[Federal Register Volume 62, Number 50 (Friday, March 14, 1997)]
[Rules and Regulations]
[Pages 12101-12104]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 97-6542]
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LEGAL SERVICES CORPORATION
45 CFR Part 1610
Use of Non-LSC Funds
AGENCY: Legal Services Corporation.
ACTION: Interim rule with request for comments.
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SUMMARY: This interim rule revises the Legal Services Corporation's
(``Corporation'' or ``LSC'') rule concerning the use of non-LSC funds
by LSC recipients. The revisions are intended to address constitutional
challenges raised by the previous rule, and to ensure that no LSC-
funded entity engages in restricted activities. This revised rule
deletes the provisions on transfers of non-LSC funds and adds a new
section setting out standards for the integrity of recipient programs.
DATES: The interim rule is effective on March 14, 1997. Comments must
be submitted on or before April 14, 1997.
ADDRESSES: Comments should be submitted to the Office of the General
Counsel, Legal Services Corporation, 750 First St. NE., 11th Floor,
Washington, DC 20002-4250.
FOR FURTHER INFORMATION CONTACT: Victor Fortuno, General Counsel, (202)
336-8910.
SUPPLEMENTARY INFORMATION: On December 2, 1996, the Corporation
published a completely revised final rule to implement Section 504 in
the Corporation's FY 1996 appropriations act, Pub. L. 104-134, 110
Stat. 1321 (1996), as incorporated by the Corporation's FY 1997
appropriations act, Pub. L. 104-208, 110 Stat. 3009. Section 504
applies certain restrictions to any person or entity receiving LSC
funds, effectively restricting the use of virtually all of a
recipient's funds to the same degree that it restricts LSC funds.
Although not required to by law, the Corporation extended the
restrictions on a recipient's funds to a transfer of a recipient's non-
LSC funds. Thus, the rule required that when a recipient transferred
its non-LSC funds to an entity that had no LSC funds, the conditions
would remain attached to the transferred funds. However, the other
funds of the entity would not be affected.
In January 1997, five legal services recipients in Hawaii, Alaska,
and California, together with two of their program lawyers, two non-
federal funders and a client organization, filed suit in the United
States District Court for the District of Hawaii challenging a number
of the Section 504 restrictions as unconstitutional conditions on their
use of non-LSC funds. Legal Aid Society of Hawaii, et al. v. Legal
Services Corporation, Civil Action No. 97-00032 ACK. On February 14,
1997, the Court entered an order which preliminarily enjoined the
Corporation from enforcing restrictions on the recipients'' use of non-
LSC funds for certain restrictions as to which the Court determined
that the plaintiffs'' had a fair likelihood of demonstrating an
infringement of First Amendment rights. The Court's preliminary ruling
was grounded in pertinent part on its understanding of the
Corporation's interrelated organization policy, but also implicated the
expansive reach of the Corporation's restrictions on non-LSC funds. The
effect of the preliminary order is to allow those recipients who are
plaintiffs in the case to use their non-LSC funds to engage in certain
prohibited activities within their recipient programs during the
interim period before a trial on the merits and a final ruling by the
judge. This creates at least a temporary situation clearly at odds with
congressional intent.
The Corporation has reviewed its policies and regulations and is
making certain limited adjustments, which are intended both to preserve
the statutory system created by Congress that forbids recipients from
engaging in prohibited activities and subsidizing prohibited activities
with LSC funds and to respond to the constitutional concerns addressed
by the Court. In making these limited revisions, the Corporation is
acting to reinforce its commitment to the statutory structure of
prohibitions and restrictions intended by Congress without risking the
possible infringement of constitutional rights where the prohibited
activities are supported entirely by non-LSC funds and carried out
without subsidization by the LSC grantee. Under the Court's decision,
an LSC-funded entity can engage in restricted activities. While
recognizing that this initial decision is not dispositive of the issue,
the Corporation is mindful that Congress clearly intended to assure
that no LSC-funded entity engage in restricted activities.
