[Federal Register Volume 62, Number 98 (Wednesday, May 21, 1997)]
[Rules and Regulations]
[Pages 27695-27700]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 97-13516]


=======================================================================
-----------------------------------------------------------------------

LEGAL SERVICES CORPORATION

45 CFR Part 1610


Use of Non-LSC Funds, Transfers of LSC Funds, Program Integrity

AGENCY: Legal Services Corporation.

ACTION: Final rule.

-----------------------------------------------------------------------

SUMMARY: This final rule revises the Legal Services Corporation's 
(``Corporation'' or ``LSC'') interim rule concerning the use of non-LSC 
funds by LSC recipients. The revisions are intended to address 
constitutional challenges while ensuring that no LSC-funded entity 
engages in restricted activities. This final rule continues the interim 
rule's deletion of the provisions on transfers of non-LSC funds and 
revises the interim rule's new section that sets out standards for the 
integrity of recipient programs. The final rule also makes several 
conforming revisions, including changes to definitions and section 
titles.

EFFECTIVE DATE: This final rule is effective June 20, 1997.

FOR FURTHER INFORMATION CONTACT: Office of the General Counsel, (202) 
336-8817.

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, Public Law 104-134, 110 
Stat. 1321 (1996), as incorporated by the Corporation's FY 1997 
appropriations act, Public Law 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, (hereinafter 
referred to as LASH). The Court entered an order on February 14, 1997, 
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 denied the preliminary injunction request with 
respect to certain other restrictions, including those relating to 
class actions and representation of ineligible aliens.) 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 was 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.
    A similar suit to LASH was also filed in January 1997, as a class 
action in the United States District Court for the Eastern District of 
New York, which sought, inter alia, to have the court declare certain 
restrictions unconstitutional and grant preliminary and final 
injunctive relief. Velazquez et al. v. Legal Services Corporation, 97 
Civ. 00182 (FB) (E.D.N.Y.). There has been no ruling or order issued to 
date.
    Because the Court's order in LASH created a situation clearly at 
odds with Congressional intent, the Operations and Regulations 
Committee (``Committee'') of the Corporation's Board of Directors 
(``Board'') held public hearings and considered a draft interim rule on 
March 7, 1997. The Committee recommended and the Board agreed on March 
8, 1997, on an interim rule, which was published in the Federal 
Register on March 14, 1997, with a request for comments.
    The interim rule revised the final rule with the intent of 
addressing the constitutional concerns raised in LASH while preserving 
the statutory system created by Congress that forbids recipients from 
engaging in prohibited activities and subsidizing prohibited activities 
with LSC funds. Generally, the interim rule deleted provisions in 
Sec. 1610.7 on the transfer of non-LSC funds and added a new 
Sec. 1610.8 dealing with the integrity of recipient programs. Section 
1610.8 replaced and nullified Section 1-7 of the Corporation's 1986 
Audit and Accounting Guide, which set out the Corporation's policy on 
interrelated organizations.
    The Corporation received three timely comments and several other 
comments thereafter, each of which was given careful consideration. 
Based on the comments and its own internal research and review, the 
Corporation has made several revisions to the interim rule. A section-
by-section analysis of this final rule is provided below. The analysis 
includes explanations of provisions in the December 1996 final rule 
that remain unchanged by the interim or this final rule.

Section 1610.1  Purpose

    The purpose section is intended to reflect Congressional intent 
that no LSC-funded organization engage in any restricted activities. 
This final rule adds language clarifying that the purpose of the rule 
is to ensure that recipients maintain objective integrity and 
independence from organizations that engage in restricted activities. 
The term ``restricted activities'' is used in the preamble and text of 
this rule as an umbrella term to refer to the restrictions included in 
the definitions of ``purpose prohibited by the LSC Act'' and ``activity 
prohibited by or inconsistent with Section 504.''

