized
receipts by 13 because it does not believe trusts will have receipts
from per capita taxes nor will they hold money for members and
affiliates. Therefore, on average, trusts will itemize 109.86 receipts
each year. Experience with the Form LM-2 indicates that a labor
organization can input all the necessary information on an itemized
receipt in 3 minutes. The total number of itemized receipts, 109.86,
was multiplied by 3 minutes to reach the yearly recordkeeping burden,
5.43 hours.
For the Form T-1 disbursement schedule the Department estimates
that, on average, filers will expend 54.13 hours a year on
recordkeeping. The Department estimated the number of itemized
disbursements on the Form T-1 by looking at the Form LM-2 filers in the
original sample. The sample indicated that the average Form LM-2 has
1,083 itemized disbursements. Like receipts, the Department estimates
it will take 3 minutes to input all the necessary information on an
itemized disbursement. The total number of itemized disbursements,
1,083, was multiplied by 3 minutes to reach the yearly recordkeeping
burden, 54.13 hours. Like labor organizations, trusts are primarily
established to provide benefits to members and beneficiaries.
Therefore, it is not surprising that the number of disbursements
greatly exceeds the number of receipts.
The Department estimates Form T-1 filers will expend 10.07 hours on
recordkeeping to compile the information necessary to complete the
officers and employees schedule (Schedule 3). The trust will not have
to increase recordkeeping for officers and key employees. Trusts are
already required to keep records on its officers and key employees for
the IRS Form 990, including name, address, current position, salary,
fees, bonuses, severance payments, deferred compensation, allowances,
and taxable and nontaxable fringe benefits. The filers will have to
begin keeping records on non-key employees. Based on the Form LM-2
sample, the Department determined that Form LM-2 filers have, on
average, 21.57 employees. Trusts, as employers, keep wage records for
each of their employees. However, it is likely that the trusts will not
keep records on each employee's allowances, expenses for official
business, and other disbursements attributed to the employee. The Form
LM-2 sample indicated that most employees did not receive anything in
allowances, disbursements for official business, or other
disbursements. Those that did receive allowances, 33.30%, received, on
average, $6,496.80. Those that did receive disbursements for official
business, 71.89%, received, on average, $10,308.49. Finally, those that
did receive disbursements other than those individually itemized,
5.17%, received, on average, $2,818.05. The Department determined that
the trust would expend 3 minutes on each $10,000 disbursement to
employees. The number of employees, 21.57, was multiplied by the
average number of disbursements and the proportion of employees that
listed each of the disbursements for a total of 10.07 recordkeeping
hours.
e. Hours for Data Input
Finally, the Department estimated that Form T-1 filers will spend
3.75 hours on each schedule inputting the data. Inputting the
information into the Form T-1 is very similar to inputting data into
the Form LM-2. Experience with the Form LM-2 in previous rule makings
indicates that labor organizations will spend 15 minutes a year
training new staff, 60 minutes preparing the download, 90 minutes
preparing and testing the data file, and 60 minutes editing, validating
and importing the data.
f. Total Hours Spent on Recordkeeping and Reporting
As discussed above, and as reflected in the following tables, the
Department estimates that, on average, labor organizations will expend
94.21 hours per Form T-1 filed on recordkeeping the first year and
69.70 hours per Form T-1 filed on recordkeeping each subsequent year on
each Form T-1 filed. Additionally, on average, labor organizations will
expend 41.20 hours per Form T-1 filed on reporting the first year and
28.28 hours per Form T-1 filed on reporting each subsequent year on
each Form T-1 filed.
[[Page 57443]]
Table 1--Non-Recurring Burden in Minutes per form T-1 Filed
--------------------------------------------------------------------------------------------------------------------------------------------------------
Non-recurring burden per form T-1 filed
---------------------------------------------------------------------------
Recordkeeping Reporting burden
burden ------------------------------------------------------------ Total non-
Schedule Schedule or item description --------------- Document recurring
Design Develop Test Mgmt. the Train burden
Change acct. report query query review query staff
structure process
--------------------------------------------------------------------------------------------------------------------------------------------------------
Page 1........................... General Trust Identifying 0 0 0 0 0 0 0 0
Information.
Page 2........................... Items 16 through 24......... 0 0 0 0 0 0 0 0
1.............................. Individually Identified 330.27 60 60 45 30 45 15 585.27
Receipts.
2.............................. Individually Identified 330.27 60 60 45 30 45 15 585.27
Disbursements.
3.............................. Disbursements to Officers 330.27 60 60 45 30 45 15 585.27
and Employees of the Trust.
--------------------------------------------------------------------------------------------------------------------------------------------------------
Total Non-Recurring Burden per Form T-1 Filed.............. 990.82 180 180 135 90 135 45 1,755.82
======================================================================================================================
Total Non-Recurring Burden Hours per Form T-1 Filed........ 16.51 3.00 3.00 2.25 1.50 2.25 0.75 29.26
--------------------------------------------------------------------------------------------------------------------------------------------------------
Table 2--Recurring Recordkeeping Burden in Minutes per Form T-1 Filed
------------------------------------------------------------------------
Recurring
Schedule or item recordkeeping
Schedule description burden per Form
T-1 filed
------------------------------------------------------------------------
Page 1.................... General Trust Identifying 0
Information.