The Operations and Regulations Committee (``Committee'') of the
Corporation's Board of Directors (``Board'') held public hearings on
this matter and considered a draft interim rule on March 7, 1997. The
Committee recommended and the Board agreed on March 8, 1997, to publish
this revised rule as an interim rule. An interim rule is necessary in
order to provide prompt and critically necessary guidance to LSC
recipients on the revised legal status of these regulations, address
the alleged constitutional infirmities, and yet preserve the integrity
of LSC-funded programs consistent with congressional intent.
Accordingly, prior notice and public comment are impracticable,
unnecessary, and contrary to the public interest. See 5 U.S.C. Sections
553(b)(3)(B) and 553(d)(3). This rule is effective upon publication.
However, the Corporation also solicits comment on this interim rule for
review and consideration by the Committee and Board. After receipt of
written public comment, the Committee intends to hold public hearings
to discuss the written comments and to hear oral comments. It is
anticipated that a final rule will be issued, which will supersede this
interim rule.
Generally, this rule deletes provisions in Section 1610.7 on the
transfer of non-LSC funds and adds a new section dealing with the
integrity of recipient programs. This section also formally replaces
and nullifies Section 1-7 of the Corporation's 1986 Audit and
Accounting Guide, which sets out the Corporation's policy on
interrelated organizations.
A section-by-section analysis is provided below.
[[Page 12102]]
Section 1610.1 Purpose
The purpose section is revised to reflect congressional intent that
no LSC-funded organization engage in any restricted activities.
Section 1610.7 Transfers of funds
The provisions on the transfer of non-LSC funds are deleted from
this section. The new Sec. 1610.8, which sets out standards to ensure
the integrity of the recipient program, has been added.
Section 1610.8 Program Integrity of Recipient
The purpose of this new section is to ensure the integrity of
recipient programs. It provides that this part's restrictions on non-
LSC funds will be applied to an organization found to be interrelated
with a recipient such that it controls, is controlled by or is subject
to common control with another organization, unless the recipient can
demonstrate that it meets this part's standards of program integrity.
This new policy on program integrity is based in part on the
Corporation's policy on interrelated organizations, which is modified
in this rule to allow recipients to have an affiliation or relationship
with separate organizations which may engage in prohibited activities
funded solely with non-LSC funds, provided that the standards for
program integrity in this rule are met. The standards of program
integrity require that there be a wall of separation between the
recipient and another organization so that LSC funds will not be used
to subsidize prohibited activities. Thus, although the recipient's
governing body could control the other organization, the separate and
distinct integrity of the recipient program is required to be
maintained.
Paragraph (a) of this section essentially reflects the
Corporation's old policy on interrelated organizations. It states that
if a recipient controls, is controlled by or is subject to common
control with another organization, the two organizations will be found
to be interrelated and will be subject to the restrictions of this part
unless they meet the standards of program integrity in paragraph (b).
``Control'' is defined as the ability to determine or influence the
management or policies of another organization. The test for
determining whether such control exists is largely the same as in the
old interrelated policy, with a few adjustments that are reflected in
the Section 1610.8(a)(3). The old policy stated that a determination of
interrelatedness will be based on the totality of the facts and that no
one factor would be determinative. This new rule retains this provision
except that it cites one factor that is determinative of
interrelatedness. If there is an overlap of officers and directors such
that the governing body of one organization includes enough
representatives of the other to cause or prevent action by the other,
interrelated status will be found. Nevertheless, this interrelation
does not automatically mean that the restrictions of this part will be
applied to both organizations. The restrictions would only be applied
if the standards of program integrity in paragraph (b) are not met.
