[Federal Register Volume 68, Number 196 (Thursday, October 9, 2003)]
[Rules and Regulations]
[Pages 58374-58538]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 03-25487]



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Part II





Department of Labor





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Office of Labor-Management Standards



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29 CFR Parts 403 and 408



Labor Organization Annual Financial Reports; Final Rule

  Federal Register / Vol. 68, No. 196 / Thursday, October 9, 2003 / 
Rules and Regulations  

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DEPARTMENT OF LABOR

Office of Labor-Management Standards

29 CFR Parts 403 and 408

RIN 1215-AB34


Labor Organization Annual Financial Reports

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

ACTION: Final rule.

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SUMMARY: The Department proposed to revise the forms used by labor 
organizations to file the annual financial report required by the 
Labor-Management Reporting and Disclosure Act (LMRDA). This document 
sets forth the Department's review of and response to comments on the 
proposal and the changes that will be made to the Form LM-2 used by the 
largest labor organizations to file the required report. The Department 
will require each labor organization that has annual receipts of 
$250,000 or more to file a Form LM-2 electronically and to itemize 
receipts and disbursements of $5,000 or more, as well as receipts not 
reported elsewhere from, or disbursements to, a single entity that 
total $5,000 or more in the reporting year, in specified categories. 
The Department has combined two proposed categories (``Contract 
Negotiation and Administration'' and ``Organizing'') into a single 
schedule entitled ``Representational Activities,'' added a category 
entitled ``Union Administration,'' combined the proposed categories for 
``Political Activities'' and ``Lobbying'' into a single schedule, and 
eliminated the category entitled ``Other Disbursements.'' Reporting 
labor organizations will be permitted, however, to report sensitive 
information for some categories that might harm legitimate union or 
privacy interests with other non-itemized receipts and disbursements, 
provided the labor organization indicates that it has done so. Using 
this procedure, however, will constitute just cause for any union 
member to review the underlying data upon request. Moreover, under the 
statute (29 U.S.C. 436), the labor organization must maintain the 
records for inspection by the Department. The new Form LM-2 will have 
schedules for reporting information regarding delinquent accounts 
payable and receivable, but specific information need only be reported 
for accounts that total $5,000 or more during the reporting year. The 
revised Form LM-2 will require labor organizations to report 
investments that have a book value of over $5,000 and exceed 5% or more 
of the union's investments. A new schedule will require labor 
organizations to report the number of members by category, but will 
allow each labor organization to define the categories used for 
reporting. Reporting labor organizations must estimate the proportion 
of each officer's and employee's time spent in each of the functional 
categories on the Form LM-2 and report that percentage of gross salary 
in the relevant schedule.
    Labor organizations that have $250,000 or more in annual receipts 
will be required to file a Form T-1 for any trust in which the labor 
organization is interested, if the trust has $250,000 or more in annual 
receipts and the labor organization contributed $10,000 or more to the 
trust during the reporting year, or that amount was contributed on the 
labor organization's behalf. Unions with less than $250,000 in annual 
receipts will not be subject to this requirement. No Form T-1 will be 
required if the trust files a report pursuant to 26 U.S.C. 527, or 
pursuant to the requirements of the Employee Retirement Income Security 
Act of 1974, 29 U.S.C. 1023 (ERISA), or if the organization files 
publicly available reports with a Federal or state agency as a 
Political Action Committee (PAC). Finally, a labor organization may 
substitute an audit that meets the criteria set forth in the 
Instructions for the financial information otherwise reported on a Form 
T-1 for a qualifying trust.

EFFECTIVE DATE: This rule will be effective on January 1, 2004, but 
will apply only to annual financial reports filed by unions for fiscal 
years beginning on or after January 1, 2004.

FOR FURTHER INFORMATION CONTACT: Lary Yud, Deputy Director, Office of 
Labor-Management Standards (OLMS), U.S. Department of Labor, 200 
Constitution Avenue NW, Room N-5605, Washington, D.C., [email protected], (202) 693-1265 (this is not a toll-free number). 
Individuals with hearing impairments may call 1-800-877-8339 (TTY/TDD).

SUPPLEMENTARY INFORMATION:

I. Background

    On December 27, 2002, the Department issued a notice of proposed 
rulemaking (67 FR 79820) proposing revisions of the forms used by labor 
organizations to file the annual financial reports required by section 
201(b) of the LMRDA, 29 U.S.C. 431(b). As the notice explained, the 
proposed revisions were based upon the fact that the American workforce 
and labor organizations have changed dramatically over the last forty 
years and the fact that the form used by labor organizations to report 
financial information has not changed significantly in the same time 
period. The proposed revisions also reflected the Department's belief, 
based on the accumulated experience of investigators and other staff in 
the Employment Standards Administration's (ESA's) OLMS, that more 
detailed and transparent reporting of labor organizations' financial 
information would be more useful to union members, more effectively 
deter fraud, and enable OLMS investigators to more easily discover 
fraud when it occurs. Finally, the proposal noted the Department's view 
that, because of technological advances, these revisions will impose 
less burden on labor organizations than revisions proposed in previous 
years.
    Before issuing this proposal, various Department officials met with 
many representatives of the regulated community, including union 
officials and their legal counsel, to hear their views on the need for 
reform and the likely impact of changes that might be made. The 
Department's proposal, developed with these discussions in mind, 
requested comments on numerous specific issues in order to base any 
revisions on a complete record reflecting the views of the parties 
affected and the Department's responses. In addition, the Department 
contracted with a professional provider of information technology 
services, SRA International (SRA), to assess the technical feasibility 
of electronically collecting and reporting the information that would 
be required by the proposed changes. The Department initially provided 
for a 60-day comment period, but later extended that period for an 
additional 30 days.
    When the comment period closed, on March 27, 2003, ESA/OLMS had 
received over 35,000 comments. Most of the comments received were 
copies of approximately 110 different form letters signed by 
individuals who said they were members or officers of unions and 
commented in general terms. Although many of these form letters 
expressed opposition to the Department's proposal to revise the forms, 
many other form letters expressed support for the proposal. In 
addition, approximately 1,200 unique comments, including lengthy, 
substantive and specific comments, were received from union members, 
local, intermediate, national and international labor organizations, 
employers and trade organizations, public interest groups, accountants,

[[Page 58375]]

accounting firms, academicians, and Members of Congress. Some 
commenters addressed their comments to specific limited issues, 
others--most notably, the American Federation of Labor and Congress of 
Industrial Organizations (AFL-CIO)--commented on virtually all aspects 
of the proposal. All comments have been carefully reviewed and 
considered. The Department's analysis of and responses to the comments 
are set forth below (see Sections II, III, and IV).
    In addition, this rule makes minor changes to the forms and the 
Instructions that did not directly result from any comments. Many of 
these changes reflect the differences between the proposed and final 
rule, requiring the addition of lines to the forms, the re-labeling of 
others, and the combination of schedules. Many of the minor changes to 
the Instructions also reflect these differences. These differences are 
discussed in detail below in the Department's analysis of the comments. 
Many of the changes in the Instructions, however, simply correspond to 
changes in the format of the form and the need to rework the 
Instructions so that they inform the filers and the public, whether 
they rely on the electronic or paper formats, about how to complete and 
use the forms. In analyzing the comments and preparing the final rule, 
some inadvertent omissions were discovered, as were some ambiguities in 
the text of the Instructions, requiring the redrafting of some of the 
Instructions and, in some instances, changes to the form. In reviewing 
the schedules for reporting disbursements to officers and employees, it 
became apparent that a filer would benefit from seeing the names of the 
schedules from which information was to be obtained, and therefore line 
I in each schedule was revised to include the names of the five 
schedules.
    The Department's review revealed some inadvertent omissions from 
the proposed Form LM-2. For example, in Schedule 12, lines 7 and 8 were 
omitted. The final form includes these lines. Line 7 will provide space 
for ``totals from continuation pages (if any),'' and line 8 will be 
used to report the ``total of lines 1-7.'' In Item 30, ``Schedule 8'' 
was omitted from the ``Form Schedule Number'' column. This omission has 
been corrected. The language of the attestation has been changed 
slightly to ensure that it complies substantially with 28 U.S.C. 1746.
    In several other places, additional lines were added in order to 
reflect changes in the Instructions, including the need for additional 
lines to reflect subtotals of itemized and aggregated amounts for some 
categories or the need to add amounts from other parts of the form. 
Several titles of categories were revised to better reflect the 
information to be reported. Thus, the title of Item 36, ``Dues and 
Other Payments,'' has been changed to ``Dues and Agency Fees,'' the 
title of Schedule 1 was changed to ``Accounts Receivable Aging 
Schedule,'' and the title of Schedule 8 was changed to ``Accounts 
Payable Aging Schedule.'' In Schedule 9, ``Loans Payable,'' the 
Instructions were revised to state that interest paid must be reported 
in Schedule 18, ``General Overhead,'' in place of the reference to the 
now obsolete ``Other Disbursements Schedule.''
    The text of the Instructions pertaining to some schedules and 
categories was revised where greater clarity was needed. Additional 
examples were included to assist filers in completing certain 
categories. For example, in Section X, a building corporation was added 
as an example of types of trusts, and new examples for ``Other 
Receipts'' were provided to better reflect the transactions to be 
reported on the schedule. Additional explanation for the ``Detailed 
Summary Page'' and the ``Initial Itemization Page'' was added. The 
``Continuation Itemization Page'' was created for labor organizations 
that utilize the hardship exemption and do not file electronically. 
Some terms that might be unfamiliar to filers were explained, including 
terms such as ``net,'' ``basis,'' and ``book value.'' In Items 39 and 
60, the following were added to illustrate items to be reported as 
supplies: union logo clothing, lapel pins, and bumper stickers.
    Additional information about compliance assistance also was added. 
In the ``How to File'' section, filers are provided a website address 
for obtaining the filing software www.olms.dol.gov; the reference in 
the proposed instructions to a CD-ROM accompanying the report package 
was deleted as obsolete. Updated information is provided in the ``If 
You Need Assistance'' section at the end of the instructions. In Item 
18, ``Changes in Constitution and Bylaws or Practices and Procedures,'' 
the language was revised to indicate that if the form is filed 
electronically, the constitution and bylaws must be submitted as an 
electronic attachment. In the second paragraph of the general 
instructions for completing Schedules 14 through 22, the statement 
relating to the compatibility of the Department's software was revised 
to reflect that the software will be compatible with the most commonly 
used electronic recordkeeping systems. A sentence was also added to 
indicate that information about the software and the technical 
specifications can be found at the OLMS Web site.

II. Comments on the Proposal and Responses to the Comments

A. General Comments

    Before discussing the many specific comments that the Department 
received, it should be noted that the Department also received many 
comments that simply expressed general support for, or opposition to, 
the proposal. Union members, employers, and public interest 
organizations filed numerous general comments in support of the 
Department's proposed reform. One union member asked, ``Government is 
accountable to taxpayers and corporations are accountable to 
shareholders, shouldn't unions be accountable to dues-paying members?'' 
The commenters included a former vice president of a local union who 
expressed ``full support of the proposed anti-corruption initiative'' 
and wrote, ``We should all know how the money is being spent at every 
level.'' Other union members suggested that the proposal was ``long 
overdue.''
    Some union members advocated more sweeping change. One union member 
commented, ``We need protection from our supposed labor leaders.'' 
Another commented, ``Just please be sure the unions cannot get around 
these [proposed] requirements through creative accounting tricks.'' A 
commenter who described himself as having been a union member for 33 
years, wrote, ``I do not believe that these new regulations go far 
enough to hold unions more accountable.''
    Some comments from union members centered on their difficulties in 
obtaining financial information from their union under the current 
reporting scheme. A shop steward said that repeated requests for 
information to the union leadership had ``gone unanswered'' and that he 
``feel[s] it is time that unions be required to account for every penny 
of the dues they collect.'' Numerous other commenters joined in 
describing futile, or largely futile, attempts made to obtain 
information about union finances from the union leadership. Some 
commenters indicated that such requests for information generate 
resentment or invite retaliation from union leaders. Another union 
member wrote, ``You shouldn't have to beg or plead with your Business 
Manager/Agent to see financial reports for an organization you 
finance.''

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    Other commenters claimed to have witnessed questionable union 
expenditures, which increased disclosure would have revealed. Another 
comment asserted, ``Significant money is spent on items which many 
would consider a waste of funds if only the members knew.'' Others said 
that the greater detail in the proposed form ``will make thefts harder 
to cover up.'' Another member supported the initiative to ``help 
prevent fraud and corruption,'' as well as to permit ``informed 
decisions about workplace issues.'' A public interest organization 
commented that ``the information provided by the AFL-CIO in the Form 
LM-2 is not sufficient to give the average union member an accurate 
picture of how the AFL-CIO spends much of the dues collected.'' One 
commenter noted that requiring unions to estimate the amount of time 
spent by union officers and employees performing various duties will 
provide significant new information to union members. The commenter 
also stated that, together with reporting receipts and disbursements by 
functional categories, the proposed rule will provide information that 
will help ensure that union leadership is acting in the interests of 
its membership. Another public interest organization commented that 
more ``detailed financial reporting is needed'' to avoid ``waste, fraud 
and corruption.'' A 25-year union member stated, ``It will be a great 
victory for [the union's] membership when the reform is passed.''
    Many commenters opposed the proposed changes, expressing their 
beliefs that the proposed rule is: political payback designed to punish 
organized labor; designed to weaken the union movement; intended to 
hamper the ability of unions to service their members; designed to 
strain union budgets; intended to expand the requirements of 
Communication Workers of America v. Beck, 487 U.S. 735 (1988); and 
intended to secure additional information for employers and anti-union 
organizations rather than union members. Although a number of unions 
and their members submitted helpful comments on the substance of the 
rule, some of the general comments in opposition simply criticized the 
Administration and Department officials, and lacked specific 
recommendations on the substance of the proposal. They nevertheless 
expressed strongly held feelings in opposition to the proposed changes.
    Acknowledging that there are strong views on both sides of the 
issue, the Department has carefully considered all of the comments and 
the arguments made for and against the proposed revision of the forms 
used by labor organizations to report annual financial information as 
required by the LMRDA.