Page 2.................... Items 16 through 24....... 0
1..................... Individually Identified 329.57
Receipts.
2..................... Individually Identified 3,247.93
Disbursements.
3..................... Disbursements to Officers 604.4285714
and Employees of the
Trust.
------------------------------------------------------------------------
Total Recurring Burden per Form T-1 Filed......... 4,181.93
=============================================
Total Recurring Burden Hours per Form T-1 Filed... 69.70
------------------------------------------------------------------------
Table 3--Recurring Reporting Burden in Minutes per form T-1 Filed
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
Recurring reporting burden per form T-1 filed
------------------------------------------------------------------------------------------------------------
Fill in Total
Schedule Schedule or item description Train Preparation Edit/ Fill out assets, recurring
new Prepare of test/ validate/ trust/labor Answer liabilities, Additional Signature reporting
staff download data file import organization questions disbursements, information burden
data file information and receipts
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
Page 1................................ General Trust Identifying 15 0 0 0 50 15 0 10 20 110
Information.
Page 2................................ Items 16 through 24.............. 15 0 0 0 0 25 10 30 0 80
1................................... Individually Identified Receipts. 15 60 90 60 0 0 0 0 0 225
2................................... Individually Identified 15 60 90 60 0 0 0 0 0 225
Disbursements.
3................................... Disbursements to Officers and 15 60 90 60 0 0 0 0 0 225
Employees of the Trust.
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
Total Recurring Burden per Form T-1 Filed............................ 75 180 270 180 50 40 10 40 20 865
=========================================================================================================================================================
Total Recurring Burden Hours per Form T-1 Filed...................... 1.25 3.00 4.50 3.00 0.83 0.67 0.17 0.67 0.33 14.42
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
3. Cost of Personnel To Complete and File Form T-1
The Department assumes that, on average, the completion by a labor
organization of Form T-1 will involve an accountant/auditor, computer
software engineer, bookkeeper/clerk, labor organization president and
labor organization treasurer. Based on the 2007 BLS wage data,
accountants earn $30.37 per hour, computer engineers earn $41.18 per
hour, and bookkeepers/clerks earn $15.76 per hour.\17\ BLS has
estimated that the total compensation cost is approximately 30.2%
higher than wages. Therefore, the Department adjusted each of the BLS
salaries to include the additional 30.2% attributed to benefits to
estimate the total compensation cost for each of the individuals
involved in completing the Form T-1.
---------------------------------------------------------------------------
\17\ The wage and salary data is based on information contained
in Bureau of Labor Statistics, Occupational Employment Statistics
Survey, 2007.
---------------------------------------------------------------------------
The Department estimated the average annual salaries of labor
organization officers needed to complete tasks for compliance with this
rule--the president and treasurer--from responses to salary inquiries
contained in the sample of 205 labor organizations that filed a Form
LM-2 in 2006 and indicated an interest in at least one section 3(l)
trust, as discussed above. See, supra, section D.1. These average
annual salary figures were then adjusted to include the additional
30.2% attributed to benefits to reflect total
[[Page 57444]]
compensation cost for each officer, which the Department calculated as
$35.66 per hour for labor organization president and $45.24 per hour
for labor organization treasurer.\18\
---------------------------------------------------------------------------
\18\ The study determined that labor organization presidents
make $24.89 an hour. The Department knows that 69.8% of compensation
cost is attributed to salary and 30.2% of compensation cost is
attributed to benefits. Salary = 69.8% (Compensation Cost) or
Compensation Cost = Salary/69.8%. If we apply the preceding equation
to the president's salary we come up with a compensation cost of
$35.66 (35.66 = 24.89/.698). The same equation was used to calculate
compensation cost for accountants, computer software engineers,
bookkeepers, and treasurers.
Table 4--Compensation Cost Table
----------------------------------------------------------------------------------------------------------------
Compensation
Title Salary: hourly Salary: yearly cost: hourly
----------------------------------------------------------------------------------------------------------------
Accountants/Auditors...................................... $30.37 $63,180.00 $43.51
Computer software engineers, applications................. 41.18 85,660.00 59.00
Bookkeepers/Clerks........................................ 15.76 32,780.00 22.58
President................................................. 24.89 51,770.35 35.66
Treasurer................................................. 31.58 65,680.48 45.24
----------------------------------------------------------------------------------------------------------------
Once the compensation costs were calculated, the Department applied
those costs to each of the Form T-1 tasks computed in the previous
section. Each task was evaluated separately to determine which
individual from a particular job category would be needed to complete
the task. For instance, as indicated above, the Department determined
that trusts will expend 16.51 hours changing their accounting
structure. As part of that total, an accountant will spend
approximately 3.3 hours of the total 16.51 hours, or 20 percent of the
time allotted for this task, updating and changing the accounting
structure. The remaining 12.21 burden hours, 80 percent of the total
time allotted for this task, will be completed by a computer software
engineer. The computer software engineer will have to write the program
to track and accept accounting entries specific to the reporting
requirements of the Form T-1, i.e., itemization of all receipts and
disbursements over $10,000 including name, address, and purpose of
receipt or disbursement.