Paragraph (b) sets out the standards of program integrity. First,
the other organization must not receive any LSC funds. Second, the
relationship of the recipient with the other organization must be
approved by the recipient's governing body. This ensures that it is the
local board, which is governed by the Corporation's governing body
regulation, 45 CFR Part 1607, rather than a recipient's staff or
management, that approves the relationship. The third standard requires
clear physical and financial separation of the recipient from the other
organization such that the recipient must have an objective integrity
and independence. Factors considered to determine whether such
objective integrity and independence exist include the existence of
separate personnel, the existence of separate accounting and
timekeeping records, the existence of separate facilities, and the
extent to which signs or other forms of identification distinguish the
recipient from the organization. Determinations taking into account
these standards are necessary to ensure that there is no identification
of the recipient with restricted activities and that the other
organization is not a sham or paper organization and is not so closely
identified with the recipient that there might be confusion or
misunderstanding about the recipient's involvement with or endorsement
of prohibited activities.
List of Subjects in 45 CFR Part 1610
Grant programs, Legal services.
For reasons set forth in the preamble, LSC revises 45 CFR Part 1610
to read as follows:
PART 1610--USE OF NON-LSC FUNDS
Sec.
1610.1 Purpose.
1610.2 Definitions.
1610.3 Prohibition.
1610.4 Authorized use of other funds.
1610.5 Notification.
1610.6 Applicability.
1610.7 Transfers of recipient funds.
1610.8 Program integrity of recipient.
1610.9 Accounting.
Authority: 42 U.S.C. 2996i; Pub. L. 104-208, 110 Stat. 3009 Pub.
L. 104-134 110 Stat. 1321 (1996).
Sec. 1610.1 Purpose.
This part is designed to implement statutory restrictions on the
use of non-LSC funds by LSC recipients and to ensure that no LSC-funded
entity shall engage in any activities restricted by this part.
Sec. 1610.2 Definitions.
(a) Purpose prohibited by the LSC Act means any activity prohibited
by the following sections of the LSC Act and those provisions of the
Corporation's regulations that implement such sections of the Act:
(1) Sections 1006(d)(3), 1006(d)(4), 1007(a)(6), and 1007(b)(4) of
the LSC Act and 45 CFR part 1608 of the LSC Regulations (Political
activities);
(2) Section 1007(a)(10) of the LSC Act (Activities inconsistent
with professional responsibilities);
(3) Section 1007(b)(1) of the LSC Act and 45 CFR part 1609 of the
LSC regulations (Fee-generating cases);
(4) Section 1007(b)(2) of the LSC Act and 45 CFR part 1613 of the
LSC Regulations (Criminal proceedings);
(5) Section 1007(b)(3) of the LSC Act and 45 CFR part 1615 of the
LSC Regulations (Actions challenging criminal convictions);
(6) Section 1007(b)(7) of the LSC Act and 45 CFR part 1612 of the
LSC Regulations (Organizing activities);
(7) Section 1007(b)(8) of the LSC Act (Abortions);
(8) Section 1007(b)(9) of the LSC Act (School desegregation); and
(9) Section 1007(b)(10) of the LSC Act (Violations of Military
Selective Service Act or military desertion).