Section 1610.1  Definitions

    This section provides definitions for terms used in this part. 
Paragraph (a) defines ``purpose prohibited by the LSC Act.'' The 
December 1996 final rule revised the Corporation's longstanding 
definition in several ways. This rule deleted reference to a 
prohibition on the representation of juveniles, because the prohibition 
is no longer in the LSC Act. This rule also deleted reference to those 
restrictions on activities in the LSC Act that are now included in the 
broader restrictions in the Corporation's appropriations act. Numbering 
changes were also made to conform to 1977 amendments to the LSC Act. 
These changes have been retained in this rule.
    Paragraph (b) defines ``activity prohibited by or inconsistent with 
Section 504'' by listing the prohibitions and requirements in Section 
504 of the Corporation's FY 1996 appropriations which have been 
incorporated by reference in the Corporation's FY 1997 appropriations 
act. These prohibitions and requirements apply to a recipient's 
activities, regardless of the source of

[[Page 27696]]

funding. The definition also makes reference to subsections 504(b) and 
504(e), which provide exceptions for specific activities supported by 
non-LSC funds.
    This section also includes definitions of ``IOLTA funds,'' ``non-
LSC funds,'' ``private funds,'' ``public funds,'' and ``tribal funds.'' 
No changes in these definitions have been made by this rule.
    Changes have been made to the definition of ``transfer'' to help 
clarify the meaning of the term and to reflect the deletion of the 
provisions on transfers of non-LSC funds. Minor changes were made to 
the first sentence of the definition to clarify that a ``transfer'' 
includes payments of LSC funds by a recipient to a person or entity for 
programmatic activities normally conducted by the recipient, such as 
the representation of eligible clients. A second sentence is added to 
clarify what is not included in the term. The additional language 
provides that a ``transfer'' does not include payments of LSC funds to 
vendors, accountants or other providers of goods and services in the 
normal course of business. The term is now found in the section on 
program integrity as well as in the section on transfers of LSC funds.

Section 1610.3  Prohibition

    This section sets out the prohibition which states that recipients 
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 
authorized by other provisions in this part.

Section 1610.4  Authorized Use of Non-LSC Funds

    This section sets out the circumstances where the restrictions in 
Section 504 and the LSC Act do not apply to certain categories of a 
recipient's non-LSC funds. Generally, pursuant to Sec. 1010(c) of the 
LSC Act, the restrictions in the LSC Act apply to a recipient's LSC and 
private funds but do not apply to a recipient's public or tribal funds 
if they are used for the purposes for which they are provided. 
Restrictions in Section 504, however, generally apply to all of a 
recipient's funds, including public funds. Paragraph (a) clarifies 
that, under the LSC Act and Section 504, tribal funds may be used for 
the purposes for which they were provided. Paragraph (b) clarifies that 
a recipient's public funds are not subject to the restrictions in the 
LSC Act but are subject to those in Section 504. This section also 
states that ``IOLTA funds'' are to be treated the same as public funds. 
Because a recipient's private funds are subject to the restrictions in 
both the LSC Act and Section 504, paragraph (c) clarifies that private 
funds may be used for the purposes for which they were provided, as 
long as such use is consistent with the restrictions in the LSC Act and 
Section 504. Finally, paragraph (d) implements an exception in Section 
504 which allows recipients to use non-LSC funds for financially 
ineligible clients, as long as the funds are used for the specific 
purpose for which they were received and are not used in a manner that 
violates the LSC Act or Section 504.