As demonstrated by this example, all tasks identified by the
Department above as necessary for compliance with the requirements of
this rule were analyzed to determine which personnel would conduct
those tasks. The following table presents this analysis of which
personnel are needed to perform each task, and the hours that such
personnel will spend completing each task.
Table 5--Cost by Task
----------------------------------------------------------------------------------------------------------------
Individual(s) Hours to
Burden type Task participating Hourly cost complete Total cost
----------------------------------------------------------------------------------------------------------------
Non-Recurring Recordkeeping..... Install/Setup Computer Software $59.00 8.00 $471.98
Hardware. Engineer.
Non-Recurring Recordkeeping..... Change Acct. Computer Software 55.90 16.51 923.11
Structure. Engineer and
Accountant.
Non-Recurring Reporting......... Obtain Trust Number Bookkeeper........ 22.58 0.17 3.76
Non-Recurring Reporting......... Design Report...... Computer Software 51.25 3.00 153.76
Engineer and
Accountant.
Non-Recurring Reporting......... Develop Query...... Computer Software 55.90 3.00 167.70
Engineer and
Accountant.
Non-Recurring Reporting......... Test Query......... Computer Software 54.08 2.25 121.68
Engineer,
Bookkeeper, and
Accountant.
Non-Recurring Reporting......... Mgmt. Review....... Treasurer......... 45.24 1.50 67.86
Non-Recurring Reporting......... Document the Query Bookkeeper........ 22.58 2.25 50.80
Process.
Non-Recurring Reporting......... Train Staff........ Computer Software 41.70 0.75 31.27
Engineer,
Bookkeeper, and
Accountant.
Recurring Recordkeeping......... Input Records...... Bookkeeper........ 22.58 69.70 1,573.72
Recurring Reporting............. Train New Staff.... Computer Software 41.70 1.25 52.12
Engineer,
Bookkeeper, and
Accountant.
Recurring Reporting............. Information on Form Accountant........ 43.51 2.40 104.42
T-1 Provided to
Trust.
Recurring Reporting............. Review Form T-1 and Computer Software 51.25 4.30 220.39
Instructions. Engineer and
Accountant.
Recurring Reporting............. Review by Trust.... Accountant........ 43.51 2.00 87.02
Recurring Reporting............. Form/Information Bookkeeper........ 22.58 1.00 22.58
Sent to Labor
Organization.
Recurring Reporting............. Obtain Pre-Filled Bookkeeper........ 22.58 0.17 3.76
Form T-1.
Recurring Reporting............. Prepare Download... Bookkeeper........ 22.58 3.00 67.74
Recurring Reporting............. Preparation of Test/ Accountant and 26.77 4.50 120.44
Data File. Bookkeeper.
Recurring Reporting............. Edit/Validate/ Accountant and 26.77 3.00 80.30
Import Data File. Bookkeeper.
Recurring Reporting............. Fill Out Trust/ Accountant........ 43.51 0.83 36.26
Labor Organization
Information.
Recurring Reporting............. Answer Questions... Accountant........ 43.51 0.67 29.01
Recurring Reporting............. Fill In Assets and Accountant........ 43.51 0.17 7.25
Liabilities.
Recurring Reporting............. Fill Additional Accountant........ 43.51 0.67 29.01
Information.
Recurring Reporting............. Management Review.. President and 40.45 4.00 161.80
Treasurer.
[[Page 57445]]
Recurring Reporting............. Signature.......... President and 40.45 0.33 13.48
Treasurer.
----------------------------------------------------------------------------------------------------------------
Total Non-Recurring Recordkeeping and Reporting................................... 37.43 1,991.92
===============================================================================
Total Recurring Recordkeeping and Reporting Burden................................ 97.98 2,609.29
----------------------------------------------------------------------------------------------------------------
4. Calculation of Total Costs to Labor Organizations Filing a Form T-1
Based on the analysis reflected in the table above, the average
cost per Form T-1 filed is estimated at $4,851.20 in the first year and
$2,609.29 in each subsequent year. The total cost for all Form T-1s
filed is estimated at $15,186,874.46 in the first year and
$8,168,474.74 in each subsequent year. The Department believes that
most of the section 3(l) trusts covered by the Form T-1 will have the
necessary hardware to compile the information required by the Form T-1
and provide it to the labor organization(s). However, some of the
smallest plans might choose to upgrade their systems. Therefore, the
Department has included in these final figures a one-time cost of $250
in the burden analysis to account for any hardware or software
purchases. These results are reflected in the table below.