(b) Activity prohibited by or inconsistent with Section 504 means
any activity prohibited by, or inconsistent with the requirements of,
the following sections of 110 Stat. 1321 (1996) and those provisions of
the Corporation's regulations that implement those sections:
(1) Section 504(a)(1) and 45 CFR part 1632 of the LSC Regulations
(Redistricting);
(2) Sections 504(a)(2) through (6), as modified by Sections 504(b)
and (e), and 45 CFR part 1612 of the LSC Regulations (Legislative and
administrative advocacy);
(3) Section 504(a)(7) and 45 CFR part 1617 of the LSC Regulations
(Class actions);
(4) Section 504(a)(8) and 45 CFR part 1636 of the LSC Regulations
(Statement of facts and client identification);
[[Page 12103]]
(5) Section 504(a)(9) and 45 CFR part 1620 of the LSC Regulations
(Priorities);
(6) Section 504(a)(10) and 45 CFR part 1635 of the LSC Regulations
(Timekeeping);
(7) Section 504(a)(11) and 45 CFR part 1626 of the LSC Regulations
(Aliens);
(8) Section 504(a)(12) and 45 CFR part 1612 of the LSC Regulations
(Public policy training);
(9) Section 504(a)(13) and 45 CFR part 1642 of the LSC Regulations
(Attorneys' fees);
(10) Section 504(a)(14) (Abortion litigation);
(11) Section 504(a)(15) and 45 CFR part 1637 of the LSC Regulations
(Prisoner litigation);
(12) Section 504(a) (16), as modified by Section 504(e), and 45 CFR
part 1639 of the LSC Regulations (Welfare reform);
(13) Section 504(a)(17) and 45 CFR part 1633 of the LSC Regulations
(Drug-related evictions); and
(14) Section 504(a)(18) and 45 CFR part 1638 of the LSC Regulations
(In-person solicitation).
(c) IOLTA funds means funds derived from programs established by
State court rules or legislation that collect and distribute interest
on lawyers' trust accounts.
(d) Non-LSC funds means funds derived from a source other than the
Corporation.
(e) Private funds means funds derived from an individual or entity
other than a governmental source or LSC.
(f) Public funds means non-LSC funds derived from a Federal, State,
or local government or instrumentality of a government. For purposes of
this part, IOLTA funds shall be treated in the same manner as public
funds.
(g) Transfer means a transfer of a recipient's funds for the
purpose of conducting programmatic activities that are normally
conducted by the recipient, such as the representation of eligible
clients, or that provide direct support to the recipient's legal
assistance activities.
(h) Tribal funds means funds received from an Indian tribe or from
a private nonprofit foundation or organization for the benefit of
Indians or Indian tribes.
Sec. 1610.3 Prohibition.
A recipient may not use non-LSC funds for any purpose prohibited by
the LSC Act or for any activity prohibited by or inconsistent with
Section 504, unless such use is authorized by Secs. 1610.4, 1610.6 or
1610.7 of this part.
Sec. 1610.4 Authorized use of other funds.
(a) A recipient may receive tribal funds and expend them in
accordance with the specific purposes for which the tribal funds were
provided.
(b) A recipient may receive public or IOLTA funds and use them in
accordance with the specific purposes for which they were provided, if
the funds are not used for any activity prohibited by or inconsistent
with Section 504.
(c) A recipient may receive private funds and use them in
accordance with the purposes for which they were provided, provided
that the funds are not used for any activity prohibited by the LSC Act
or prohibited or inconsistent with Section 504.
(d) A recipient may use non-LSC funds to provide legal assistance
to an individual who is not financially eligible for services under
part 1611 of this chapter, provided that the funds are used for the
specific purposes for which those funds were provided and are not used
for any activity prohibited by the LSC Act or prohibited by or
inconsistent with Section 504.
Sec. 1610.5 Notification.
(a) Except as provided in paragraph (b) of this section, no
recipient may accept funds from any source other than the Corporation,
unless the recipient provides to the source of the funds written
notification of the prohibitions and conditions which apply to the
funds.
(b) A recipient is not required to provide such notification for
receipt of contributions of less than $250.
Sec. 1610.6 Applicability.
Notwithstanding Sec. 1610.7(a), the prohibitions referred to in
Secs. 1610.2(a)(4) (Criminal proceedings), (a)(5) (Actions challenging
criminal convictions), (b)(7) (Aliens) or (b)(11) (Prisoner litigation)
of this part will not apply to:
(a) A recipient's or subrecipient's separately funded public
defender program or project; or
(b) Criminal or related cases accepted by a recipient or
subrecipient pursuant to a court appointment.
Sec. 1610.7 Transfers of recipient funds.