B. The Secretary's Statutory Authority

    Some of the commenters questioned the Department's authority to 
make the proposed changes, arguing that the Department is upsetting the 
delicate balance between labor and management that was recognized by 
Congress in the National Labor Relations Act. Some unions complained 
that the proposal would require that labor organizations disclose 
confidential trade secrets, such as organizing strategy and negotiating 
plans, which some courts have ruled are not discoverable by union 
members and would give adversaries a greater knowledge of the inner 
workings of the labor organizations with which they may deal in 
connection with collective bargaining or organizing activities. These 
commenters argue that the Department's proposal is inconsistent with 
the principle that governmental intrusion into the affairs of labor 
organizations should be limited because the Constitution protects the 
right of association, there purportedly is no evidence that union 
members want this information, and, they alleged, other voluntary 
organizations are not subjected to this level of disclosure.
    The Department takes seriously the concerns expressed that the 
proposed rule would intrude too deeply in the internal affairs of labor 
organizations and provide unfair advantages to the adversaries and 
competitors of such organizations. Accordingly, the Department has made 
numerous changes, described below, to avoid these unintended and 
unwanted results. In the Department's view, however, none of these 
changes is necessitated by any lack of authority on the part of the 
Department to revise the reporting forms or the manner in which reports 
must be filed. On the contrary, the LMRDA gives the Secretary of Labor 
authority to make such changes, for the reasons outlined in the Notice 
of Proposed Rulemaking (NPRM) and in this rule. Section 201(b) of the 
LMRDA, 29 U.S.C. 431(b), requires that:

    Every labor organization shall file annually with the Secretary 
a financial report signed by its president and treasurer or 
corresponding principal officers containing the following 
information in such detail as may be necessary accurately to 
disclose its financial condition and operations for its preceding 
fiscal year * * *

(Emphasis added.) In addition, section 208 of the LMRDA, 29 U.S.C. 438, 
states in part:

    The Secretary shall have authority to issue, amend and rescind 
rules and regulations prescribing the form and publication of 
reports required to be filed under this title and such other 
reasonable rules and regulations (including rules prescribing 
reports concerning trusts in which a labor organization is 
interested) as he may find necessary to prevent the circumvention or 
evasion of such reporting requirements.

    These provisions make it clear that the Secretary has discretion to 
determine the format in which the information required by the statute 
must be provided, as well as the detail in which the information must 
be reported.
    The statutory language describing the information that labor 
organizations are required to report is broad. Each labor organization 
must include in its annual financial report:
    (1) Assets and liabilities at the beginning and end of the fiscal 
year;
    (2) receipts of any kind and the sources thereof;
    (3) salary, allowances and other direct or indirect disbursements 
(including reimbursed expenses) to each officer and also to each 
employee who, during such fiscal year, received more than $10,000 in 
the aggregate from such labor organization and any other labor 
organization affiliated with it or with which it is affiliated, or 
which is affiliated with the same national or international labor 
organization;
    (4) direct and indirect loans made to any officer, employee, or 
member, which aggregated more than $250 during the fiscal year, 
together with a statement of the purposes, security, if any, and 
arrangements for repayment;
    (5) direct and indirect loans to any business enterprise, together 
with a statement of the purpose, security, if any, and arrangements for 
repayment; and
    (6) other disbursements made by it including the purposes thereof; 
all in such categories as the Secretary may prescribe.
    29 U.S.C. 431(b)(1)-(6). Comments that the Secretary lacks 
authority to require that receipts and disbursements be itemized or 
that disbursements be reported in categories are inconsistent with the 
plain language of the statute. In fact, the statute authorizes the 
Secretary to require labor organizations to report every receipt and 
disbursement, in any amount, and in any categories prescribed by the 
Secretary. The statute's requirement that labor organizations report 
``receipts'' and ``disbursements'' does not, as some comments argue, 
call for only aggregated receipts and disbursements. Neither the fact 
that the Secretary has not heretofore exercised the full extent

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of her statutory authority nor the fact that forms previously required 
less detailed reporting diminishes the authority provided the Secretary 
by the LMRDA as enacted in 1959.
    In the Department's view, this rule meets both the letter and the 
spirit of the LMRDA, both generally and with respect to its provisions 
specific to union reporting requirements. The rule promotes the two 
related overarching purposes of union reporting: to fully inform union 
members, on a yearly basis, about their union's ``financial condition 
and operations,'' 29 U.S.C. 431(b); and, by public disclosure of this 
information, to deter union officials and employees from abusing their 
stewardship duties and to allow members, the Department, and the public 
an opportunity to review a union's financial information as a check on 
the actions of its officials and employees. See United States v. 
Budzanoski, 462 F.2d 443, 450 (3d Cir.), cert. denied, 409 U.S. 949 
(1972); Int'l Bhd. of Teamsters, et al. v. Wirtz, 346 F.2d 827, 831 
(D.C. Cir. 1965). The Department's reforms also advance the LMRDA's 
declared purpose ``that labor organizations, employers, and their 
officials adhere to the highest standards of responsibility and ethical 
conduct in administering the affairs of their organizations.'' 29 
U.S.C. 401(a).
    The AFL-CIO commented that the proposed rule attempts to dictate to 
unions what they should treat as their ``most * * * important 
purposes'' in structuring their budgets and accounts and is contrary to 
the LMRDA insofar as the statute reflects the theory that, ``[g]iven 
certain minimum standards, `individual members are fully competent to 
regulate union affairs' '' (quoting S. Rep. No. 85-1684, at 4-5 
(1958)). In the view of the AFL-CIO, Congress deliberately established 
a two-step process, found in 29 U.S.C. 431, to inform members about 
their union's finances and operations. The process was established to 
protect unions from improper government intervention in their affairs 
and harassment from members that would divert them from their 
representational function. The first step requires the preparation of a 
financial report in such detail as needed to disclose the union's 
financial condition (29 U.S.C. 431(b)); the second step requires a 
union, upon a member's showing of just cause, to disclose additional 
information (29 U.S.C. 431(c)). In the AFL-CIO's view, the proposed 
rule collapses this two-part process and destroys protections for a 
union's confidentiality and trade secrets in violation of established 
protections.
    In the Department's view, this argument is unpersuasive. The 
revised form calls for more detail than the previous form, but does not 
require disclosure of the underlying records necessary to verify the 
report. See 29 U.S.C. 431(c). The fact that the Secretary has exercised 
her authority to determine that more detailed financial information 
should be reported on a Form LM-2 than previously does not limit a 
union's ability to maintain additional information, in any format it 
desires, including the physical evidence of financial transactions 
(such as cancelled checks, bills, or receipts), nor does it eliminate 
each union member's right to examine such information, enforceable in 
district court upon a showing of ``just cause.'' Congress conditioned a 
union member's right to examine records necessary to verify the union's 
annual financial report on a showing of just cause in order to relieve 
unions from the harassment of repeated requests for documents based 
simply on curiosity. See Kinslow v. American Postal Workers Union, 
Chicago Local, 222 F.3d 269, 273 (7th Cir. 2000). This requirement, 
however, ``simply entails a showing that the union member had some 
reasonable basis to question the accuracy of the LM-2 or the documents 
on which it was based, or that information in the LM-2 has inspired 
reasonable questions about the way union funds were handled.'' Id. at 
274; see also Mallick v. Int'l Bhd. of Elec. Workers, 749 F.2d 771, 781 
(D.C. Cir. 1984). No matter how much detail a union provides on its 
Form LM-2, members have a right to examine the actual documents or 
other evidence of recorded transactions to determine, for example, 
whether the union accurately recorded the information. Moreover, as 
explained more fully below, in Section III(B)(2), in response to 
comments from numerous unions that making certain information available 
to the public at large would be harmful to legitimate interests, the 
Department will permit labor organizations to report some receipts and 
disbursements as part of the aggregated total, without specificity, 
provided, with limited exceptions, it indicates on the Form LM-2 that 
it has done so. If a labor organization uses this option, only those of 
its members who satisfy the ``just cause'' standard and the Department 
will be entitled to review the specific information related to these 
disbursements. Far from eliminating the method Congress provided 
members to review their union's finances in more detail pursuant to 
section 201(c), 29 U.S.C. 431(c), that statutory tool is central to 
these reforms.

C. Comparison With Reporting Requirements for Corporations and Non-
Profit Organizations

    Several commenters, asserting that corporate scandals have 
surpassed any union misconduct in recent years, argued that 
corporations should first be made to file disclosure reports like those 
proposed by the Department before unions are asked to do so. Some union 
members argued that labor organizations are already subject to more 
stringent reporting requirements than corporations or other non-profit 
organizations. Many commenters felt that unions are like small 
businesses and should be provided the same protections from intrusive 
reporting requirements that, they assert, small businesses are provided 
by the Department and other regulatory agencies.
    Other commenters noted that corporations and their executives are 
subject to significantly more burdensome reporting requirements than 
are unions. One commenter noted that labor organizations, unlike 
corporations, are not subject to various external controls and scrutiny 
by such entities as Wall Street investment analysts, portfolio 
managers, financial media, and millions of shareholders. Another 
commenter found the comparison between labor organizations and 
corporations irrelevant because unlike commercial entities, which are 
accountable based on their profit or loss, labor unions are accountable 
only in terms of the stewardship responsibilities of their officers. 
One commenter also noted that like corporate disclosure requirements, 
which have been amended periodically, union disclosure requirements 
should be changed in order to keep pace with the times. Another 
commenter estimated that the reporting and disclosure burdens on 
businesses are many times the burden on labor organizations.
    The Department has concluded that, while there are important 
differences among corporations, public interest organizations, and 
labor organizations, increased transparency is as important for labor 
organizations as for other such organizations. Moreover, for the 
reasons set forth below, the Department is not persuaded that the 
requirements imposed by this rule are more restrictive than those that 
apply to other entities. If anything, these requirements are less 
intrusive, less burdensome, and require less disclosure than reporting 
requirements governing other entities.
    First, no comparison should be drawn between union reporting 
requirements and requirements imposed on a

[[Page 58378]]

privately held enterprise where the operator of the business is also 
the source of much of the venture's financing. Legally mandated 
financial disclosure regimes for both unions and publicly held 
corporations are designed primarily to address a fundamental problem 
common to both institutions: that managerial control of an entity lies 
beyond the direct control of the people who fund the entity. See 
generally Henn & Alexander, Hornbook on Laws of Corporations Sec.  186 
et seq. (1983). Corporate and union financial disclosure regimes are 
intended to reduce the informational advantages agents have over 
principals and permit principals to monitor and assess the performance 
of agents. See Fletcher, Cyclopedia of the Law of Private Corporations 
Sec. Sec.  2213 et seq., 6842-43 (perm. ed.), available on Westlaw at 
Fletcher-CYC. Adequate transparency encourages union officers and 
corporate directors (agents) who are elected by union members and 
corporate shareholders (principals) to conduct the business of their 
organizations in the best interests of the people who provide the 
operating funds. Agents failing to do so can be removed through the 
mechanisms of corporate and union democracy. See Cyclopedia of the Law 
of Private Corporations Sec.  351 et seq.
    In a privately held enterprise, where the operator of the business 
is also the source of the venture's financing, there is no principal to 
perform the monitoring and no agent to be monitored. See generally Laws 
of Corporations Sec.  257 et seq.; see also Soderquist, Understanding 
the Securities Laws Sec.  2:2.2 (2001), available on Westlaw at PLIREF-
SECLAW. While privately held companies are required to make certain 
financial disclosures related to franchise taxes, Small Business 
Administration loans, Federal Communications Commission licenses and 
other regulatory schemes, these disclosures are designed to assess 
taxes, fees, or eligibility for government-provided benefits, not to 
ensure transparency of managerial performance. See generally Cyclopedia 
of the Law of Private Corporations Sec.  6666 et seq. The only scenario 
in which it is instructive to compare the financial disclosure regime 
of a privately held company to a union is when a privately held firm 
creates a principal/agent relationship by accepting funding through the 
venture capital markets. This scenario, however, also offers no basis 
for comparison with the relationship between a union and its members 
because financial institutions and other entities that provide such 
funding can condition it on the disclosure of any financial information 
concerning the company seeking funding, can demand that the information 
be provided in any level of detail desired, and can use contractual 
remedies to enforce the condition. Union members, by contrast, are 
entitled only to the report that their union files with the Department 
of Labor pursuant to the LMRDA and, upon a showing of just cause, ``to 
examine any books, records, and accounts necessary to verify such 
report.'' 29 U.S.C. 431(b), (c).
    Accordingly, the only reporting requirements applied to businesses 
that are relevant for comparison with the annual union financial report 
are those applied to publicly-traded companies. Generally speaking, the 
regulatory regime governing financial reporting by large and small 
public companies is much more extensive than the system that exists for 
labor organizations. See generally Hazen, Law of Securities Regulation 
Sec. Sec.  3.2-3.7, 9.4 (2002), available on Westlaw at LAWSECREG; 
Understanding the Securities Laws Sec.  2:2.2. Furthermore, the 
reporting requirements under the securities laws have been 
substantially increased since the enactment of the Sarbanes-Oxley Act, 
Pub. L. 107-204, 116 Stat. 745. See generally 68 FR 36636-01 et seq. 
(June 18, 2003) (amending various disclosure rules established by the 
Securities and Exchange Commission (``SEC''), including 17 CFR 240.13a-
14, 240.13a-15, 240.15d-14, 240.15d-15, 249.220f). Labor organizations 
must file only one form a year, need not disclose qualitative 
information, and are not required to conduct certified audits of their 
financial statements. See 29 U.S.C. 431. The financial reporting scheme 
for public companies, as amended by the Sarbanes-Oxley Act, requires 
the disclosure of both quantitative and qualitative information and 
imposes strict audits and significant internal controls on public 
companies, their officers, directors, auditors, accountants and 
attorneys. See generally 17 CFR Parts 210-211, 228-32, 239, 241, 249 
(Subparts A-D) (2003) (particularly provisions amended by 68 FR 4820 
(Jan. 30, 2003), 68 FR 5110 (Jan. 31, 2003), 68 FR 15354-02 (Mar. 31, 
2003), 68 FR 36636-01 (June 18, 2003). See also Bloomenthal, Sarbanes-
Oxley Act in Perspective Sec.  10 (2002), available on Westlaw at SEC-
SOAP S 10. Small and large public companies are required to file annual 
and quarterly reports. See 17 CFR 240.13a-1 et seq.; Cyclopedia of the 
Law of Private Corporations Sec.  6842; Law of Securities Regulation 
Sec.  9.6[4]. All public companies must certify audits for the accuracy 
of information in their annual and quarterly reports. See 68 FR 36636 
et seq. (discussed above); Bloomenthal & Wolff, Securities and Federal 
Corporate Law Sec.  7:35.13 (2002). A substantial amount of 
quantitative financial information is contained in both annual and 
quarterly reports. These reports must disclose ``material'' financial 
information. See Law of Securities Regulation Sec. Sec.  3.2-3.7, 9.4; 
Understanding the Securities Laws Sec.  12-8; Cyclopedia of the Law of 
Private Corporations Sec.  6862. In its Statement of Financial 
Accounting Concepts No. 2 (SFAC No. 2), the Financial Accounting 
Standards Board (FASB) stated the essence of the concept of materiality 
as follows:

    The omission or misstatement of an item in a financial report is 
material if, in the light of surrounding circumstances, the 
magnitude of the item is such that it is probable that the judgment 
of a reasonable person relying upon the report would have been 
changed or influenced by the inclusion or correction of the item.