Table 6--Reporting and Recordkeeping Burden Hours and Costs for T-1
--------------------------------------------------------------------------------------------------------------------------------------------------------
Total
Number of Reporting Total Recordkeeping Total burden Total Average
Form form T-1s hours per reporting hours per recordkeeping hours per burden cost per Total cost
filed form T-1 hours form T-1 hours form T-1 hours form T-1
filed filed filed
--------------------------------------------------------------------------------------------------------------------------------------------------------
Form T-1:
First Year.................... 3,130.54 41.20 128,978.11 94.21 294,935.64 135.41 423,913.74 $4,851.20 $15,186,874.46
Second Year................... 3,130.54 28.28 88,542.01 69.70 218,194.92 97.98 306,736.92 2,609.29 8,168,474.74
Third Year.................... 3,130.54 28.28 88,542.01 69.70 218,194.92 97.98 306,736.92 2,609.29 8,168,474.74
---------------------------------------------------------------------------------------------------------------------
Three Year Average................ 3,130.54 32.59 102,020.71 77.87 243,775.16 110.46 345,795.86 3,356.59 10,507,941.31
--------------------------------------------------------------------------------------------------------------------------------------------------------
Final Regulatory Flexibility Analysis
The Department's NPRM in this rulemaking contained initial
Regulatory Flexibility Act and Paperwork Reduction Act analyses. As
noted above in the introduction to the Department's PRA analysis,
because of the overlapping nature of costs for the purposes of both the
RFA and PRA analyses, the Department construed all comments received
related to the Department's assessment of costs to the regulated
community as comments addressing both the PRA and the RFA analyses. The
Department's discussion of significant issues raised in comments
related to cost estimates, the agency's response thereto, and
adjustments made to the methodology as a result of comments is found in
the PRA section of this preamble. See, supra, Paperwork Reduction Act,
Sec. A. As explained in that section, based upon careful consideration
of the comments, the Department made significant adjustments to the
methodology employed to assess costs, and those adjustments resulted in
modifications to conclusions on costs, which have been employed in the
following final RFA analysis. Thus, the statutory requirement that the
Department provide in its final RFA analysis ``a summary of the
significant issues raised by the public comments in response to the
initial regulatory flexibility analysis, a summary of the assessment of
the agency of such issues, and a statement of any changes made in the
proposed rule as a result of such comments[,]'' 5 U.S.C. 604(a)(2), has
been satisfied. Moreover, the Department received no comments
addressing or challenging the specific conclusion in the NPRM that the
rule does not have a significant economic impact on a substantial
number of small entities.
The Regulatory Flexibility Act of 1980 (RFA), 5 U.S.C. 601 et seq.,
requires agencies to consider the impact of their regulatory proposals
on small entities, analyze effective alternatives that minimize small
entity impacts, and make initial analyses available for public comment.
5 U.S.C. 603, 604. If an agency determines that its rule will not have
a significant economic impact on a substantial number of small
entities, it must certify that conclusion to the Small Business
Administration (SBA). 5 U.S.C. 605(b).
In the 2003 and 2006 Form T-1 rules, the Department undertook
regulatory flexibility analyses, utilizing the SBA's ``small business''
standard for ``Labor Unions and Similar Labor Organizations.''
Specifically, the Department used the $5 million standard established
in 2000 (as updated in 2005 to $6.5 million) for purposes of its
regulatory flexibility analyses. See 65 FR 30836 (May 15, 2000); 70 FR
72577 (Dec. 6, 2005). This same standard has been used for the
Department's regulatory flexibility analysis in this rule.
The Department recognizes that the SBA has not established fixed
financial thresholds for ``organizations,'' as distinct from other
entities. See A Guide for Government Agencies: How to Comply with the
Regulatory Flexibility Act, Office of Advocacy, U.S. Small Business
Administration at 12-13, available at http://www.sba.gov. The
Department further recognizes that under SBA guidelines, the
relationship of an entity to a larger entity with greater receipts is a
factor to be considered in determining the necessity of conducting a
regulatory flexibility analysis. In this regard, the affiliation
between a local labor organization and a national or international
labor organization, a widespread practice among labor organizations
subject to the LMRDA, presents a unique circumstance in determining
whether and, if so, how, receipts of labor organizations should be
aggregated, if at all, in assessing whether a regulatory flexibility
analysis is required and how it should be conducted. The Department has
concluded, however, that it would be inappropriate, given the past
rulemaking concerning the Form T-1 and the Form LM-2, to depart from
the
[[Page 57446]]
$6.5 million receipts standard in preparing this regulatory flexibility
analysis.
All numbers used in this analysis are based on 2006 data taken from
the Office of Labor-Management Standards e.LORS database, which
contains data from annual financial reports filed by labor
organizations with the Department pursuant to the LMRDA, and BLS wage
data.
1. Statement of the Need for, and Objectives of, the Rule
The following is a summary of the need for and objectives of the
rule. A more complete discussion is found in the preamble.
The objective of this rule is to increase the transparency of labor
organization financial reporting by creating a new form for labor
organization trust reporting (Form T-1) to enable members to be
responsible, informed, and effective participants in the governance of
their labor organizations; discourage embezzlement and financial
mismanagement; prevent the circumvention or evasion of the statutory
reporting requirements; and strengthen the effective and efficient
enforcement of the LMRDA by the Department. The Form T-1 is designed to
close a reporting gap where labor organization finances in relation to
LMRDA section 3(l) trusts were not disclosed to members, the public, or
the Department.
One of the LMRDA's primary reporting obligations (Forms LM-2, LM-3,
and LM-4) applies to labor organizations, as institutions; other
important reporting obligations apply to officers and employees of
labor organizations (Form LM-30), requiring them to report any
conflicts or potential conflicts between their personal financial
interests and the duty they owe to the labor organization they serve,
and to employers who must report payments to labor organizations and
their representatives (Form LM-10). See 29 U.S.C. 432, 433. Requiring
labor organizations to report the information required by the Form T-1
provides an essential check for labor organization members and the
Department to ensure that labor organizations, labor organization
officials, and employers are accurately and completely fulfilling their
reporting duties under the Act, obligations that can easily be ignored
without fear of detection if reports relating to trusts are not
required.