(a) For a transfer of LSC funds, the prohibitions and requirements
referred to in this part, except as modified by paragraphs (b) and (c)
of this section, will apply both to the funds transferred and to the
non-LSC funds of the person or entity.
(b)(1) In regard to the requirement in Sec. 1610.2(b)(5) on
priorities, persons or entities receiving a transfer of LSC funds shall
either:
(i) use the funds transferred consistent with the recipient's
priorities; or
(ii) establish their own priorities for the use of the funds
transferred consistent with 45 CFR part 1620;
(2) In regard to the requirement in Sec. 1610.2(b)(6) on
timekeeping, persons or entities receiving a transfer of LSC funds are
required to maintain records of time spent on each case or matter
undertaken with the funds transferred.
(c) For a transfer of LSC funds to bar associations, pro bono
programs, private attorneys or law firms, or other entities for the
sole purpose of funding private attorney involvement activities (PAI)
pursuant to 45 CFR part 1614, the prohibitions or requirements of this
part shall apply only to the funds transferred.
Sec. 1610.8 Program integrity of recipient.
(a) If a recipient controls, is controlled by or is subject to
common control with another organization, the two organizations are
interrelated organizations and the restrictions in this part will be
applied to both organizations, unless the association between the two
organizations meets the standards of program integrity in paragraph (b)
of this section.
(1) Control means the direct or indirect ability to determine the
direction of management and policies or influence the management or
policies of another organization.
(2) Factors considered to determine whether control exists are:
(i) The extent and pattern of any overlap of officers, directors,
or other managers between two organizations;
(ii) The contractual and financial relationships (especially in
terms of the proportion of the organization's funds or resources that
are provided by the possibly controlling organization);
(iii) The history of relationships among the organizations (e.g.,
the fact that one organization provided initial funding and named
initial director of another would be a relevant fact; as would facts
relating to decision-making on policies or transactions of mutual
interest; actual control of particular decisions);
(iv) A close identity of interest;
(v) One organization has become a mere conduit, ``incorporation
pocketbook,'' or ``straw'' party for another;
(vi) Funds are solicited by a separate entity in the name of and
with the expressed or implicit approval of the recipient and
substantially all of the funds solicited are intended by the
contributor or are otherwise required to be transferred to the
recipient or used at its discretion or direction;
(vii) A recipient transfers resources to another entity that holds
these resources for the benefit of the recipient; and
(viii) A recipient assigns functions to an entity whose funding is
primarily
[[Page 12104]]
derived from sources other than public contributions.
(3) A determination of interrelatedness will be based on the
totality of the facts and the presence or absence of any one or more
factors is not determinative, except that an overlap of officers and
directors such that the governing body of one organization includes
enough representatives of the other to cause or prevent action by the
other will be determinative that the organizations are interrelated.
(b) The restrictions in this part will not be applied to an
organization found to be interrelated pursuant to paragraph (a) if:
(1) The organization receives no LSC funds, and LSC funds do not
directly or indirectly subsidize restricted activities;
(2) The relationship with the organization is approved by the
recipient's governing body; and
(3) The recipient is physically and financially separate from the
organization. Mere bookkeeping separation of LSC funds from other funds
is not sufficient. In order to be physically and financially separate,
the recipient and the organization must have an objective integrity and
independence from one another. Factors considered to determine whether
such objective integrity and independence exist shall include, but are
not limited to:
(i) The existence of separate personnel;
(ii) The existence of separate accounting and timekeeping records;
(iii) The existence of separate facilities; and
(iv) The extent to which signs and other forms of identification
which distinguish the recipient from the organization are present.
Sec. 1610.9 Accounting.
Funds received by a recipient from a source other than the
Corporation shall be accounted for as separate and distinct receipts
and disbursements in a manner directed by the Corporation.
Dated: March 11, 1997.
Victor M. Fortuno,
General Counsel.
[FR Doc. 97-6542 Filed 3-13-97; 8:45 am]
BILLING CODE 7050-01-P