Section 1610.5  Notification

    This section incorporates the requirement of Section 504(d)(1) of 
the appropriations act that recipients may not accept funds from non-
LSC sources unless they provide written notice to the funders that 
their funds may not be used in any manner inconsistent with the LSC Act 
or Section 504. The requirement applies only to cash contributions; 
recipients are not required to notify persons or organizations who make 
non-cash donations or volunteer their time or services to the 
recipient.
    The rule contains a de minimis exception which relieves recipients 
of the notice requirement for individual contributions of less than 
$250. This exception is keyed to the level which triggers the IRS 
reporting requirement. It is not intended to incorporate any IRS 
instructions and guidelines concerning contributions to charities. It 
simply recognizes that, because recipients must provide acknowledgments 
for donations of $250 or more for IRS purposes, it does not constitute 
any significant additional burden to incorporate the required 
notification into the acknowledgment.
    Generally, notification should be provided before the recipient 
accepts the funds. Thus, notice should be given during the course of 
soliciting funds or applying for a grant or contract. However, for 
unsolicited donations where advance notice is not feasible, notice 
should be given in the recipient's letter acknowledging the 
contribution. For contracts and grants awarded prior to the enactment 
of the restriction, notice should be given prior to acceptance by the 
recipient of any additional payments.
    The notice requirement applies to funds received by recipients as 
grants, contracts or charitable donations from funders other than the 
Corporation, which are intended to fund the non-profit work of the 
recipient. It does not include funds received from sources such as 
court payment to attorneys for their work under court appointments; nor 
does it include payments to the recipient for rent, bank interest, or 
sale of goods, such as manuals.
    An exception is provided for tribal funds. The notice requirement 
would apply only when the tribal funds are in fact restricted. Thus, 
when a recipient receives tribal funds to which the restrictions do not 
apply, no notice is required to the source of the funds.

Section 1610.6  Applicability

    This section addresses two distinct situations. First, paragraph 
(a) clarifies that the prohibitions on criminal proceedings, actions 
challenging criminal convictions, aliens or prisoner litigation do not 
apply to a recipient's or subrecipient's separately funded public 
defender programs or projects. The authority for this provision is 
found in Section 1010(c) of the LSC Act and is also based on the scope 
of certain restrictions in Section 504. The restrictions on 
representation of aliens and prisoners in Section 504 apply only to 
civil representation and thus do not prohibit criminal representation 
in public defender programs. Also, although the LSC Act prohibits LSC 
recipients from engaging in or using resources for any criminal 
representation, a narrow exception for separately funded public 
defender programs or projects is provided in Section 1010(c).
    Paragraph (b) provides an exception for criminal or related cases 
accepted by a recipient or subrecipient pursuant to a court 
appointment.

Section 1610.7  Transfers of LSC Funds

    This section addresses the applicability of the statutory 
restrictions listed in Sec. 1610.2 (a) and (b) when a recipient 
transfers LSC funds to another person or entity. The statutory 
restrictions on a recipient's funds in the LSC Act and the 
Corporation's current appropriations act do not address the 
applicability of these provisions when a recipient transfers its LSC 
funds to another person or entity. However, the Corporation has 
historically applied such provisions to transfers of a recipient's LSC 
funds. See 45 CFR parts 1627 and 1632 and Program Letter dated December 
11, 1995. This policy reflects the intent of the Corporation that 
transfers of LSC funds not become a means to circumvent statutory 
restrictions on those funds.
    Paragraph (a) provides that the restrictions listed in Sec. 1610.2 
(a) and (b) will apply to any LSC funds transferred to another person 
or entity as well as to the non-LSC funds of the person or entity 
receiving such funds. This requirement is based on the

[[Page 27697]]