Under the Department's former LM-2 rule (superseded by the revised
2003 Form LM-2), a reporting obligation concerning section 3(l) trusts
would arise only if the trust was a ``subsidiary'' of the reporting
labor organization and met other requirements previously set by the
Department. See Form LM-2 instructions in effect prior to the 2003
final rule; see also 68 FR 58413. Thus, the former LM-2 rule, which was
crafted shortly after the Act's enactment, required reporting by only a
portion of the labor organizations that contributed to section 3(l)
trusts. During the intervening decades, the financial activities of
individuals and organizations have increased exponentially in scope,
complexity, and interdependence. 67 FR 79280-81. For example, many
labor organizations manage benefit plans for their members, maintain
close business relationships with financial service providers such as
insurance companies and investment firms, operate revenue-producing
subsidiaries, and participate in foundations and charitable activities.
67 FR 79280. The complexity of labor organization financial practices,
including business relationships with outside firms and vendors,
increases the likelihood that labor organization officers and employees
may have interests in, or receive income from, these businesses. As
more labor organizations conduct their financial activities through
sophisticated trusts, increased numbers of businesses have commercial
relationships with such trusts, creating financial opportunities for
labor organization officers and employees who may operate, receive
income from, or hold an interest in such businesses. In addition,
employers also have fostered multi-faceted business interests, creating
further opportunities for financial relationships between labor
organizations, labor organization officials, employers, and other
entities, including section 3(l) trusts.
Such trusts ``pose the same transparency challenges as `off-the-
books' accounting procedures in the corporate setting: Large scale,
potentially unattractive financial transactions can be shielded from
public disclosure and accountability through artificial structures,
classification and organizations.'' 67 FR 79282. The Department's
former rule required labor organizations to report on only a subset of
such trusts. This approach allowed a gap in the reporting of financial
information concerning these trusts. The trust funds, if they had been
retained by the labor organization, would have appeared on the labor
organization's Form LM-2. Despite the close relationship between the
labor organization and the trust and the purpose of the funds to
benefit the members of the labor organization, transparency ended once
the funds left the labor organization and thereby limited
accountability. Thus, Form T-1 will essentially follow labor
organization funds that remain in closely connected trusts, but which
would otherwise go unreported. As a result of non-disclosure of these
funds, members have long been denied important information about labor
organization funds that were being directed to other entities,
presumably for the members' benefit, such as joint trusts administered
by a labor organization and an employer pursuant to a collective
bargaining agreement, educational or training institutions, credit
unions, and redevelopment or investment groups. See 67 FR 79285.
The Form T-1 is necessary to close this gap, and to prevent certain
trusts from being used to evade the Title II reporting requirements.
The Form T-1 will identify the trust's significant vendors and service
providers. A labor organization member who is aware that a labor
organization official has a financial relationship with one or more of
these businesses will be able to determine whether the business and the
labor organization official have made required reports. The purpose of
the LMRDA disclosure requirements is to prevent financial malfeasance
of labor organization money. 67 FR 79282-83. This purpose is
demonstrably frustrated when existing reporting obligations fail to
disclose, for example, opportunities for fraud. (Examples of situations
where money in section 3(l) trusts was being used to circumvent or
evade the reporting requirements can be found in the preamble and at 67
FR 79283.)
As explained in the preamble, additional trust reporting is
necessary to ensure, as intended by Congress, the full and
comprehensive reporting of a labor organization's financial condition
and operations, including a full accounting to labor organization
members from whose work the payments were earned. 67 FR 79282-83. This
final rule will prevent circumvention and evasion of these reporting
requirements by providing labor organization members with financial
information concerning their labor organization's trusts when the labor
organization, alone or in combination with other labor organizations,
selects the majority of the directors or provides the majority of the
trust's receipts.
2. Legal Basis for Rule
The legal authority for this final rule is section 208 of the
LMRDA. Section 208 provides that the Secretary of Labor shall have
authority to issue, amend, and rescind rules and regulations
[[Page 57447]]
prescribing the form and publication of reports required to be filed
under title II of the Act, including rules prescribing reports
concerning trusts in which a labor organization is interested, and such
other reasonable rules and regulations as she may find necessary to
prevent the circumvention or evasion of the reporting requirements.
Section 3(l) of the Act, 29 U.S.C. 402(l), defines a ``trust in which a
labor organization is interested.''
3. Number of Small Entities Covered Under the Rule
The e.LORS database shows that 4,452 labor organizations filed the
Form LM-2 in 2006. Based on an analysis of annual receipts reported by
Form LM-2 filers in 2006, the Department estimates that of the 4,452
labor organizations subject to this rule, 4,228 of these, or 94.96
percent of all Form LM-2 filers, have receipts less than $6.5 million,
the SBA small business size standard for ``Labor Unions and Similar
Labor Organizations.'' These labor organizations have annual average
receipts of $1.3 million. Based on e.LORS data, the Department has
determined that only 2,009 of these 4,228 labor organizations have an
interest in a section 3(l) trust and will have to file Form T-1
reports. The Department estimates that these organizations will file
approximately 2,752.33 reports annually (on average about 1.37 reports
per labor organization). See PRA analysis, supra.