    Id. at ] 132. See discussion below in Section (II)(D). Due to the 
myriad factors involved in determining whether financial information 
meets this rather vague threshold, professional assistance is required. 
See id. at ]] 123-132. As noted above, the SEC generally requires 
public companies to disclose in their annual reports ``material'' 
quantitative information on balance sheets or income statements related 
to numerous types of assets, accounts, and expenditures. See Law of 
Securities Regulation Sec. Sec.  3.2-3.7, 9.4. Public companies must 
disclose ``material'' financial data on executive compensation, 
including: annual salary; bonuses; other annual compensation; 
restricted stock; and options. Id. They must also provide ``material'' 
quantitative information on computation of per share earnings and 
market risk. Id. The Sarbanes-Oxley Act added several additional 
categories of material, quantitative data that public companies must 
disclose, including disclosing in each annual and quarterly report all 
``material'' off-balance sheet transactions, arrangements and 
obligations (including contingent obligations). See Title III, 116 
Stat. 775, and Title IV, 116 Stat. 785.
    Since its inception, the LM-2 reporting system has eschewed the use 
of a vague standard based on individualized judgments regarding 
materiality for determining what quantitative data a union must report, 
and has instead required specific information regarding all assets, 
liabilities and transactions. The Department has determined that it 
will

[[Page 58379]]

continue with this approach. This avoids forcing labor organizations to 
incur the expenses and burdens associated with making determinations 
about whether given items are ``material.'' Even those commenters that 
suggested that the Department should consider implementing a 
materiality standard recognized that such a standard would introduce an 
element of judgment in the reporting process with potential for 
complicating the investigative process. Although a commenter argued 
that such tradeoffs are similar to those necessitated by dollar 
thresholds for reporting, the Department believes that a dollar 
threshold is easier for reporting unions to apply, for the Department 
to enforce, and for union members to understand.
    In addition to the detailed quantitative data, the annual and 
quarterly reports of large and small public companies must also 
disclose ``material'' qualitative data. See Law of Securities 
Regulation Sec. Sec.  3.4, 3.6, 9.4. This includes narrative 
descriptions of ``material'' aspects of a company's businesses and 
principal products. Id. Public companies must also disclose information 
on relationships the company has that may have a ``material'' effect on 
current or future financial condition, liquidity, capital expenditures, 
capital resources, or significant components of revenues or expenses of 
the company. Id. This includes an explanation of a company's dependence 
on customers whose loss would materially affect the company's financial 
health and an explanation of material changes in the mode of conducting 
business. Id. ``Material'' legal proceedings must be reported, 
including full identification of parties and the circumstances and 
basis of the proceedings. Id. ``Material'' property holdings must also 
be identified and described, including their use and any encumbrances 
upon them. Id.
    Public companies are also required to make forward-looking 
statements about the future financial performance of the company, 
including analysis of all ``material'' risks facing the company. Id. 
Public companies must also report ``material'' information about market 
risk, such as potential loss in future earnings of cash flow based on 
changes in interest rates, foreign currency exchange rates, commodity 
prices and other relevant market factors. Id. A detailed explanation of 
internal controls and procedures must also be provided. Id; see also 68 
FR 36636-01. The Department has decided not to require labor 
organizations to provide their members with any qualitative information 
on its finances, much less the detailed qualitative analysis public 
companies are required to disclose.
    Following the passage of Sarbanes-Oxley, the SEC and the Public 
Company Accounting Oversight Board (``the Board'') oversee the audits 
of public companies; establish accounting and audit report standards 
and rules for public companies; and certify, investigate, inspect, and 
enforce compliance with standards applicable to professionals involved 
in the preparation of audits and financial reports by public companies. 
See Title I, 116 Stat. 750. Annual audits and financial reporting by 
public companies must be under the control of an audit committee 
composed exclusively of independent directors. See Title II, Sec.  202, 
116 Stat. 772-73; Title III, 116 Stat. 775-77. These independent 
committees must include at least one ``financial expert'' and are 
directly responsible for the appointment, compensation, and oversight 
of the certified firms that do private audits of public companies. See 
Title IV, Sec.  408, 116 Stat. 790-91. To effectuate the whistleblower 
provisions of the Sarbanes-Oxley Act, these audit committees must also 
establish procedures for the receipt, retention and review of anonymous 
complaints by a public company's employees regarding accounting 
practices, internal financial controls, and auditing matters. See Title 
III, Sec. Sec.  301-04, 116 Stat. 775-78. Public companies must give 
their audit committees the financial resources necessary to hire any 
independent advisors or attorneys required to carry out these 
responsibilities. Id.
    The LMRDA does not require labor unions to perform any audits. It 
does not mandate that unions use governance structures that ensure 
independent oversight of financial operations, such as independent 
audit committees. Union members have no whistleblower rights. The 
Department does not enforce any independent system of certification, 
quality control, ethics, independence standards or other regulation of 
firms that some unions use to prepare annual Form LM-2 reports. There 
are also no restrictions on other services that a firm preparing Form 
LM-2 reports may perform for a labor organization. In contrast to the 
reviews the SEC performs on public companies not less than once every 
three years (see 15 U.S.C. 7266(c)), labor unions currently can expect, 
on average, to be audited by the Department of Labor approximately once 
every 150 years. Ten of the 25 largest unions have never been audited 
because of OLMS's limited resources.
    Several commenters suggested that unions be required to file annual 
independent audits. Many unions, one individual commented, have 
constitutional provisions that already require an audit by an outside 
accounting firm. While some commenters argued that requiring unions to 
obtain annual audits is within the Department's statutory authority, no 
provision of the LMRDA vests the Secretary of Labor with any express 
authority to require unions to obtain audits and the Department has 
chosen not to attempt to impose such a requirement, to avoid imposing 
on the labor organizations that are not currently obtaining private 
audits any need to hire financial experts to conduct a qualitative 
analysis of the union's records. Simply permitting those unions that 
currently obtain annual audits to file whatever audit is currently 
performed is not likely to ensure that all of the statutorily-required 
information is reported, nor would it ensure that the information is 
provided in a standard format that is both readily understandable and 
accessible to union members. Information that may be meaningful to 
trained financial analysts or auditors may not be useful to many union 
members.
    Accordingly, the statutory requirements, and the Secretary's 
longstanding implementation of those requirements, have been framed in 
terms of assets, liabilities, disbursements and receipts, rather than 
more general financial terms. The Department has concluded that 
continuing to require unions to report holdings and transactions, 
rather than third-party descriptions of their financial conditions, 
will provide understandable information to members, permit members to 
compare reports of different years, permit members to compare reports 
with those of other unions, and enhance the detection and deterrence of 
fraud.
    Alternatively, commenters suggested, the Department should annually 
conduct a compliance audit of each union. The Department's 
responsibility for insuring the financial integrity of unions involves 
both requiring adequate reporting and conducting compliance audits. The 
statute does not contemplate the two components as mutually exclusive; 
in fact, the Department intends to increase the number of compliance 
audits, as resources permit, at the same time it implements the revised 
Form LM-2. Additional compliance audits would not, however, constitute 
a satisfactory alternative to the reforms embodied in the revised Form 
LM-2, as compliance audits would address the accuracy of the 
information provided in the existing

[[Page 58380]]

Form LM-2, but would not improve the transparency of labor 
organizations' finances, increase the information available to members, 
or make the data disclosed in reports more understandable and 
accessible.
    As one commenter noted, it is even more difficult to deter 
financial mismanagement by labor organization officials than it is in a 
corporate setting because of the absence of natural market influences 
and because there are fewer regularly occurring checks on the financial 
performance of unions. The same commenter noted that the additional 
disclosure as a result of the proposed changes would make it more 
difficult, and more expensive, to hide fraud. Recognizing that 
achieving this goal will also make it more expensive for unions to 
report, and that disclosure alone will reduce but not entirely overcome 
fraud, the Department has attempted to achieve a balance in this rule 
between the benefits and burdens of more detailed disclosure, and 
intends to follow promulgation of the rule both with more effective 
enforcement, using the additional information disclosed to uncover 
fraud when it occurs, and with more compliance assistance to respond to 
questions and concerns.
    The Department is also not persuaded by the comments that suggest 
that the reporting requirements for labor organizations should be 
comparable to those that govern non-profit organizations. The LMRDA was 
enacted in the aftermath of a congressional investigation in the 1950's 
that found corruption in union leadership and a disregard for the 
rights of the rank-and-file. See Wirtz v. Hotel, Motel & Club Emp. 
Union, Local 6, 391 U.S. 492, 497-98 (1968). The over-riding purpose of 
the reporting provisions of the LMRDA is to provide union members with 
``all the vital information necessary for them to take effective action 
in regulating affairs of their organization.'' See S. Rep. 187, 86th 
Cong., 1st Session, p.9, 1959 U.S.C.C.A.N. 2318, 2325 (1959). The 
Senate Labor Committee declared: ``A union treasury should not be 
managed as the private property of union officers, however well 
intentioned, but as a fund governed by fiduciary standards appropriate 
to this type of organization. The members who are the real owners of 
the money and property of the organization are entitled to a full 
accounting of all transactions involving their property.'' See S. Rep. 
187 at p. 8, 1959 U.S.C.C.A.N. at 2324. In light of these congressional 
directives, the Department is not persuaded as a general matter that a 
comparison between labor organizations and ordinary non-profit 
organizations is apt in the context of determining reporting standards. 
Nevertheless, although other reporting standards will not be treated as 
benchmarks or models, the Department has considered the specific 
comments of labor organizations and others in assessing the 
appropriateness of each proposed change to the reporting forms, as 
discussed in the succeeding sections.

D. Application of Generally Accepted Accounting Principles

    Some commenters argued that the changes proposed by the Department 
depart from the generally accepted accounting principles (GAAP) 
promulgated by the FASB and the American Institute of Certified Public 
Accountants (AICPA). In particular, this position was advanced by a 
professor of accountancy whose comments were made on behalf of, and 
attached to the comment of, the AFL-CIO. This commenter said that many 
of the terms used and information required by the Department's proposal 
are inconsistent with various interpretations of GAAP. These assertions 
fail to recognize, however, that not all GAAP standards are consistent 
with the disclosure requirement of the LMRDA. 29 U.S.C. 431(b). 
Although the Department has considered the GAAP standards, and has 
accepted them in principle where they further the purposes of the 
LMRDA, the Department will not adopt GAAP standards when they are not 
consistent with these purposes. For example, as many commenters noted, 
the current Form LM-2 mandates reporting on a cash accounting basis, 
which is inconsistent with GAAP, but some cash accounting procedures 
are made necessary by the statute's requirement that the union disclose 
``receipts'' and ``disbursements.'' See 29 U.S.C. 431(b). Further, Form 
LM-2 is a special-purpose financial report prepared for compliance with 
the LMRDA. Special financial reports to government regulatory bodies 
are generally prepared in conformity with Other Comprehensive Basis Of 
Accounting (OCBOA).
    This commenter also argued that the Department's proposal calls for 
the presentation of disaggregated information, which is contrary to 
GAAP and confusing for the user of the reported information. Although 
GAAP precepts do not control the inquiry, the revised Form LM-2, like 
the current Form LM-2, includes Statements A and B, which provide 
aggregated totals of financial information. Form LM-2 users do not have 
to rely solely on the itemized information contained in the schedules 
to obtain an overall understanding of the reporting labor 
organization's financial performance. The Department proposed requiring 
labor organizations to provide certain itemized information in addition 
to the aggregated totals in order to provide users of the Form LM-2 
with additional financial information on specific financial issues. In 
fact, the FASB recognizes the appropriate inclusion of disaggregated 
information in financial reporting:

    Disaggregated information that permits users of financial 
information to relate components of revenues to components of 
expenses also is often preferable to information provided by their 
aggregated amounts.

    Financial Accounting Standard 117 (FAS 117), ] 118.
    Several commenters asserted that the individual items reported on 
the Form LM-2 supporting schedules in and of themselves are not 
material financial information that will be relevant to the user. The 
FASB states that materiality of information is not measured solely on 
its magnitude. SFAC No. 2. ``Materiality is a pervasive concept that 
relates to the qualitative characteristics, especially relevance and 
reliability.'' Id. The Supreme Court, in deciding whether an omitted 
fact was material, described a general standard of materiality as:

    A substantial likelihood that, under all the circumstances, the 
omitted fact would have assumed actual significance in the 
deliberations of the reasonable shareholder. Put another way, there 
must be a substantial likelihood that the disclosure of the omitted 
fact would have been viewed by the reasonable investor as having 
significantly altered the ``total mix'' of information made 
available.