Corporation's interpretation of legislative intent that the statutory 
conditions on LSC funds attach to a recipient's non-LSC funds and that, 
in most situations, this should also be the case when LSC funds are 
transferred by a recipient to another person or entity. Otherwise, 
recipients would be able to avoid legislative intent by simply 
transferring their LSC funds to other persons or entities.
    Paragraph (b) modifies this requirement in the areas of timekeeping 
and priorities. The statutory provisions on timekeeping and priorities 
are administrative requirements more appropriately applicable to a 
recipient's own use of its funds. The intent is to assure greater 
accountability for the recipient's use of its funds without imposing 
unnecessary administrative burdens. Thus, this section applies the 
administrative requirements on priorities and timekeeping only to the 
funds transferred and only to the extent to ensure accountability for 
those funds. The rule requires that entities receiving a transfer of 
LSC funds must either use the funds consistent with the recipient's 
priorities or establish their own priorities for the use of the funds. 
In regard to timekeeping, the language tracks the statutory requirement 
so that entities that receive a transfer of LSC funds are required to 
maintain records of time spent on each case or matter undertaken with 
the funds transferred. However, they are not required to keep time in 
accordance with the Corporation's timekeeping regulation, 45 CFR part 
1635.
    Paragraph (c) provides an exception 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. For such 
transfers, the restrictions or requirements would apply only to the LSC 
funds transferred and not to the other funds of the persons or entities 
listed in this paragraph.
    The December 1996 final rule included provisions on the transfer of 
non-LSC funds. The interim rule deleted these provisions and included 
in the rule instead a new Sec. 1610.8 on program integrity. The deleted 
provisions provided that non-LSC funds transferred by a recipient would 
be subject to the restrictions of this part, but that any other funds 
of the entity receiving such funds would not be subject to the 
restrictions.
    Comments on the interim rule generally favored deleting the 
provisions, but suggested that the Corporation state affirmatively in 
the rule itself that non-LSC funds that are transferred are not subject 
to the restrictions. The Board determined that it is not necessary to 
include an affirmative statement of the effect of taking out the 
provisions. There is no statutory provision requiring that a transfer 
of non-LSC funds be subject to LSC restrictions, and the fact that the 
provision has been deleted speaks for itself.

Section 1610.8  Program Integrity of Recipient

    This section provides a standard for program integrity by requiring 
that recipients maintain objective integrity and independence from any 
organization that engages in restricted activities. The program 
integrity test in the interim rule was a 2-step process. Paragraph 
(a)(2) of Sec. 1610.8 of the interim rule set out the first step by 
delineating the factors used to determine whether an affiliation 
existed between the recipient and another organization, such that the 
recipient would be found to control, be controlled by or be subject to 
common control by the other organization. The factors to determine 
control were taken almost verbatim from the Corporation's interrelated 
organization policy. If such an affiliation were found to exist under 
paragraph (a), then the recipient was required to comply with step 2, 
the program integrity test delineated in paragraph (b), so that the 
restrictions listed in this part would not apply to the affiliate 
organization. The second step of the program integrity test was 
fashioned after the program integrity standard found to be 
constitutional in Rust v. Sullivan by the Supreme Court, see 500 U.S. 
173 (1991).
    Most of the comments on the interim rule's first step (the 
interrelated organization policy) stated that the meaning of several of 
the factors to determine control was unclear. In addition, although 
paragraph (a) expressly stated that only one factor would be 
dispositive of control, the commenters also expressed confusion on this 
matter and suggested that the determination of control should be based 
on the totality of the facts and not on the existence of any particular 
factor.
    Based on the Corporation's review of the comments and its research 
and analysis of the factors of the interrelated organization policy, 
the Board decided to delete paragraph (a) in its entirety for the 
following reasons:
    The purpose of the policy was to establish whether a relationship 
existed between the recipient and another organization, such that the 
recipient and the other organization actually operated as one, rather 
than two separate organizations. The Board determined that if a program 
is found to be in compliance with the second step of the program 
integrity test, there would be a sufficiently separate identity and 
operational independence from the recipient.
    Based on comments from the Corporation's Office of Inspector 
General (OIG), the Board determined that the interim rule did not 
provide sufficient guidance regarding any relationship a recipient 
might have with another independent organization. Under the interim 
rule, a recipient could have a relationship with another organization 
in which no formal control of one organization by the other exists, but 
in which there is substantial sharing of non-LSC funds, office space, 
equipment and personnel. By deleting paragraph (a) and revising 
paragraph (b), the rule provides guidance regarding a recipient's 
relationship with any organization, independent or affiliated, that 
engages in restricted activities. At the same time, because the 
standards will allow control at the Board level, recipients will have 
an avenue through which to engage in restricted activities as long as 
they comply with the program integrity standards.
    Comments on the second step generally stated that the standards 
created substantial practical problems for recipients. They also said 
that the standards were unclear as to the strictness of each factor, 
whether any particular factor would be determinative and whether a 
determination of compliance with the standards would be based on the 
totality of the facts.
    Having deleted the first step of the analysis on program integrity, 
the Board revised the second step to stand alone without reference to 
the interrelated organization factors. In response to comments, this 
new paragraph (a) was further revised to clarify that a determination 
of compliance with the program integrity standard would require a case-
by-case determination based on the totality of the facts. Paragraph (a) 
now provides that a recipient must have an objective integrity and 
independence from any organization that engages in prohibited 
activities. Whether a recipient will be found to have such objective 
integrity and independence will be based on three considerations.
    First, paragraph (a)(1) provides that the other organization must 
be a separate legal entity. This factor was implied but not made 
explicit in the interim rule. This change is necessary to implement 
Congressional intent that a recipient as a legal entity may not