The affiliation among labor organizations may have an impact on the
number of organizations that should be counted as ``small
organizations'' under section 601(4) of the RFA, 5 U.S.C. 601(4).
Section 601(4) provides in part: ``The term `small organization' means
any not-for-profit enterprise which is independently owned and operated
and is not dominant in its field.'' However, for purposes of analysis
here and for ready comparison with the RFA analyses in its earlier Form
T-1 rulemakings, the Department has used the $6.5 million receipts test
for ``small businesses,'' rather than the ``independently owned and
operated and not dominant'' test for ``small organizations.''
Application of the latter test likely would reduce the number of labor
organizations that would be counted as small entities under the RFA.
4. Relevant Federal Requirements Duplicating, Overlapping or
Conflicting With the Rule
To the extent that there are federal rules that duplicate, overlap,
or conflict with this rule, some specific exemptions from the
requirements of this rule have been provided. First, no Form T-1 need
be filed for a trust that is required to file a Form 5500 with EBSA. In
addition, no Form T-1 must be filed for a trust that is covered by the
Federal Employees Health Benefits Act, 5 U.S.C. 8901 et seq. Finally, a
labor organization is not required to report a Political Action
Committee (PAC) fund, if publicly available reports on the PAC's funds
are filed with federal or state agencies, nor must a labor organization
file a Form T-1 for a political organization for which reports are
filed with the IRS under 26 U.S.C. 527.
5. Differing Compliance or Reporting Requirements for Small Entities
Under the rule, the reporting, recordkeeping, and other compliance
requirements apply equally to all labor organizations that are required
to file a Form T-1 under the LMRDA.
6. Clarification, Consolidation and Simplification of Compliance and
Reporting Requirements for Small Entities
OLMS has updated the e.LORS system to allow labor organizations to
file Form T-1 as they file Form LM-2. Under the rule, labor
organizations are directed to use an electronic reporting format to
maintain financial information. This information can then be
electronically compiled in the proper format for electronic filing.
OLMS will provide compliance assistance for any questions or
difficulties that may arise from using the reporting software. A toll-
free help desk is staffed during normal business hours and can be
reached by telephone at 1-866-401-1109.
The use of electronic forms makes it possible to download
information from previously filed reports directly into the form;
enables officer and employee information to be imported onto the form;
makes it easier to enter information; and automatically performs
calculations and checks for typographical and mathematical errors and
other discrepancies, which reduces the likelihood of having to file an
amended report. The error summaries provided by the software, combined
with the speed and ease of electronic filing, will also make it easier
for both the reporting labor organization and OLMS to identify errors
in both current and previously filed reports and to file amended
reports to correct them.
7. The Use of Performance Rather Than Design Standards
The Department considered a number of alternatives to the rule that
could minimize the impact on small entities. One alternative would be
not to create a Form T-1. As stated above, this alternative was
rejected because OLMS case files and experience demonstrate that the
goals of the Act are not being met with regard to the finances of labor
organizations held in section 3(l) trusts. As explained further in the
preamble, labor organization members have no information on their labor
organization's section 3(l) trusts. Labor organization members need
this information to make informed decisions on labor organization
governance.
Another alternative would be to limit the proposed reporting
requirements to national and international parent labor organizations.
However, the Department has concluded that such a limitation would
eliminate the availability of meaningful information from local and
intermediate labor organizations, which may have a far greater impact
on and relevance to labor organization members, particularly since such
lower levels of labor organizations generally set and collect dues and
provide representational and other services for their members. Such a
limitation would reduce the utility of the information to a significant
number of labor organization members. Of the estimated 4,452 labor
organizations subject to Form T-1 filing requirements under the
proposal, just 101 are national and international labor organizations.
Requiring only national and international organizations to file Form T-
1 would not effectively increase labor organization transparency nor
provide any deterrent to fraud and embezzlement by local and regional
officials.
Another alternative would be to propose a phase-in of the effective
date of the Form T-1, which would provide some labor organizations
additional time to modify their recordkeeping systems in order to
comply with the new reporting requirement. The Department has
concluded, however, that the rule allows all Form T-1 filers sufficient
time to adapt to the disclosure requirements and make any necessary
adjustments to their recordkeeping and reporting systems. OLMS also
plans to provide compliance assistance to any labor organization or
section 3(l) trust that requests it. The Department believes it has
minimized the economic impact of the form on small labor organizations
to the extent possible while recognizing members' and the Department's
need for information to protect the rights of labor organization
members under the LMRDA.
[[Page 57448]]
8. Reporting, Recording and Other Compliance Requirements of the Rule
\19\
---------------------------------------------------------------------------
\19\ The estimated burden on labor organizations is discussed in
detail in the section concerning the Paperwork Reduction Act, supra.
The figures discussed in the text are derived from the figures
explained in that section.
---------------------------------------------------------------------------
This analysis only considers labor organizations with annual
receipts between $250,000 and $6.5 million. Labor organizations with
less than $250,000 in annual receipts are not required to file the Form
T-1 and those with annual receipts greater than $6.5 million are
outside the coverage of the Regulatory Flexibility Act. This rule is
not expected to have a significant economic impact on a substantial
number of small entities. The LMRDA is primarily a reporting and
disclosure statute. Accordingly, the primary economic impact of the
final rule will be the cost of obtaining and reporting required
information.