    TSC Industries Inc. v. Northway Inc., 426 U.S. 438, 449 (1976). The 
FASB agrees that the ``usefulness of information must be evaluated in 
relation to the purposes to be served, and the objectives of financial 
reporting are focused on the use of accounting information in decision 
making.'' Id. The Department has concluded, based on the experience of 
its investigators and the comments received from many union members, 
that the information that will be reported as a result of this revision 
of the Form LM-2, in fact, will have the capacity to make a difference 
in the ability of union members to make decisions regarding workplace 
and union governance issues. As indicated in Section III(B)(3), (4), 
the proper threshold for when a union must itemize and separately 
report a receipt or expenditure is subject to competing arguments. 
Setting the threshold lower (or eliminating it entirely) increases the 
number of receipts and expenditures

[[Page 58381]]

that must be reported, which correspondingly increases the information 
available for inspection. The availability of this information makes 
concealment of fraud more difficult, and allows members to evaluate the 
wisdom of the union's financial transactions. The threshold is 
significant: union members ordinarily protect their rights by reviewing 
these reports, unlike investors in public corporations and other 
individuals protected by the audit, oversight, and whistleblower 
provisions discussed in Section II(C). While a strong argument could be 
made that all expenditures are thus significant and should be itemized, 
a lower threshold would increase the accounting burden. The $5,000 
threshold adopted strikes a balance between the opposing viewpoints. 
Thus, while the revised form neither permits nor necessitates 
individual assessments of the materiality of information about 
particular transactions, it requires the disclosure of information that 
is significant to union members.
    Commenters also argued that proposed Form LM-2 violates GAAP 
because the costs of reporting the information exceed the benefits to 
users of the information. While the costs of the revised Form LM-2 are 
addressed in more detail in the Regulatory Flexibility and Paperwork 
Reduction Act Analyses, see Section V, the Department has determined 
that these costs are outweighed by benefits. FASB and other government 
regulatory bodies have discovered that the total benefits derived from 
shared information are nearly impossible to quantify. Information is 
different from other commodities because the benefits from information 
can extend beyond the immediate users. The revised Form LM-2 directly 
benefits union members because increased disclosure permits members to 
make better decisions about union governance and helps deter and detect 
fraud. The public also benefits from the deterrence of fraud, due to 
the costs fraud imposes on, for example, the criminal justice system, 
and from the promotion of ethical conduct in the administration of 
labor organization affairs, which increases the stability of labor 
organizations, and thus promotes the flow of commerce. See 29 U.S.C. 
401 (``Declaration of Findings, Purposes, and Policy''). The 
information required on the revised Form LM-2 thus benefits a wide 
variety of users, which is consistent with SFAC No. 2, ] 143.
    Commenters noted several issues related to the application of FAS 
117, Financial Statements of Not-For-Profit Organizations, to labor 
organization financial reporting. The FASB has opined regarding the 
appropriate scope of financial statements for not-for-profit 
organizations:

    A complete set of financial statements of a not-for-profit 
organization shall include a statement of financial position as of 
the end of the reporting period, a statement of activities and a 
statement of cash flows for the reporting period, and accompanying 
notes to financial statements. FAS 117, ] 6.

    FAS 117, however, applies only broad, general standards for 
reporting information in not-for-profit organization financial 
statements (FAS 117, ] 48), and the FASB recognizes that general 
purpose financial statements may not fulfill the special-purpose needs 
of regulatory requirements like those imposed by the LMRDA (FAS 117, ] 
45). Even not-for-profit organizations subject to FAS 17 are required 
to report expenses by functional categories and to allocate costs among 
significant programs as applicable (see FAS 117, ] ] 26-28) because of 
differences in indicators of performance as compared to for-profit 
business organizations (FAS 117, ] 61).
    Comments on the Department's proposal indicate some confusion 
regarding the question whether revisions to Form LM-2 will require 
labor organizations to maintain their financial records using a cash 
basis or accrual method. Some unions and individuals have read the 
proposed rules to require unions to maintain their financial records 
system on an accrual basis. In this regard, some of the commenters 
noted that Schedule 1 of the proposed Form LM-2 requires reporting of 
receivables, a concept associated with accrual accounting. Some of the 
commenters also expressed their view that the majority of unions use 
the cash method of accounting and that it would be a substantial burden 
for them to make the conversion to the accrual method. Some of the 
commenters also noted that cash basis reporting comports with IRS 
requirements.
    A local union explained that its accounting system uses the cash 
basis method. It noted that the proposed Schedule 1 (Accounts 
Receivable) and Schedule 8 (Accounts Payable) call for information 
maintained by systems set up on the accrual method of accounting. The 
local explained that this information is not readily available from 
cash basis systems, noting that commercial accounting systems track 
income and expenses, not receipts and disbursements. The local 
expressed its concern that it would be able to provide the accounts 
receivable and accounts payable information only by undertaking manual 
searches through voluminous records. It also noted a specific concern 
regarding the reporting of membership information, noting that its 
system to track membership is not integrated with its general ledger, 
with the result that it has no general ledger account set up to capture 
written off or uncollected dues income. Similarly, one labor 
organization noted concerns with regard to reporting accounts 
receivable and accounts payable (insofar as they require ``aging'' 
information). The commenter explained that this change would require it 
to spend considerable additional time to properly complete a Form LM-2. 
It explained that many local unions have members' dues sent to third 
parties or their particular international and that the locals' portion 
of the dues is only later remitted to the locals. One commenter stated 
that the cash basis method better effectuates the LMRDA's focus on 
receipts and disbursements.
    Some commenters, however, read the proposed rules as continuing the 
cash basis requirement. In their comments, they requested that the 
Department, as part of the final rule, allow unions the option to 
utilize the accrual method of accounting. In support of this approach, 
they noted that accrual accounting is required by GAAP, reflecting, in 
their view, the belief that accrual accounting provides a more 
effective gauge of an organization's financial condition. In this 
regard, one commenter noted that the Department itself once recognized, 
when it proposed revisions to the Form LM-2 in 1992 (later withdrawn in 
part), that ``accrual accounting generally provides a more accurate 
indication of an organization's financial condition and operations.'' 
57 FR 49282 (Oct. 30, 1992). Other commenters noted that the current 
cash basis requirement forces them to convert information in their 
accrual-based system for the sole purpose of submitting a Form LM-2, an 
expensive and time-consuming undertaking. One labor organization noted 
that its accounting personnel last year spent nearly half of the 1,200 
hours it spent in preparing the Form LM-2 in converting information 
from its accrual-based system to a cash basis mode. Several commenters 
also noted that the IRS accepts reports using the accrual method of 
accounting.
    An international labor organization, the Air Line Pilots 
Association (ALPA), explained that it uses an accrual system to collect 
detailed information for its payroll, employee expense reports, member 
accounts receivable, and flight pay loss. ALPA noted that the current 
requirement that unions employ the cash method in preparing a Form LM-2 
requires time-consuming conversion

[[Page 58382]]

of ALPA's financial information, preventing it from ever meeting the 
March 31 deadline imposed by the LMRDA. Another international, the 
International Brotherhood of Electrical Workers (IBEW), stated that it 
maintains its books on an accrual basis for two reasons: first, it 
enables the organization to match revenue and expenses to the proper 
time period; and second, it enables the organization to comply with 
accounting rules and to receive an ``unqualified'' opinion from an 
independent auditor as to the organization's financial health.
    In the Department's 1992 rulemaking, the Department specifically 
proposed that unions would be required to utilize the accrual 
accounting method. In response to the comments submitted, however, the 
1992 final rule allowed unions the option to utilize either the cash or 
accrual method of accounting in reporting their finances. This option 
was rescinded in December 1993. This action was taken in response to 
comments that only relatively few of the larger unions used the accrual 
method and to correct the mistaken perception held by some unions that 
the Department's rule, in practice, was encouraging unions to utilize 
accrual accounting, a departure from the cash basis method that had 
been prescribed for reports in the past and the method used by the vast 
majority of unions. One union commenter on the current rule, however, 
asserted that the option concept was well thought-out because it 
recognized that although some unions used the accrual method of 
accounting, imposing this method on many smaller unions would present a 
real hardship to these unions because they rely on volunteers, not 
accountants, to prepare the Form LM-2. As discussed immediately below, 
this option is indeed available to unions, which may choose to track 
their finances on a cash basis, accrual basis or some other method of 
accounting.
    Since the 1992 rule was rescinded, the Form LM-2 has, in fact, 
required that receipts and disbursements be reported on a cash basis, 
but has also required the reporting of certain information more 
typically maintained in an accrual-based system (e.g., Schedule 1 `` 
Loans Receivable, Schedule 8 `` Loans Payable, Accounts Payable, 
Mortgages Payable). Thus, requiring a combination of both types of 
information in one form, which might be characterized as modified cash 
basis accounting, represents no change from the existing Form LM-2 and 
was not identified as a change in the NPRM. The statement in the 
Instructions to the existing Form LM-2 that the form ``must be prepared 
using the cash method of accounting,'' was dropped, however, as it was 
not wholly accurate and could be misleading.
    As explained in greater detail below, the Department has not 
proposed to require unions to establish a particular method to account 
for, and manage, their finances. Unions, for various reasons, may 
choose to track their finances on a cash basis, accrual basis, a hybrid 
of the two, or some other method of accounting. As noted by some 
commenters, the Form LM-2 reporting format requires unions to utilize 
some elements of both cash basis and accrual accounting. To a large 
extent, however, that format is driven by the fact that the statute 
itself requires both types of information. For example, the statement 
of ``receipts and disbursements'' required by the LMRDA is basically an 
accounting of the inflow and outflow of an organization's cash during 
the fiscal period. Consequently, a ``profit and loss'' statement 
prepared on the accrual basis is unacceptable as compliance with the 
Act since it reflects the income and expenses of an organization in the 
fiscal period and not the disposition of its cash. See 29 U.S.C. 
431(b).
    In contrast, the statement of ``assets and liabilities'' required 
by the LMRDA is essentially an accrual type of statement and provides 
for reporting all receivables, payables, accruals and deferred items. 
Consequently, it should be unnecessary for an organization that 
maintains its records on the accrual system of accounting to change its 
procedures in order to prepare the statement of assets and liabilities. 
Preparation of a ``cash receipts and disbursement'' statement when the 
accrual method of accounting is used normally requires only an analysis 
of the organization's cash receipts and disbursements records in order 
to properly reclassify the necessary cash transactions to conform to 
the types of accounting classifications represented by like items on 
the prescribed forms. More importantly, the necessary modifications to 
either a cash based or accrual based system that may be necessary to 
comply with the format of the revised Form LM-2 are no different than 
modifications that labor organizations currently perform to file the 
existing Form LM-2.
    The Department believes it would be inappropriate to dictate the 
particular system by which a union keeps track of its finances. While 
some unions may find it easier to use the accrual method of accounting 
and convert information to complete Form LM-2 items reporting the 
inflow and outflow of funds, the reporting goals can be achieved 
without directing all unions to use accrual accounting as the 
foundation of their financial management systems. Such a mandate is 
unnecessary and has been rejected in light of the comments that most 
unions maintain their books on the cash basis. Nor is the Department 
persuaded that accrual accounting should be mandated because it accords 
with GAAP. As discussed above, GAAP practices are neither binding nor 
necessarily appropriate for all aspects of financial reporting, 
particularly insofar as the operations of not-for-profit entities are 
concerned. The Department's concern is in ensuring the disclosure of 
information that satisfies the statutory requirements of the LMRDA in a 
manner best suited to meet the purposes of the statute, which can be 
accomplished without requiring a labor organization to use an 
accounting method that may not be best suited to its overall needs.

E. Additional Reforms Considered

    Several commenters suggested that the Department should undertake 
other reforms, in addition to those proposed. While some comments 
expressed general support for wide dissemination of information filed 
with the Department of Labor on the labor organization annual financial 
reports, others thought that more specific dissemination requirements 
should be imposed. One commenter suggested that unions be required to 
post their most recent labor organization annual financial report on 
union bulletin boards in union halls and on employer bulletin boards 
reserved for union use in employer workplaces, while another suggested 
that labor organizations should make their annual financial reports 
available at their membership meetings. One comment suggested that 
information reported on the labor organization annual financial reports 
should be sent by unions to their members by mail or included in 
newsletters, as well as be made available on the Internet. Finally, one 
comment urged the Department to implement the provisions of section 105 
of the LMRDA, requiring ``[e]very labor organization [to] inform its 
members concerning the provisions of this Act.'' See 29 U.S.C. 415.
    Section 205 of the LMRDA provides that the reports filed with the 
Department under Title II of the Act ``shall be public information'' 
and permits the Secretary of Labor to publish any information obtained. 
See 29 U.S.C. 435. Section 208 gives the Secretary of Labor authority 
to issue rules and regulations prescribing the

[[Page 58383]]

form and publication of reports required to be filed under Title II. 
See 29 U.S.C. 438. Neither sections 205 and 208 nor any other provision 
of the Act expressly vest the Secretary of Labor with any authority to 
require labor organizations to disseminate information filed with the 
Department of Labor on labor organization annual financial reports at 
membership meetings, on labor organization websites, in labor 
organization newsletters or otherwise by mail to the members, or on 
union or employer bulletin boards. Neither the terms of section 105, 
nor of any other provision of the LMRDA, vest the Secretary of Labor 
with any express authority to enforce section 105. See 29 U.S.C. 415.
    The Department, however, has developed and implemented, with 
direction from Congress to do so, an extensive system for making 
available on the Internet the labor organization annual financial 
reports filed with the Department for the years 2000 and thereafter, as 
well as reports filed under section 203 of the LMRDA by labor relations 
consultants who engage in persuader activity and the employers who 
enter into agreements for such services. See 29 U.S.C. 433. Using this 
system, any member of a labor organization or the general public with 
Internet access can review all such reports (at http://union-reports.dol.gov) except those for the approximately 600 very small 
labor organizations whose national organizations file summary reports 
on their behalf pursuant to 29 CFR 403.4(b) because those small unions 
had no assets, liabilities, receipts, or disbursements during the 
reporting period.