[[Page 27698]]

engage in certain restricted activities, regardless of the source of 
funds. At the same time, the Corporation has fashioned a rule that does 
not foreclose a recipient from engaging in restricted activities 
through another legally distinct organization, as long as the recipient 
meets this rule's program integrity standards.
    Second, paragraph (a)(2) provides that the other organization must 
not receive any LSC funds and no LSC funds may subsidize restricted 
activities. In response to comments, the Board deleted the words 
``directly or indirectly'' before ``subsidize'' because they elicited 
objections and provided unclear guidance. ``Subsidize'' includes a 
payment of LSC funds to support, in whole or in part, a restricted 
activity conducted by another entity, or payment to another entity to 
cover overhead, in whole or in part, relating to a restricted activity. 
A recipient will be considered to be subsidizing the restricted 
activities of another organization if it provides the use of its LSC-
funded resources to the organization without receiving a fair market 
price for such use. Thus, if a recipient makes an in-kind contribution, 
such as donated LSC-funded space or telephone services, to another 
organization, the donation would be a subsidy. However, this example is 
not intended to mean that a recipient may share resources as long as 
the recipient receives a fair payment. A recipient must also maintain 
an actual physical and financial separation as set out in paragraph 
(a)(3) of this section.
    Third, under paragraph (a)(3), the recipient must maintain a 
physical and financial separation from the other organization. Mere 
bookkeeping is not enough and a determination of sufficient separation 
will be based on the totality of the facts. The factors include, but 
are not limited to, existence of separate personnel, existence of 
separate accounting and timekeeping records, degree of separation of 
facilities and extent of the use of facilities for restricted work, and 
the extent to which indicia, such as signs, distinguish the recipient 
from the other organization. Whether the recipient meets the program 
integrity standard by having sufficient separation will be determined 
on a case-by-case basis, and each case will be determined on the 
totality of the facts and no one factor is intended to be 
determinative. \1\
---------------------------------------------------------------------------

    \1\ In response to certain comments construing or characterizing 
the separation-of-personnel factor as dispositive or absolute, the 
interpretation in this preamble, based on consideration of the 
totality of the circumstances, supersedes any arguably contrary or 
inconsistent interpretation provided by any individual LSC official 
prior to issuance of this final rule.
---------------------------------------------------------------------------