Because the Form T-1 requires the provision of the same trust
information regardless of the size of the reporting labor organization,
the burden for completing and filing each Form T-1 is the same
regardless of the size of the labor organization. In 2006, there were
380 labor organizations with annual receipts between $250,000 and
$499,999 who indicated on their Form LM-2 that they were interested in
at least one section 3(l) trust. As explained above, these labor
organizations will spend, on average, $4,851.20 in the first year per
Form T-1 filed, or, on average for all labor organizations in this
group, 1.35% of its annual receipts. The cost per Form T-1 filed in
each subsequent year will drop to $2,609.29 or, on average for all
labor organizations in this group, 0.72% of its annual receipts.
The Department has determined that the impact on the 1,629 labor
organizations with annual receipts between $500,000 and $6,500,000 that
indicated that they were interested in at least one section 3(l) trust
will be significantly smaller than the impact on labor organizations
with between $250,000 and $499,999 in annual receipts. Like the smaller
labor organizations, these labor organizations will spend, on average,
$4,851.20 in the first year per Form T-1 filed and $2,609.29 each
subsequent year. However, these costs will only require the labor
organization to spend, on average for all labor organizations in this
group, 0.28% of its annual receipts in the first year and, on average
for all labor organizations in this group, 0.15% of its annual receipts
in the second year.
Table 7--Summary of T-1 Regulatory Flexibility Analysis
------------------------------------------------------------------------
Total burden
For labor organizations that meet the hours per Total cost per
SBA small entities standard respondent per respondent per
T-1 filed T-1 filed
------------------------------------------------------------------------
First Year Cost of Form T-1:
For Labor Organizations with 135.41 $4,851.20
$250,000 to $499,999 in Annual
Receipts...........................
Percent of Average Annual Receipts.. n.a. 1.35%
Second Year Cost of Form T-1:
For Labor Organizations with 97.98 2,609.29
$250,000 to $499,999 in Annual
Receipts...........................
Percent of Average Annual Receipts.. n.a. 0.72%
Percentage Reduction in Cost From n.a. 46.21%
Previous Year......................
First Year Cost of Form T-1:
For Labor Organizations with 135.41 4,851.20
$500,000 to $6,500,000 in Annual
Receipts...........................
Percent of Average Annual Receipts.. n.a. 0.28%
Second Year Cost of Form T-1:
For Labor Organizations with 97.98 2,609.29
$500,000 to $6,500,000 in Annual
Receipts...........................
Percent of Average Annual Receipts.. n.a. 0.15%
Percentage Reduction in Cost From n.a. 46.21%
Previous Year......................
------------------------------------------------------------------------
9. Conclusion
The Regulatory Flexibility Act does not define either ``significant
economic impact'' or ``substantial'' as it relates to the number of
regulated entities. 5 U.S.C. 601. In the absence of specific
definitions, ``what is `significant' or `substantial' will vary
depending on the problem that needs to be addressed, the rule's
requirements, and the preliminary assessment of the rule's impact.'' A
Guide for Government Agencies, supra, at 17. As to economic impact, one
important indicator is the cost of compliance in relation to revenue of
the entity. Id.
In this case, as shown in the table above, the Department has
determined that the costs of compliance with this rule in the first
year will consist of between 0.28% and 1.35% of the revenue of all
small labor organizations, those with annual receipts between $250,000
and $6.5 million. In the subsequent years, compliance costs for those
labor organizations will be between 0.15% and 0.72% of their annual
receipts. The Department concludes that this economic impact is not
significant. As to the number of labor organizations affected by this
rule, the Department has determined by examining e.LORS data that in
2006, the Department received 4,228 Form LM-2s from labor organizations
with receipts between $250,000 and $6,500,000, or just 17.6% of the
24,065 labor organizations that must file any of the annual financial
reports required under the LMRDA (Forms LM-2, LM-3, or LM-4). The
Department concludes that the rule does not impact a substantial number
of small entities. Therefore, under 5 U.S.C. 605, the Department
concludes that the final rule will not have a significant economic
impact on a substantial number of small entities.
Electronic Filing of Forms and Availability of Collected Data
Appropriate information technology is used to reduce burden and
improve efficiency and responsiveness. The current forms can be
downloaded from the OLMS Web site. OLMS has also implemented a system
to require Form LM-2 and Form T-1 filers and permit Form LM-3 and Form
LM-4 filers to submit forms electronically with digital signatures.
Labor organizations are currently required to pay a minimal fee to
obtain electronic signature capability for the two officers who sign
the form.
The OLMS Internet Disclosure site at http://www.unionreports.gov is
available for public use. The site contains a copy of each labor
[[Page 57449]]
organization's annual financial report for reporting year 2000 and
thereafter as well as an indexed computer database on the information
in each report that is searchable through the Internet. Form T-1
filings will be available on the Web site.
OLMS includes e.LORS information in its outreach program, including
compliance assistance information on the OLMS Web site, individual
guidance provided through responses to e-mail, written, or telephone
inquiries, and formal group sessions conducted for labor organization
officials regarding compliance.
Information about this system can be obtained on the OLMS Web site
at http://www.olms.dol.gov. Digital signatures ensure the authenticity
of the reports.