III. Responses to Comments on Proposed Changes to Form LM-2

A. Which Labor Organizations Must File a Form LM-2

1. The Filing Threshold
    Since 1994, only labor organizations with $200,000 or more in 
annual receipts have been required to file a Form LM-2; smaller unions 
are permitted to use the simpler Forms LM-3 or LM-4. Although the 
Department considered raising the threshold for filing a Form LM-2 in 
its 2002 NPRM, thus reducing the number of labor organizations affected 
by most of the changes proposed, it did not propose an increase. The 
Department did solicit comments, however, on the appropriate level of 
annual receipts to trigger a Form LM-2 obligation. Some commenters 
expressed the view that the current threshold is too high and some 
argued that all unions should be required to file the expanded form, 
without regard to the amount of their annual receipts. Other commenters 
argued that the current threshold is too low and should be raised.
    Shortly after the LMRDA was enacted in 1959, the threshold for 
filing the more detailed Form LM-2 was set by the Secretary at $20,000. 
The threshold was raised by the Secretary in 1962 to $30,000 and again 
in 1981 to $100,000. If any of these levels were now adjusted for 
inflation, the amount would be less than the current threshold of 
$200,000. Nevertheless, the Department has decided to raise the 
threshold to $250,000, an amount that approximates an inflation 
adjustment of the current threshold. Although the overwhelming majority 
(79%) of all reporting labor organizations are currently exempt from 
filing Form LM-2, changing the threshold to $250,000 will reduce the 
recordkeeping and reporting burden for approximately 500 labor 
organizations. The Department will continue its past practice of 
periodically assessing the appropriateness of the filing threshold to 
ensure that it is relevant in terms of the current economy.
    A number of labor organizations commented that the Department 
should permit unions to ``pass through'' funds received during the 
reporting period like per capita fees collected by local unions for 
transmission to a national or international labor organization and/or 
to use net dollar figures in order to avoid meeting the filing 
threshold. This concern should be alleviated somewhat by increasing the 
filing threshold to $250,000 but, more importantly, the Department does 
not agree that the concern is valid. Labor organizations should be 
accountable for all funds received and in their custody or control 
during the reporting period. Members who pay dues and per capita fees 
to their locals have a right to know what action their local took with 
respect to those funds. Similarly, members have a right to know how 
much money came into their union during the year, not just the net 
amount left at year's end.
    Several commenters, including the AFL-CIO, cited the situation 
where a small labor organization with a history of filing either Form 
LM-3 or LM-4, i.e., one with annual receipts below $200,000, by virtue 
of an unusual event during the year had receipts boosted to in excess 
of $200,000. For example, a small union with consistent annual receipts 
of $50,000 sells a surplus piece of real estate for $200,000, resulting 
in annual receipts for that year of $250,000. Under current practice, 
the union would be required to file Form LM-2, and under the new rule 
it would also meet the Form LM-2 filing level.
    In this example, by virtue of a one-time-only event, annual 
receipts would be quintupled. This union would likely not keep records 
conducive to providing the kind of details required by Form LM-2--and 
particularly the details and new schedules envisioned in the revised 
Form LM-2. In addition, labor organizations with such small annual 
receipts would be less likely to have electronic recordkeeping than 
their larger counterparts.
    In this situation, if a labor organization lacks the capability of 
filing electronically, it could invoke the continuing hardship 
exemption, and thereby be excused from filing electronically for that 
year. The Department has concluded that providing any other relief is 
unnecessary and could undermine the purpose of these reforms in 
situations where transparency and full disclosure are most important. 
First, union members are likely to be especially interested in how 
``windfall'' funds are handled. Second, if a union's annual receipts 
meet the filing threshold only because of a one-time event, the union 
is unlikely to have many other transactions within the reporting period 
and fewer subject to the disclosure thresholds of the final rule. The 
union therefore will not face substantial burdens in collecting the 
information necessary to file a Form LM-2, even though it has not been 
required to keep track of this information in the past. There is no 
sound reason to permit a union that has $250,000 in annual receipts to 
avoid the reporting obligation imposed on all other unions with similar 
receipts simply because the union has not had similar receipts in other 
years.
2. Intermediate Unions Without Private Employee Members
    Three labor organizations--the National Education Association 
(NEA), the American Federation of Teachers (AFT), and the AFL-CIO--and 
one individual union member submitted comments on the Department's 
proposal to adopt the holding of the U.S. Court of Appeals for the 
Ninth Circuit in Chao v. Bremerton Metal Trades Council, AFL-CIO, 294 
F.3d 1114 (2002), interpreting section 3(j) of the LMRDA. In that case, 
the court of appeals ruled that an intermediate labor organization that 
has no dealings itself with private employers and no members who are 
employed in the private sector may nevertheless be a labor organization 
engaged in an industry affecting commerce within the meaning of

[[Page 58384]]

section 3(j) of the LMRDA if the intermediate body is ``subordinate to 
a national or international labor organization which includes a labor 
organization engaged in commerce.'' The Department proposed to follow 
this holding by adding language to the instructions for Forms LM-2, LM-
3, and LM-4 clarifying that any ``conference, general committee, joint 
or system board, or joint council'' that is subordinate to a national 
or international labor organization will be required to file an annual 
financial report if the national or international labor organization is 
a labor organization engaged in an industry affecting commerce within 
the meaning of section 3(j) of the LMRDA.
    The three union commenters objected to the application of the LMRDA 
to wholly public sector intermediate bodies pursuant to Bremerton as 
contrary to the statutory language, established case law, and 
Department of Labor regulations at 29 CFR 451.3(a)(4). Additionally, 
the NEA and AFT opposed the extension of the LMRDA to wholly public 
sector bodies through the regulatory process and commented that such an 
extension should require Congressional action. They further commented 
that the decision in Bremerton does not bring wholly public sector 
intermediate bodies within LMRDA coverage, and any reference to 
Bremerton should, therefore, be taken out of the new rules where such 
reference is used to attempt coverage of wholly public sector 
organizations.
    The expanded language in the instructions merely incorporates and 
restates the language of section 3(j) of the statute. The reference to 
the Bremerton decision clarifies that the Department intends to 
interpret this language in a manner consistent with that decision. 
Bremerton is the most recent court decision interpreting section 3(j). 
The Department recognizes that the interpretation of section 3(j) set 
forth in Bremerton represents a departure from previous court decisions 
and the Department's prior administration of the Act. However, the 
Department has concluded that the Bremerton court's interpretation is 
the correct reading of the statutory language. Further, neither the 
Department nor the court has added statutory language or otherwise 
encroached on Congressional prerogatives here. The court, pursuant to 
its constitutional authority, interpreted terms contained in the 
statute, and the Department, operating within its authority to 
administer the statute, has stated its intention to adopt that 
interpretation. The stated intent of Congress was to exempt ``wholly 
public sector'' labor organizations from the coverage of the Act. The 
Bremerton court found that an intermediate labor organization is not 
``wholly public sector'' and exempt from the Act where it is 
subordinate to a parent organization that meets the definition of a 
labor organization engaged in an industry affecting commerce. The 
Department's regulation at 29 CFR 451.3(a)(4) is not contrary to the 
Bremerton decision when the regulation is read as giving effect to the 
court's interpretation of the term ``wholly public sector labor 
organization.'' The Department concludes that none of the commenters 
provides a persuasive argument for disagreeing with the Bremerton 
court's reading of the statute and therefore will maintain the expanded 
language in the instructions for the Form LM-2. The expanded language 
adopting the Bremerton court's construction of the statute will also be 
added to the instructions for Forms LM-3 and LM-4, but since no other 
changes will be made to those forms, neither the forms nor the 
instructions for those forms will be reprinted in the appendix.
    In its comments, the NEA incorporated by reference the arguments 
presented by its state affiliates in Alabama Education Association, et 
al. v. Chao, No. 1:03CV00253 (D.D.C. filed Feb. 14, 2003). There, the 
NEA's state affiliates argue that they represent only public employees 
and are self governing, autonomous organizations affiliated with the 
NEA, not subordinate bodies within the meaning of section 3(j)(5) of 
the LMRDA and, therefore, not subject to the LMRDA, even if the NEA is 
subject. The AFL-CIO, in a comment related to the NEA state affiliates' 
argument in Alabama Education Association, et al. v. Chao, cautioned 
that neither the Department of Labor nor the Ninth Circuit can do away 
with the statutory limitation of the section 3(j) proviso to entities 
that are ``subordinate'' to a national or international union covered 
by the LMRDA. The AFL-CIO further commented that the proposal to amend 
coverage language should not be used to preempt pending litigation, and 
the NPRM preamble should not be used to create an argument in 
litigation that the Department of Labor's adoption of this statutory 
instruction is entitled to deference.
    The question whether a particular labor organization falls within 
the Bremerton test is not decided by the proposed language of the 
instructions or the references to Bremerton in the NPRM. That coverage 
issue involves a factual determination that will turn on the 
application of the statutory terms to the circumstances of each case. 
While this rulemaking provides a vehicle for making clear the 
Department's interpretation of the statutory term, after notice and 
comment, the factual question whether a particular labor organization 
meets the statutory test applying that interpretation cannot and should 
not be resolved in this context. The NEA's state affiliates and other 
entities are free to challenge the application of the Bremerton 
interpretation to their organizations and to pursue any avenues 
relative to the issue of their coverage under the LMRDA. The proposed 
language in the instructions and accompanying references are not 
intended to forestall any such action, but rather to make clear the 
Department's views regarding the general meaning of the statutory 
terms.
    One commenter mistakenly read the instructions and the preamble 
language to include state or local central bodies among those 
organizations that must file. The LMRDA and the Department's 
regulations at 29 CFR 451.5 make clear that a ``state or local central 
body'' is excepted from the definition of labor organization in section 
3(i) and the definition of a labor organization deemed to be engaged in 
an industry affecting commerce in section 3(j). The Department's 
adoption of the reasoning of the Bremerton court does not bring these 
organizations within the ambit of the LMRDA, either explicitly or 
implicitly.
    An additional comment urged the Department to continue to seek full 
disclosure from the Washington State Education Association, as state 
law provided no comparable protection for public sector employees. The 
Department will seek compliance from all organizations required by the 
LMRDA to file labor organization reports.

B. Itemization of Major Receipts and Disbursements

1. General Comments Concerning Itemization
    The Department received numerous comments concerning proposed 
Schedules 14 through 19. These Schedules call for individual 
identification of certain receipts and disbursements for various 
categories that reflect the services provided to union members. 
Receipts and disbursements are allocated to Schedules 14 through 19 and 
are either listed as individual entries or as

[[Page 58385]]

aggregated entries. Individual (or ``major'') receipts and 
disbursements, as well as payments to or from a single entity or 
individual that aggregate to meet the disclosure threshold, must be 
reported.
    The Department received several comments supporting itemization. 
Most of these comments expressed general approval for requiring 
disclosure of financial information in greater detail. A common theme 
of these comments was a belief that the Department's proposal would 
increase the accountability of union officials to union members, serve 
to discourage union corruption, and improve overall union democracy. 
One comment cited a specific instance in which union officials 
concealed improper transactions within aggregated disbursements, which 
could have been prevented (or at least identified) by itemized 
reporting. Similarly, commenters related well-publicized situations 
involving union officers who allegedly misappropriated funds as 
examples of instances where itemization, by allowing members to detect 
questionable transactions, would have limited the damage to the union 
and its finances and, perhaps, deterred the individuals involved from 
breaching the obligations entrusted to them. Other commenters stated 
that without itemization `` and the transparency it brings to union 
finances `` union members have little defense against the potential 
mismanagement and misappropriation of union funds. Unusual spending 
patterns or shifts in expenses, as revealed in a Form LM-2, a commenter 
stated, may tip union members off to fraud and abuse, allowing them the 
option of disciplining or removing wasteful or corrupt union leaders.
    Other comments supported itemization because it replaces broad 
categories with more useable, informative, and detailed data. These 
commenters emphasized the members' right and need to know how a union 
is spending their money to ensure that it is being managed well and 
spent wisely. Members expressed particular concerns about the lack of 
information about various categories of expenses, among them political 
activities, joint labor-management programs, and the transfer of funds 
to other entities. The Regulatory Studies Program of the Mercatus 
Center at George Mason University commented, ``By increasing the number 
of classification categories, lowering the dollar level of disclosures, 
and by potentially increasing the number of people who must participate 
in a potential fraud, the revised reports * * * should make committing 
fraud more costly than it is under current disclosure rules.''
    Many commenters turned to recent corporate finance scandals in 
describing their general support for greater transparency among 
institutions, whether governmental, business, or labor organizations. 
They stated that greed can infect any organization and that disclosure 
is its best remedy. As noted by some commenters, the fiscal integrity 
of labor organizations has a profound impact on the financial stability 
and security of employees. The mismanagement, or failure, of labor 
organizations can cause major disruptions in work relationships, 
retirement plans, and overall employee well being.
    The Department received voluminous comments opposing itemization 
and raising a number of concerns about the necessity of reporting this 
information; potential problems involving adequate accounting systems; 
possible adverse consequences from disclosing the required information; 
and a variety of other issues.
    Several comments opposed itemization in general as too costly or 
burdensome because current union accounting systems or practices do not 
capture all of the information required by the criteria, and that 
electronic record keeping systems will have to be reconfigured to 
comport with the revised form. The Department believes the comments 
overstate the technological difficulties involved in transforming 
existing accounting systems to accommodate itemization procedures. 
Preliminarily, union officers and employees will need to study the 
instructions and forms, and thereby gain an understanding of the new 
requirements. The Department will launch a compliance assistance 
initiative that includes an overview of the requirements, a comparison 
to the old requirements, a tentative schedule of seminars for 
international, national, intermediate and local unions hosted 
throughout the country, an email list-serve to provide periodic updates 
to interested parties, web-based materials that include frequently 
asked questions, a description of the Form T-1 registration process, 
and other topics of interest to filers.
    Once union officials understand the new reporting requirements, it 
may be necessary to make some adjustments to their recordkeeping 
systems. The most important change that should be made immediately 
involves the tracking of disbursements and ``other'' receipts to ensure 
that each disbursement and ``other'' receipt is allocated to the proper 
disbursement category with a descriptive purpose. Although some 
commenters asserted that this is a dramatic policy shift tantamount to 
imposing a new accounting system, unions have always been required to 
allocate each disbursement to one or more disbursement categories on 
the Form LM-2. The revised form alters the categories but not the 
underlying method of allocating these disbursements. Indeed, there are 
fewer disbursement categories on the new form. After allocating the 
disbursement, the union officer or bookkeeper makes a brief entry on 
the ``purpose'' for each transaction in a memo field. These sorts of 
operations are routine within accounting systems; organizations change 
the way disbursements are classified in the normal course of business.
    The AFL-CIO's survey data also suggests that many unions already 
maintain their records and accounting systems in ways that are readily 
compatible with the requirements of the final rule. For example, the 
AFL-CIO's survey data suggest: 59% of national and international unions 
record expenses by type of activity or functional category; 62% of 
unions can generate the required itemization detail; 86% of unions do 
not have trouble downloading information from their account systems 
into a spreadsheet; 40% of national and international unions have a 
system of accounts receivable that is immediately compatible with the 
final rule, and 66% of national and international unions have a system 
of accounts payable that is immediately compatible with the final rule. 
Labor organizations that do not currently maintain electronic books, or 
that use accounting software that cannot be modified to track the data 
required by the revised form, will experience an increased burden, but 
as the analysis under the Paperwork Reduction Act indicates in Section 
V, the burden is, on average, a modest one.
    The burden of reporting the individual items required by Schedules 
14-19 is minimized by the electronic reporting system, which creates 
efficiency gains by performing the administrative functions of the 
reporting system. To this end, the Department has provided technical 
specifications to assist labor organizations in converting financial 
data into a form supported by the Department's electronic filing 
software. The technical specifications contained in the appended Data 
Specifications Document (DSD) inform affected unions of the various 
data formats that can be exported into the electronic form. Filers will 
have the option of exporting itemized data from