    Several commenters asked the Corporation to clarify whether the 
``program integrity'' requirement would automatically fail to be 
satisfied if a particular factor, such as personnel or facilities, was 
not completely separate. Because the Corporation is adopting a case-by-
case approach based on the totality of the circumstances, LSC does not 
believe that it would be appropriate or feasible to use this preamble 
to provide advisory opinions based on limited or incomplete information 
about a recipient's relationship with an organization involved in 
restricted activities. However, consistent with the Corporation's 
longstanding practice regarding compliance issues, individual 
recipients are welcome to submit all the relevant ``program integrity'' 
information and request a review by the Corporation of any existing or 
contemplated relationship with an organization that engages in 
restricted activities.
    Commenters on the practical problems raised by the standards argued 
for mere bookkeeping and appeared to say that use of LSC-funded 
facilities and equipment is necessary for a non-LSC organization to 
function and engage in prohibited activities. Some commenters stated 
that it is not financially possible to duplicate everything and that 
programs should be allowed to use a recipient's facilities, equipment 
or staff, as long as there is appropriate documentation and allocation 
of funds. The Board determined that such a situation would violate the 
Congressional requirement that entities it funds not engage in 
restricted activities. The rule requires ``objective integrity and 
independence'' which cannot be achieved by mere bookkeeping. Thus, 
determinations taking into account the physical and financial 
separation standards must ensure that there is no identification of the 
recipient with restricted activities and that the other organization 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.
    The interim rule's requirement that the recipient's board approve 
the recipient's affiliation with another organization has been deleted 
and replaced by a requirement in paragraph (b) that each recipient's 
governing body certify to the Corporation within 180 days of the 
effective date of this rule that it is in compliance with the program 
integrity standards set out in this section. Thereafter, the governing 
body must certify on an annual basis that the recipient has maintained 
such compliance. This requirement is intended to ensure that a 
recipient's governing body has reviewed any relationships the recipient 
has with other organizations involved in restricted activities to 
assure compliance with the program integrity standards. The Corporation 
will issue guidance regarding the form of certification and the records 
necessary to support such certification.

Section 1610.9  Accounting

    This section sets out the general accounting requirement for 
recipients for their non-LSC funds. Currently, recipients are directed 
by the accounting guidance issued by the Corporation.

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, TRANSFERS OF LSC FUNDS, PROGRAM 
INTEGRITY

Sec.
1610.1  Purpose.
1610.2  Definitions.
1610.3  Prohibition.
1610.4  Authorized use of non-LSC funds.
1610.5  Notification.
1610.6  Applicability.
1610.7  Transfers of LSC 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.


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 restricted activities and that recipients 
maintain objective integrity and independence from organizations that 
engage in restricted activities.


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);

[[Page 27699]]

    (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 
(Client identification and statement of facts);
    (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 payment of LSC funds by a recipient to a 
person or entity 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. Transfer does not include 
any payment of LSC funds to vendors, accountants or other providers of 
goods and services made by the recipient in the normal course of 
business.
    (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 non-LSC 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 LSC funds.

    (a) If a recipient transfers LSC funds to another person or entity, 
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 LSC funds transferred and to the non-LSC funds of the person or 
entity to whom those funds are transferred.
    (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.

[[Page 27700]]

Sec. 1610.8  Program integrity of recipient.

    (a) A recipient must have objective integrity and independence from 
any organization that engages in restricted activities. A recipient 
will be found to have objective integrity and independence from such an 
organization if:
    (1) The other organization is a legally separate entity;
    (2) The other organization receives no transfer of LSC funds, and 
LSC funds do not subsidize restricted activities; and
    (3) The recipient is physically and financially separate from the 
other organization. Mere bookkeeping separation of LSC funds from other 
funds is not sufficient. Whether sufficient physical and financial 
separation exists will be determined on a case-by-case basis and will 
be based on the totality of the facts. The presence or absence of any 
one or more factors will not be determinative. Factors relevant to this 
determination shall include but will not be limited to:
    (i) The existence of separate personnel;
    (ii) The existence of separate accounting and timekeeping records;
    (iii) The degree of separation from facilities in which restricted 
activities occur, and the extent of such restricted activities; and
    (iv) The extent to which signs and other forms of identification 
which distinguish the recipient from the organization are present.
    (b) Each recipient's governing body must certify to the Corporation 
within 180 days of the effective date of this part that the recipient 
is in compliance with the requirements of this section. Thereafter, the 
recipient's governing body must certify such compliance to the 
Corporation on an annual basis.


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: May 19, 1997.
Victor M. Fortuno,
General Counsel.
[FR Doc. 97-13516 Filed 5-20-97; 8:45 am]
BILLING CODE 7050-01-P