List of Subjects in 29 CFR Part 403
Labor unions, Trusts, Reporting and recordkeeping requirements.
Text of Rule
0
Accordingly, the Department amends part 403 of 29 CFR Chapter IV as set
forth below:
PART 403--LABOR ORGANIZATION ANNUAL FINANCIAL REPORTS
0
1. The authority citation for part 403 is revised to read as follows:
Authority: Labor-Management Reporting and Disclosure Act Secs.
202, 207, 208, 73 Stat. 525, 529 (29 U.S.C. 432, 437, 438);
Secretary's Order No. 4-2007, May 2, 2007, 72 FR 26159.
0
2. In Sec. 403.2, paragraph (d) is revised to read as follows:
Sec. 403.2 Annual financial report.
* * * * *
(d)(1) Every labor organization with annual receipts of $250,000 or
more shall file a report on Form T-1 for each trust that meets the
following conditions:
(i) The trust is of the type defined by section 3(l) of the LMRDA,
i.e., the trust was created or established by the labor organization or
the labor organization appoints or selects a member of the trust's
governing board; and the trust has as a primary purpose to provide
benefits to the members of the labor organization or their
beneficiaries (29 U.S.C. 402(1)); and the labor organization, alone or
with other labor organizations, either:
(A) Appoints or selects a majority of the members of the trust's
governing board; or
(B) Makes contributions to the trust that exceed 50 percent of the
trust's receipts during the trust's fiscal year; and
(ii) None of the exemptions discussed in paragraph (d)(3) of this
section apply.
(iii) For purposes of paragraph (d)(1)(i)(B), contributions by an
employer pursuant to a collective bargaining agreement with a labor
organization shall be considered contributions by the labor
organization.
(2) A separate report shall be filed on Form T-1 for each such
trust within 90 days after the end of the labor organization's fiscal
year in the detail required by the instructions accompanying the form
and constituting a part thereof, and shall be signed by the president
and treasurer, or corresponding principal officers, of the labor
organization.
(3) No Form T-1 should be filed for any trust
(i) that meets the statutory definition of a labor organization and
already files a Form LM-2, Form LM-3, or Form LM-4,
(ii) that the LMRDA exempts from reporting, such as an organization
composed entirely of state or local government employees or a state or
local central body,
(iii) established as a Political Action Committee (PAC) if timely,
complete and publicly available reports on the PAC are filed with a
Federal or state agency,
(iv) established as a political organization under 26 U.S.C. 527 if
timely, complete, and publicly available reports are filed with the
Internal Revenue Service,
(v) constituting a federal employee health benefit plan subject to
the provisions of the Federal Employees Health Benefits Act (FEHBA)
(vi) required to file a Form 5500. For purposes of this section
only, a trust is ``required to file a Form 5500'' if a plan
administrator is required to file an annual report on behalf of the
trust under 29 U.S.C. section 1021 and/or 1024. A trust on whose behalf
such annual report is required to be filed that is eligible for an
exemption from filing the annual report, the Form 5500, or the Form
5500-SF is not included within this exemption and is deemed for
purposes of this section only not to be a trust ``required to file a
Form 5500,'' even if a Form 5500 is filed on behalf of that trust. A
trust eligible to file a notice or statement with the Secretary of
Labor in lieu of an annual report pursuant to an exemption from, or as
an alternative method of complying with, the annual reporting
obligation is not included within this exemption, even if it does file
a Form 5500 or Form 5500-SF.
(4) A labor organization may complete only Items 1 through 15 and
Items 26 through 27 (Signatures) of Form T-1 if annual audits prepared
according to standards set forth in the Form T-1 instructions and a
copy of the audit is filed with the Form T-1.
(5) If such labor organization is in trusteeship on the date for
filing the annual financial report, the labor organization that has
assumed trusteeship over such subordinate labor organization shall file
such report as provided in Sec. 408.5 of this chapter.
0
3. Amend Sec. 403.5 by revising paragraph (d) to read as follows:
Sec. 403.5. Terminal financial report.
* * * * *
(d) If a labor organization filed or was required to file a report
on a trust pursuant to Sec. 403.2(d) and that trust loses its identity
during its subsequent fiscal year through merger, consolidation, or
otherwise, the labor organization shall, within 30 days after such
loss, file a terminal report on Form T-1, with the Office of Labor-
Management Standards, signed by the president and treasurer or
corresponding principal officers of the labor organization. For
purposes of the report required by this paragraph, the period covered
thereby shall be the portion of the trust's fiscal year ending on the
effective date of the loss of its reporting identity.
0
4. In Sec. 403.8, revise paragraph (c)(3) to read as follows:
Sec. 403.8 Dissemination and verification of reports.
* * * * *
(c) * * *
(3) 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.
* * * * *
[[Page 57450]]
Signed in Washington, DC, this 24th day of September 2008.
Victoria A. Lipnic,
Assistant Secretary for Employment Standards.
Don Todd,
Deputy Assistant Secretary for Labor-Management Programs.
Appendix
Note: This appendix, which will not appear in the Code of
Federal Regulations, contains Form T-1 and instructions.
BILLING CODE 4510-86-P
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[FR Doc. E8-22853 Filed 10-1-08; 8:45 am]
BILLING CODE 4510-86-C