[[Page 58386]]

standard accounting reports in one of several common file formats. 
There will be a non-recurring burden as the filers create the proper 
reports, which can then be used in future years. It is important to 
note that smaller filers that would only report a handful of itemized 
transactions for the year may choose to complete the form manually 
through copy-and-paste techniques rather than using the DSD to set up 
the necessary accounting reports to export the itemized data. As the 
analysis of the burden associated with making the changes required by 
the revised form, set forth in Section V, demonstrates, the burdens 
anticipated by many commenters are overstated.
    As explained in Section V, the Department agrees with some of the 
comments that, even though the Department has received no comments over 
the years regarding its published assessments of the burden of filing 
the current Form LM-2, the burden of filing the current form may have 
been underestimated. The Department has revised its assessment of the 
burden associated with the current form upward in response to the 
comments it received in order to improve the estimate of the additional 
time and cost involved in filing the revised form. Even using these 
higher estimates and acknowledging that there will be increased costs 
for reporting labor organizations as a result of these reforms, the 
Department has concluded that the advantages derived from the more 
detailed reporting outweigh the extra burden imposed on unions. As 
noted above, the FASB acknowledges the utility of itemized (or 
``disaggregated'') financial data. FAS No. 117, ] 118. By contrast, 
reporting in general ``bottom-line'' amounts does not provide the level 
of detailed information that will effectively answer an interested 
member's inquiry. Moreover, generalized reporting places the burden on 
the member to obtain the information from the union, including resort 
to litigation if the union fails or refuses to disclose the requested 
information voluntarily. OLMS experience over years of auditing and 
investigating union financial activities indicates that increased 
access to information concerning a union's financial picture will 
enable its members to protect their own interests through more 
effective vigilance over union funds, and will aid OLMS in future 
enforcement efforts. Disclosure of basic information about major 
transactions is the most effective means of providing information to 
union members who are interested in their organization's financial 
affairs. Together with reporting receipts and disbursements by 
functional categories, the proposed rule will provide information that 
will help ensure that union leadership is acting in the interests of 
its membership.
    The Department disagrees with those comments that suggest 
itemization will overwhelm interested parties with information. These 
comments rest on the erroneous premise that an individual seeking 
information must rely on hard-copy documents to review the Form LM-2. 
Labor organizations (with few exceptions), however, must file the form 
electronically. The new procedures provide more detailed, and more 
accessible, information than the existing system by utilizing the 
advantages of computer technology. Electronic filing permits the 
reviewer to focus his or her review using a search engine to guide the 
inquiry; on-screen (or paper) review of each entry is unnecessary. 
Further, the current Form LM-2 informs the member only of the aggregate 
disbursements (or receipts); the member must go through the trouble of 
obtaining more detailed information from the union concerning the 
individual transactions in order to find any meaningful information 
regarding specific receipts and disbursements. Itemized reporting 
provides the detailed information in a searchable format as an initial 
matter. Finally, Statement B of the revised Form LM-2 provides 
aggregate figures for each disbursement Schedule. A member reviewing 
the revised Form LM-2, therefore, has access to both the aggregate and 
the individual disbursements for each category. Resort to the more 
detailed information remains at the member's discretion.
    In a related vein, one comment contended that the level of detail 
required by itemization will inevitably result in unintentional 
reporting errors, ``costly criminal investigations'' for misreporting, 
and ``prosecutorial abuse.'' Two comments expressed an additional 
concern that the errors could be used to prosecute union officers under 
the LMRDA because the officers must certify the correctness of the 
reported information. The commenters' suggestion that increased 
reporting errors may prompt unwarranted investigations and prosecutions 
is speculative and unsupported by any evidence in the rulemaking 
record. Moreover, only willful violations, not inadvertent errors, can 
result in criminal liability. See 29 U.S.C. 439.
    Several comments argued that itemization imposes a unique reporting 
standard on unions that no other oversight agency requires and no other 
entity or organization must meet. The argument is neither accurate nor 
persuasive. First, as explained in detail in Section II(C), this 
argument is based upon incorrect assumptions. Second, other agencies 
do, in fact, require itemized reporting of financial transactions by 
certain kinds of organizations (for example, the Internal Revenue 
Service requires itemized reporting of disbursements by Section 527 
organizations and the Federal Election Commission requires itemized 
reporting of receipts and disbursements by federal political 
committees. Third, reporting practices for a regulated community may 
vary depending on the particular requirements imposed by various laws. 
The appropriate standards for financial disclosure by labor 
organizations must be determined in light of the LMRDA, and not the 
practices, policies or criteria of other laws. In that vein, the LMRDA 
sought to address the particular problems posed by labor organization 
reporting by requiring reports containing ``such detail as may be 
necessary to disclose its financial conditions and operations.'' See 29 
U.S.C. 431(b). The fact that other agencies, administering other laws, 
utilize different reporting criteria and practices is not a valid 
objection to requiring itemization for purposes of the LMRDA.

2. Itemization of Confidential Information

    One of the most significant concerns expressed by many comments 
concerned the potential harm to union interests in disclosing 
confidential financial and personal information required by Schedules 
14-19. Commenters contended that such detailed disclosure could 
adversely affect union interests and activities that should be kept 
confidential as a matter of law or public policy. The comments focused 
principally on disclosure of the information to individuals or 
organizations outside the union that might use the information to 
impede legitimate union activities or otherwise harm union interests. 
The comments cited a variety of examples in which such itemization 
could be detrimental to the union itself or other organizations and 
individuals involved with the union and its activities: (i) Identifying 
individuals paid by the union to seek employment with a non-union 
employer in order to assist the union in organizing its workforce; (ii) 
revealing ``job-targeting'' or ``market recovery'' programs; (iii) 
discouraging the union from seeking legal advice if fee disclosure 
reveals the attorney-client relationship; (iv) violating legal rules

[[Page 58387]]

that limit discovery about experts in litigation (e.g., FRCP 
26(b)(4)(B)); (v) violating confidentiality agreements in settlements; 
(vi) revealing information about union organizing campaigns, political 
activities and legal strategies; (vii) affording tactical advantages to 
service vendors and opposing parties in contract negotiations; and 
(viii) endangering the lives of foreign labor activists supported by 
the union. In some cases, the comments viewed disclosure as the direct 
cause of a potential harm; in other cases, the comments contended that 
disclosure may provide clues from which an adverse party could educate 
itself about union activities, relationships, and strategic goals. Some 
commenters made similar arguments with respect to the proposal to 
require itemization of receipts.
    The Department agrees that there may be some situations in which 
the potential harm to union interests occasioned by disclosing certain 
types of confidential information warrants an exception from the 
requirement to provide itemized information regarding major receipts 
that are not reported elsewhere on the form and major disbursements. 
These situations are likely to be far more limited, however, than 
suggested by some comments. Unions are not required to provide non-
financial information regarding organizing strategy, notes of meetings, 
or names of volunteers on a Form LM-2. Rather, they are required only 
to provide certain information regarding financial transactions. 
Generally speaking, the information disclosed will indicate simply that 
a disbursement was made to, or money received from, a particular 
individual for a purpose described by the union. Although there may be 
certain consequences as a result of such disclosure--as where, for 
example, a union indicates that a payment has been made for ``job 
targeting'' that some might consider inappropriate--such consequences 
must be both serious and beyond the scope of consequences intended by 
the LMRDA to warrant consideration of overriding the interest in 
disclosure embodied in that statute.
    The Department has decided, however, that commenters have made a 
persuasive argument that certain information need not be made available 
to the general public and that disclosure could be sufficiently adverse 
to union interests that the modification described below is warranted 
to permit labor organizations to protect certain confidential 
information on certain schedules. Specifically, the Department has 
concluded that this special procedure should be made available for the 
following types of information:
    [sbull] Information that might identify individuals paid by the 
union to work in a non-union facility in order to assist the union in 
organizing employees, provided that such individuals are not employees 
of the union who receive more than $10,000 in the aggregate in the 
reporting year from the union (in which case the statute requires that 
it be reported, see 29 U.S.C. 431(b)(3));
    [sbull] Information that might provide insight into the reporting 
union's organizing strategy; and
    [sbull] Information that might provide a tactical advantage to 
parties with whom the reporting union or an affiliated union is engaged 
or will be engaged in contract negotiations.
    With respect to these specific types of information, if the 
reporting union believes that itemized disclosure of a specific major 
disbursement or aggregated disbursement would be adverse to the union's 
legitimate interests, it may report the disbursement in the ``All Other 
Disbursements'' portion of either Schedule 15 (Representational 
Activities) or Schedule 19 (Union Administration) on the Detailed 
Summary Page. The union must also enter a notation in Item 69 
(``Additional Information'') identifying the Schedule(s) from which the 
union excluded any itemized receipts or disbursements because of an 
asserted legitimate interest in confidentiality.
    A union member, however, has the statutory right ``to examine any 
books, records, and accounts necessary to verify'' the union'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 (2002). In the 
Department's view, any exclusion of itemized disbursements from 
Schedules 15-19 would constitute a per se demonstration of ``just 
cause'' for purposes of the Act. Consequently, any union member (and 
the Department, which need not establish ``just cause''), but not a 
member of the public, upon request, has the right to review the 
undisclosed information that otherwise would have appeared in the 
applicable Schedule if the union withholds the information in order to 
protect confidentiality interests. The Department has added to the 
final rule a provision that clarifies the Department's interpretation 
of the statute in light of the specific modification of the proposed 
itemization requirement in response to the numerous comments received 
in this regard.
    Some courts have held that a finding of just cause ``requires 
balancing the [union's] financial interest in nondisclosure against the 
injury to the interest of [a requesting union member] and other union 
members in determining how funds held in trust for them are being 
spent.'' Mallick v. Int'l Bhd. of Elec. Workers, supra, 749 F.2d at 
785. In the Department's view, this result is not required by the 
statute and is, in fact, inconsistent with the statutory mandate that 
any member be permitted to examine records to verify the union's 
financial report merely upon a showing of just cause, without regard to 
any competing interest of the union. Accordingly, language has been 
added to Sec.  403.8 to make clear the Department's view that the fact 
that a union has chosen not to disclose the identity of an entity that 
has received a disbursement of $5,000 or more, on the ground that 
disclosure to third parties might be adverse to the union's interests, 
is just cause for union members to inquire as to the identity of the 
recipient or donor and the reason for the transfer of funds. The 
statute requires no additional showing to require the union to permit a 
member to examine the underlying records.
    Further, a reporting union will also be permitted to report amounts 
received or disbursed pursuant to a settlement that is subject to a 
confidentiality agreement, or that the union is otherwise prohibited by 
law from disclosing, in the ``All Other Receipts'' or ``All Other 
Disbursements'' portion of the applicable Schedule on the Detailed 
Summary Page. Similarly, the Department agrees that in the extremely 
rare situation where disclosure would endanger the health or safety of 
an individual, the information need only be reported in the ``All Other 
Receipts/Disbursements'' portion of the applicable Schedule. In these 
circumstances, non-itemized reporting of the information, by itself, 
will not constitute just cause for additional disclosure.
    Finally, some commenters asserted that disclosure of itemized 
information regarding benefits provided to individuals, such as, for 
example, burial expense benefits, would invade the privacy of those 
individuals. This argument, while persuasive, affects only 
disbursements that may properly be reported in Schedule 20 (Benefits). 
Accordingly, as discussed below, the Department has decided to retain 
the previous Schedule for Benefits, rather than the one proposed in the 
NPRM, and to continue to permit labor organizations to report these 
disbursements only in the aggregate.
    The Department believes that the modified disclosure procedures for

[[Page 58388]]

confidential financial information satisfactorily address the privacy 
concerns raised by the comments. The comments focus primarily on the 
potential harm in disclosing a union's confidential information about a 
particular disbursement to the general public, especially individuals 
and entities whose interests may conflict with the union's interests. 
The union must report the disbursement in some form. The modified 
procedures enable the union to withhold the confidential information 
from general public disclosure while complying with the Act's reporting 
requirements. The union, however, may not withhold the information from 
its members because they have a statutory right to examine the 
information underlying the reported data if ``just cause'' exists.
    Unless disclosure is prohibited by law or would endanger an 
individual, the concerns justifying the decision to permit 
nondisclosure of specific information derive from an interest in 
preventing members of the public, other than union members and the 
Department, from gaining access to that information. In the 
Department's view, withholding on these grounds information that should 
otherwise be disclosed in the Form LM-2 is a sufficient basis for 
``just cause.'' The union's concerns regarding disclosure to third 
parties arise outside the context of the members' right to information. 
In order to protect both the union's and its members' competing 
interests, recognizing that the failure to report specific information 
for a major receipt or disbursement constitutes ``just cause'' for 
examining withheld information in these circumstances, together with 
the aggregate reporting of disbursements for benefits, strikes an 
appropriate balance.
    Unions will have ample opportunity to argue that the Department's 
interpretation of the ``just cause'' provision of the statute (29 
U.S.C. 431(c)) is in error before it discloses information that it has 
reported only in the non-itemized total. Unless a union voluntarily 
discloses information when it is requested by a member, the member will 
still be forced to seek enforcement of the right to this information in 
federal district court and the union will be able to argue to the court 
that the Department's interpretation of the statutory requirement is 
incorrect. Even if the court agrees that use of this reporting 
procedure is sufficient to support a finding of just cause, the union 
may argue that it has a legitimate concern that a union member may 
further disclose the underlying records, or information about the 
underlying records, in a manner detrimental to the union. In these 
circumstances, there is nothing in the revised regulation or forms that 
would prevent the union from seeking a protective order or some other 
means of protecting its interests.
    The Department disagrees with the comment that a union's compelled 
disclosure of information relating to legal fees associated with an 
organizing campaign would improperly intrude upon the union's attorney-
client privilege. This privilege does not generally extend to the fact 
of consultation or employment, including the payment and amount of 
fees. See McCormick on Evidence, Sec.  90, (5th ed. 1999, updated 
2003). Further, while the privilege might protect the identity of a 
client when sought from an attorney, a client can be required to 
divulge the name of its attorney, which would be relevant here. Id. 
Similarly, the Department has concluded that the rule that limits 
discovery about experts in litigation to ``exceptional circumstances'' 
is not relevant, in that the language of the rule protects the ``facts 
known or opinions held'' of the expert, which would not be revealed in 
a Form LM-2. See FRCP 26(b)(4)(B). Nor is the mere fact that a 
disbursement has been made likely to reveal a union's legal strategies. 
Further, to the extent that a payment to an attorney or expert can meet 
the standards for non-itemized disclosure--that is, for example, 
because disclosure of a payment to an attorney would somehow provide a 
tactical advantage to a party with whom the reporting union is engaged 
in contract negotiations--a union may utilize those procedures. The 
Department does not agree that it is necessary to permit unions to 
avoid the itemized reporting obligation simply because disclosure might 
reveal the union's political activities. Indeed, as demonstrated by the 
comments discussed in Section C (4), such disbursements are likely to 
be of particular interest to union members and no convincing argument 
has been advanced regarding any legitimate need to keep such 
information confidential.
    Other comments objected to reporting a recipient's address because 
the information was unnecessary or impinged on the recipient's privacy 
through its publication. The Department disagrees. The schedules only 
require the disclosure of business addresses, if available, but at 
least the recipient's city and state. This information is necessary for 
verifying the recipient's existence and identity. The privacy concern 
is questionable given the public availability of most addresses for 
individuals and business entities on the Internet and in telephone 
books. Finally, labor organizations may resolve any serious privacy 
concerns with respect to the types of information specified above by 
exercising their option to report the disbursement in question in the 
``All Other Disbursements'' entry for the schedule on the Detailed 
Summary Page. While concealing the identity of individuals or entities 
receiving disbursements may raise questions concerning the 
disbursement's legitimacy, such questions are precisely the reason that 
labor organizations will be required to indicate in Item 69 
(``Additional Information'') that they have used this procedure and 
that use of this procedure will constitute ``just cause'' for union 
members who request access to the underlying information.
3. Itemization of Major Receipts
    The Department proposed changes to Schedule 14 to require 
additional information for reporting ``other receipts'' in the 
reporting period. ``Other receipts'' consist of all receipts that the 
labor organization does not report elsewhere in Statement B of Form LM-
2. Specifically, the Department proposed requiring a labor organization 
to identify all the other receipts that are ``major'' receipts. A 
``major'' receipt is either an individual receipt of $5,000 or more, or 
the aggregate receipts from an individual source over the reporting 
period totaling $5,000 or more. Each such receipt must be listed by 
payee with the following information: the name and address of the 
entity providing the receipt; the type of business or job 
classification of the entity; the purpose of the receipt; the date of 
the receipt; and the amount of the receipt.
    A variety of comments addressed the proposed $5,000 threshold for 
``major'' receipts. Some comments considered the threshold too high 
because $5,000 allows a margin within which union officials may still 
commit financial improprieties, and prevents union members from 
reviewing the smaller amounts for potential improprieties, i.e., 
complete transparency for union finances. The comments recommended 
thresholds ranging from zero to $2,000 as a means of obtaining greater 
(or complete) information about a union's receipts. Other comments 
considered the threshold too low. The majority of these comments 
recommended $25,000 as an appropriate figure; others suggested basing 
the threshold on a percentage of the union's receipts (the higher of 
either 4% or $15,000, or a level related to the GAAP concept of 
materiality). A related recommendation applied a graduated threshold 
that

[[Page 58389]]

increases with the increase in a union's income. In general, the 
proponents of higher thresholds contended that the $5,000 figure 
results in burdensome reporting requirements and excessive detail.
    The Department believes that $5,000 is an appropriate threshold for 
reporting ``other'' receipts. The comments underscore the competing 
interests in setting a reasonable figure. Setting the threshold lower 
(or eliminating it entirely) increases the number of receipts that must 
be reported, which correspondingly increases the information available 
for inspection. A lower threshold, however, also would increase the 
burden, particularly for aggregated receipts from individual sources. 
Raising the threshold would reduce the reporting burden, but it also 
would reduce the financial information captured for review and thereby 
undermine the goal of transparency. While a strong argument could be 
made that all disbursements are significant and should be itemized, the 
Department concludes that some threshold must be used that accommodates 
both the purpose behind the disclosure of such information and the 
concerns about the burden of tracking and reporting the information. 
The $5,000 threshold strikes a balance between the opposing viewpoints. 
Full-time workers who were union members had median usual weekly 
earnings of $740 in 2002. See Union Members in 2002, Bureau of Labor 
Statistics News Release (USDL-03-88) (http://www.bls.gov/news.release/union2.nr0.htm). Thus, it is reasonable to assume that to union 
members, $5,000 represents a significant amount of money. A receipt (or 
aggregated receipts from an individual source) in this amount may 
reasonably attract interest in the payment's source. The Department 
will continue to be mindful of the need for any future adjustment in 
the threshold for itemization in order to ensure that the information 
reported is meaningful.
    The Department rejects the suggested use of percentage-based 
thresholds rather than defined dollar amounts. A percentage-based 
threshold will vary annually depending on the figure (e.g., annual 
receipts) from which it is derived. This figure cannot be determined 
until the close of the fiscal year. In any given year, moreover, the 
base figure itself may be controversial if the Department and the union 
disagree as to the monies that should be included in that figure. A 
percentage-based threshold is therefore unstable and more difficult to 
enforce. A defined dollar threshold provides an unequivocal and 
predictable standard by which each union may determine whether a 
receipt must be reported as a major receipt, as well as one that 
members may use with ease and certainty in reviewing the Form LM-2. 
Some commenters recommended that the Department index the threshold 
annually for inflation. The Department disagrees for the same reason it 
rejects the use of a percentage-based threshold: adopting a figure that 
is subject to annual fluctuation creates an unpredictable standard. The 
Department believes all parties will benefit from a defined standard 
that applies to all unions. The Department also rejects the use of a 
graduated threshold linked to union income. This approach suffers from 
the same defects as percentage-based thresholds and thresholds indexed 
to inflation, discussed above. Furthermore, a single standard unrelated 
to union income promotes the purposes of the LMRDA. Although the 
economic significance to the union of $5,000 may vary with the size of 
a union's income, the interest of the membership in having access to a 
broad array of information concerning the sources and uses of union 
finances, and in the detection and deterrence of fraud, remains 
constant.
    The proposed Schedule 14 requires a union to report aggregated 
receipts from each individual source if the total amount received from 
the individual source is $5,000 or more. Some comments opposed 
aggregation because tracking each receipt throughout the fiscal year to 
determine whether all receipts from a specific source ultimately reach 
the threshold is burdensome. The Department believes that aggregation 
of receipts is appropriate. In terms of its interest to a union member, 
there is no difference between a single $5,000 (or more) receipt from 
one source and several receipts from one source totaling $5,000 or 
more. Consequently, reporting aggregated receipts is equally important 
in terms of achieving transparency for a union's financial picture.
    Despite the concerns expressed by numerous commenters, tracking 
multiple receipts from a specific source throughout the fiscal year 
will not impose unreasonable additional burden on a reporting union. 
The revised form alters the categories but not the underlying method of 
allocating these disbursements, and, indeed, reduces the number of 
disbursement categories. After allocating the disbursement to the 
proper category, the union officer need only make a brief entry on the 
``purpose'' for each transaction in a memo field. These sorts of 
operations are routine within accounting systems. As demonstrated in 
the Paperwork Reduction Act Analysis, in Section V, the cost of 
maintaining sufficient information to permit the aggregation of major 
receipts not reported elsewhere from, and disbursements to, a single 
entity over the course of the year, combined with all of the other 
changes as a result of this rule, were estimated in order to arrive at 
a realistic assessment of the overall cost of these reforms. Balancing 
this cost for reporting unions against the benefits for union members, 
and for unions themselves, resulting from increased transparency--
including the enhancement of the ability of members to fully 
participate in the democratic governance of their unions and the 
deterrent value of disclosure in preventing mismanagement and 
misappropriation of union funds--the Department has concluded that 
itemization, to which only a portion of this cost is attributable, is 
not only a worthwhile, but an essential, element of this reform.
4. Itemization of Major Disbursements
    The Department also proposed to require labor organizations to 
report ``major'' disbursements in specified categories. A ``major'' 
disbursement is either an individual disbursement meeting the 
threshold-reporting amount or a series of payments to an individual 
that, in the aggregate, reach the threshold, in a single category. The 
Department requested comments on the appropriate threshold for a 
``major'' disbursement, proposing a $2,000-$5,000 range. The Department 
also requested comments on whether individual disbursements among 
different categories should be aggregated to reach the threshold.
    The Department received numerous comments concerning the 
appropriate threshold for itemizing disbursements on the various 
Schedules. Several comments recommended setting the threshold in the 
$200-$500 range to increase the amount of information about 
disbursements that the unions must disclose; one comment suggested 
setting the threshold at zero for the same reason. Conversely, many 
comments criticized the proposed threshold as too low. Several comments 
expressed general opposition but did not provide a specific 
alternative. Commenters that did propose an alternative threshold 
typically recommended using a $25,000 figure. A few comments suggested 
indexing the threshold to some other figure (e.g., total assets, 
disbursements or annual revenues) to establish a floating threshold 
linking it to the union's size or financial activity. As with 
itemization of ``other'' receipts, the

[[Page 58390]]

proponents of higher thresholds contended that a lower baseline would 
result in burdensome and excessive detail.
    The Department has decided to adopt $5,000, the highest proposed 
amount, as the threshold for itemizing disbursements. As with the 
``other'' receipts threshold, the fundamental issue involves a 
balancing of competing interests. Advocates of a low (or no) threshold 
emphasized the need for transparency of union finances; by lowering or 
eliminating the threshold, the union must divulge a greater amount of 
financial information. Ultimately, greater transparency enhances the 
deterrence of union financial misconduct and provides union members 
with more knowledge about the union's activities, regardless of any 
potential financial mismanagement. Greater transparency, however, also 
involves a greater burden on the unions in terms of reporting. 
Proponents of a higher threshold focused on this aspect, and urged the 
Department to set a high standard, e.g., $25,000. After consideration 
of both viewpoints, the Department believes that a $5,000 threshold 
strikes the proper balance between the benefits and costs of 
itemization. First, it is plain that virtually any disbursement is 
significant in that it provides information on how the union is being 
run, and provides a potential avenue for fraud. Second, the Department 
has concluded that the threshold should be set at an amount that will, 
in effect, establish a uniform standard for determining that a 
particular transaction, or set of transactions, is reportable. Third, 
the threshold must accommodate the concerns about the burden of 
tracking and reporting the information. The Department will continue to 
be mindful of the need for any future adjustment in the threshold for 
itemization in order to ensure that the information reported is 
meaningful. Several comments recommended using indexed thresholds 
rather than defined dollar amounts. The comments contended that indexed 
thresholds provide a more accurate basis for determining whether a 
disbursement is significant in light of the union's overall level of 
outlay. Two comments merely suggested adopting an indexed threshold as 
a general proposition. Other comments identified specific alternative 
formulae: 5% of total union assets; 5% of total disbursements; or a 
percentage based on the GAAP concept of materiality.
    The Department rejects the indexed threshold approach because it 
does not provide a desirable level of certainty for the reporting 
community. An indexed threshold will vary annually depending on the 
base figure from which the threshold is derived. This figure cannot be 
determined until the close of the fiscal year. In any given year, 
moreover, the base figure itself may be controversial if the Department 
and the union disagree as to the monies that should be included in the 
base figure, complicating a union's ability to comply with, and the 
Department's ability to enforce, the reporting requirements. Any 
disagreement over the base figure will necessarily affect the indexed 
threshold and disrupt the reporting of disbursements. Thus, a figure 
that is subject to annual fluctuation creates an unpredictable 
standard. A defined dollar threshold provides an unequivocal and 
predictable standard by which each union may determine whether a 
disbursement must be reported. Although the economic significance to 
the union of $5,000 may vary with the size of a union's income, the 
interest of the membership in having access to a broad array of 
information concerning the sources and uses of union finances, and in 
the detection and deterrence of fraud, remains constant.
    The proponents of an indexed threshold or a materiality standard 
premised their arguments on the belief that a bright line threshold 
will require reporting of immaterial disbursements. As explained above, 
the Department's adoption of a $5,000 threshold is based in large part 
upon the view that receipts and disbursements of that amount are 
significant to union members. Further, the Department does not believe 
that the GAAP's test for materiality is persuasive in this context. As 
a commenter noted, unlike commercial entities, which are accountable 
based on their profit or loss, labor unions are accountable in terms of 
the stewardship responsibilities of their officers. Consequently, the 
use of a sum that would have little effect on an entity's viability may 
be safely ignored by an investor who cares only for return on 
investment, but may be of considerable interest to a union member when 
spent by his or her union, as the union member's interest extends well 
beyond a concern with the union's bottom line, to the furtherance of 
its overall mission. A materiality standard would not give sufficient 
weight to these non-economic concerns, for a union member is interested 
not solely in the funds themselves, but the activities of the union. 
See Statement of Financial Accounting Concepts No. 2 (SFAC No. 2), 
]]123-132. Further, adoption of the vague materiality standard as the 
threshold for itemization would require unions to obtain substantial 
professional assistance, thus increasing the burden on the labor 
organization. See id.
    A few comments opposed reporting aggregated disbursements to a 
single entity or individual if the total amount meets the threshold 
because the union would have to track each disbursement through the 
fiscal year to determine whether the aggregated amount meets the 
threshold at the end of the year. Other comments treated aggregation as 
part of itemization and opposed both requirements because they 
perceived the entire reporting process as imposing burdensome and 
costly compliance requirements; providing too much information to be 
useful; imposing a unique and more rigorous standard on labor unions 
than applies to any other organization; and requiring significant and 
costly changes to the union's current accounting system.
    With respect to tracking minor (less than $5,000) disbursements 
through the fiscal year, the Department does not believe the comments 
identify a substantial basis for abandoning the aggregation principle. 
Once the union installs or modifies its accounting software to 
appropriately chart each disbursement, tracking every disbursement 
regardless of amount will not be burdensome. Indeed, unions already 
must track every disbursement, and must know the type and amount of 
each disbursement, in order to report them in the appropriate aggregate 
amounts for each category on the existing Form LM-2. Furthermore, the 
advantages of aggregation offset any additional burden from tracking 
all disbursements. Aggregation denies the incentive to break up a 
``major'' disbursement to a single entity or individual in order to 
avoid the threshold for itemizing the payment to circumvent the 
reporting requirements of the statute. Aggregation therefore provides a 
more accurate picture of a union's disbursements because it focuses on 
the total amount of money the union pays a particular entity or 
individual, rather than only the ``major'' disbursements. Given the 
benefits of aggregation and the fact that unions are already required 
to track each disbursement, the Department rejects the position that 
aggregation will be overly burdensome by requiring the union to track 
all disbursements, including those that ultimately will not be reported 
as itemized payments.
    The Department invited comments on whether to require itemization 
of disbursements to an individual or entity that, in the aggregate, 
total less than the threshold amount in a particular Schedule once the 
threshold has been reached either in another Schedule or in

[[Page 58391]]

a combination of Schedules. The comments reflected little or no support 
for aggregation among the Schedules. Although virtually all 
disbursements are significant, cross-Schedule aggregation would 
perceptibly increase the burden on unions, as it would require an 
additional modification to the union's accounting programs or 
procedures, and would require internal accounting reports to be 
generated for all payees under all Schedules, rather than permitting 
more focused inquiries on a Schedule-by-Schedule basis. As noted 
elsewhere, the Department believes that the $5,000 threshold strikes a 
balance between the benefits of transparent financial disclosure and 
the burdens caused by detailed reporting. The most effective means of 
preserving this compromise in the context of categorical reporting is 
to apply the threshold to each individual Schedule. Further, each 
Schedule reflects the distinctiveness of the disbursements in that 
particular category. If disbursements to an entity or individual in a 
particular category are minor as measured by the threshold for 
reporting, then the union should not have to itemize those 
disbursements (and all other categories of disbursements) simply 
because dissimilar disbursements in another category are comparatively 
more substantial and do meet the threshold. Disbursements to an entity 
or individual must therefore reach the threshold for each Schedule 
before a union must itemize the disbursements attributable to that 
specific category. Meeting the threshold for any one Schedule will have 
no effect on the obligation to itemize disbursements for any other 
Schedule. This approach not only reduces the overall reporting burden, 
but also preserves the distinction among the various categories of 
disbursements established by the Schedules.
    The Form LM-2 requires the union to provide the following 
information for each itemized disbursement in Schedules 15-19: The 
recipient's name and address; the recipient's business or job 
classification; the purpose or reason for making the disbursement; the 
date on which the union made the disbursement; and the disbursement's 
amount. The Department received numerous comments objecting to 
reporting this information. A few comments expressed specific concerns 
about the difficulty in tracking and recording all of the required 
information for credit cards, e.g., the date of payment (rather than 
charge), and the full name and address of the recipient. In this 
context, one union stated that the proposed treatment of credit cards, 
which requires that each vendor paid with a credit card be treated as a 
separate disbursement, is an example of a new burden that the 
Department's analysis simply ignored. The union also noted that this 
recordkeeping requirement was far from a standard business practice. 
Although another union noted that the proposed changes in reporting 
expenses paid by credit card would vastly increase the number of 
individual transactions that must be entered, processed and reported, 
this union stated that it currently follows standard business practices 
and divides the charges that are paid with a credit card into separate 
accounting entries for each underlying type of expense and responsible 
department. The union also noted that any credit card charge that is 
required to be reported as a disbursement to an individual officer or 
employee (per the instructions for current Schedules 9 and 10) is coded 
so that information is available for the current Form LM-2 report. As 
noted by the preceding comment, unions are now required to break out 
credit card disbursements by category on the current form, rather than 
simply treating the payment as a transaction solely involving the 
creditor bank. To the extent any union may have misapprehended this 
requirement, the revised Form LM-2 makes this point explicitly.
    Another union commented that many credit card transactions involve 
plane tickets or hotel bills and frequently have charges issued when a 
trip is booked and a credit issued if the trip is cancelled or changed 
and that the charges and credits may appear in different monthly 
statements--sometimes in amounts that are not exactly the same. The 
union stated that it is not clear from the proposed instructions if the 
Department intends that such charges and refunds be matched or reported 
separately. Such amounts must be tracked in the current and revised 
Form LM-2, as they constitute receipts and disbursements. The method by 
which these amounts should be tracked is set forth in the instructions. 
Otherwise, as the union itself noted, if the transactions are reported 
without any attempt to match them, anyone trying to read and understand 
the report will find it virtually impossible to calculate the amount of 
true expenses.
    The Department recognizes that filers will not always have the same 
access to information regarding credit card payments as with other 
transactions. Filers should report all of the information required in 
the itemization schedules that is available to the union. For instance, 
in the case of credit card transactions for which the union's receipts 
and monthly statements do not provide the full legal name of a payee 
and the union does not have possession of any other documents that 
would contain the information, the union should report the name as it 
appears on its receipts and statements. Similarly, if the union's 
credit card receipts and statements do not include a full street 
address, the union should report as much information as is available, 
but no less than the city and state. A labor organization may choose to 
report either the date of the charge or the date of the payment for a 
credit card transaction as long as the method of reporting is 
consistent throughout the form.
    The Department has considered the comments that assert that an 
unreasonable burden will be incurred by the filers in recording each 
transaction in their recordkeeping systems, but is not persuaded by 
them. The burden is similar to the burden already imposed by the 
current Form LM-2 reporting requirements. The current Form LM-2 
requires unions to track all credit card transactions to determine 
whether each transaction must be reported on one of the disbursement 
schedules or elsewhere in the report. The current form does not treat a 
payment to a credit card company as a single disbursement. For 
instance, a single payment to a credit card company may include amounts 
that must be reported in ``Disbursements for Official Business'' in 
column (F) of Schedule 9, ``Other Disbursements'' in column (G) of 
Schedule 9, and ``Office and Administrative Expenses'' on Schedule 13. 
This has always been a requirement. Many credit card companies have 
made it easier to track information regarding vendors for specific 
charges by allowing their customers to download the contents of monthly 
statements or individual transactions electronically via the Internet. 
Once these transactions have been incorporated into the union's record 
keeping system they can be treated like any other transaction for 
purposes of assigning a description and purpose.

C. Disbursement Schedules 14-19

1. Reporting by Functional Category
    The Department received a large number of comments on its proposal 
to require unions to report their disbursements by defined categories 
based, in part, on a grouping of functional activities performed by a 
union, its officers, and employees. The Department proposed to include 
eight

[[Page 58392]]

reporting categories on the Form LM-2: (1) Contract negotiation and 
administration, (2) organizing, (3) political activities, (4) lobbying, 
(5) contributions/gifts/grants, (6) general overhead, (7) benefits, and 
(8) other disbursements. Almost all the national and international 
unions that submitted comments addressed this issue, as did most of the 
trade associations and public interest organizations. A number of local 
union officials and members submitted comments, as did many ``agency 
fee payers'' (and other individuals who did not indicate whether they 
worked in units represented by unions).
    The Department received several comments from trade associations, 
public interest organizations, union members and others in support of 
the proposal. They asserted that the proposed changes in reporting 
requirements are necessary to allow members and potential members to 
better understand the operation of particular unions and to make 
informed choices about whether to join, or retain their membership in, 
these unions. They stated that the proposed Form LM-2 would permit a 
member to determine the union's priorities and whether they accord with 
the member's own priorities and those of the general membership. The 
same information would inform individuals who may be considering voting 
for or joining a particular union. Several commenters also expressed 
the view that functional reporting would better enable members, the 
Department, and the public to uncover any improper use of union funds 
and deter union officials or employees from embezzling or otherwise 
making improper use of such funds.
    Although some commenters stated that the proposed changes would 
impose some burdens on unions, these costs, in their opinion, are 
outweighed by the gain in transparency. Today's electronic 
recordkeeping systems, in one commenter's opinion, make it possible for 
labor unions to provide a wealth of financial information with minimal 
burden. The commenter also stated that the burden would decrease once 
unions learn of the need to code transactions in ways that fit the 
reporting categories.
    A number of labor organizations stated that the proposed system, if 
adopted, would entail very substantial burdens and costs to the union 
without significant gain, if any, in informing union members about the 
operation of their union. A few commenters indicated that there would 
be severe practical problems posed by the need to ``code,'' by 
function, virtually all the union's financial transactions, which they 
characterized as a burdensome and time-consuming undertaking. Union 
commenters asserted that they lack the present capability to maintain 
their records in a way that would allow them to meet the proposal's 
requirements. The Department finds these contentions unpersuasive. 
Unions have always been required to allocate each disbursement to a 
category on the Form LM-2. The revised form alters and reduces the 
number of categories, but not the allocation process. Accounting 
software will need to be adjusted to reflect the revised categories, 
but these sorts of operations are routine within accounting systems and 
do not present an unreasonable burden. One union commenter noted that 
long distance charges and utility payments, under the revised rule, 
must be allocated across multiple functional schedules and that such a 
process would pose a significant burden. This commenter has failed to 
note, however, that these telephone and utility payments would have to 
be coded to a category under the existing form, and further classified 
by general groupings or bookkeeping categories.
    Several labor organizations acknowledged that they already 
categorize their activities, including disbursements, by functional 
category. Some explained that they do so in order to comply with Beck, 
but others explained that functional reporting is a useful financial 
management tool. Still others said that they categorize for the 
functions reported on the current form. At the same time, however, some 
commenters explained that even with sophisticated functional accounting 
systems in place, it would be difficult for unions to program their 
systems to meet the Department's proposed requirements. As demonstrated 
in the Section V, in the Paperwork Reduction Act analysis, the 
Department has considered these burdens and determined that the burden 
is reasonable.
    The AFL-CIO stated that the Department's proposal would force each 
union to conform its operations to the manner in which the Department 
assumes all unions operate or should operate. In this connection, some 
of the unions state that the Department's proposal misapprehends the 
way in which unions conduct their affairs. Many unions argued that the 
Department's proposal represents the first time that unions have been 
required to collect and report information by functional categories.
    Several commenters expressed concern that the proposal, in spite of 
the burden and expense it would impose on unions, would fail to achieve 
its goal of better informing members about union finances and 
operations. As put by one commenter, the proposal creates artificial 
and misleading categories of disbursements that will overwhelm a member 
with a deluge of detail, not enlighten him. These comments rest on the 
erroneous premise that an individual seeking information must sort 
through a paper submission to review the Form LM-2. Electronic 
reporting permits a union member to focus his or her review using a 
search engine to guide the inquiry; on-screen (or paper) review of each 
entry is unnecessary. Further, the current Form LM-2 informs the member 
only of the aggregate disbursements (or receipts); the member must go 
through the trouble of obtaining more detailed information from the 
union concerning the individual transactions in order to find any 
meaningful information regarding specific receipts and disbursements. 
Itemized reporting provides the detailed information in a searchable 
format as an initial matter. Finally, Statement B of the Form LM-2 
provides aggregate figures for each disbursement Schedule. A member 
reviewing the revised Form LM-2, therefore, has access to both the 
aggregate and the individual disbursements for each category. Resort to 
the more detailed information remains at the member's discretion.
    Instead of putting unions to the burden and expense of creating the 
detail required by the Department's proposal, one union expressed the 
view that the Department should rely on a union member's ability to 
vote out officials who are pursuing an unpopular agenda, not by 
imposing additional paperwork requirements. Another commenter suggested 
that the Department could achieve its goal by permitting unions to 
allocate their expenditures, based on the estimates of its officers and 
staff, and thus dispensing with the need to exhaustively ``account for 
every sheet of paper, every pen and pencil, etc.'' The Department has 
considered these proposals and has determined that they would not 
effectively provide an adequate amount of reliable information to union 
members concerning the union's financial operations and conditions. The 
revised reporting requirements will enhance union democracy, by 
providing members with information needed to cast an informed vote. In 
addition, the suggestion that unions should be allowed to allocate 
disbursements by estimate would necessarily produce reports of 
questionable accuracy.

[[Page 58393]]

    One union stated that the Department could achieve its goal without 
such drastic changes in the requirements by using the methodology in 
the current Form LM-2. In its view, the Department could have taken the 
``natural categories'' on the present Form LM-2 and divided them into 
natural ``subcategories,'' or it could have developed schedules similar 
to those presently required for ``Office and Administrative Expenses'' 
or ``Benefits.'' While such revisions would still involve reporting 
disbursements in the aggregate, members would have the right under 
Section 201(c) of the LMRDA, 29 U.S.C. 431(c), to obtain more detailed 
data directly from their union. The Department rejects the suggestion 
that unions should be allowed to design their own functional reporting 
categories or add categories to those prescribed by the Department. As 
explained by the FASB in the Qualitative Characteristics of Accounting 
Information, at ] 16, not even the FASB expects ``all its policy 
decisions to accord exactly with the preferences of every one of its 
constituents.''

    Indeed, they clearly cannot do so, for the preferences of its 
constituents do not accord with each other. Left to themselves, 
business enterprises, even in the same industry, would probably 
choose to adopt different reporting methods for similar 
circumstances. But in return for the sacrifice of some of that 
freedom, there is a gain from the greater comparability and 
consistency that adherence to externally imposed standards brings 
with it. There also is a gain in credibility. The public is 
naturally skeptical about the reliability of financial reporting if 
two enterprises account differently for the same economic phenomena.

    Statement of Financial Accounting Concepts No. 2 (SFAC No. 2), ] 
16. On this point, the FASB also explained:

    Information about an enterprise gains greatly in usefulness if 
it can be compared with similar information about other enterprises 
and with similar information about the same enterprise for some 
other period or some other point in time. The significance of 
information, especially quantitative information, depends to a great 
extent on the user's ability to relate it to some benchmark.

    Id., ] 111. Further, a union member's statutory right, under 
Section 201(c) of the LMRDA, to examine records underlying the report 
is a complement to, but does not supplant, a union's statutory duty to 
report. In light of the comments from union members concerning the 
difficulties members have faced in obtaining review of these records, 
the Department has determined that altering the categories, rather than 
merely relying on Section 201(c), would more effectively further the 
transparency goals of the LMRDA. See 29 U.S.C. 431(c).
    The Department does not agree with the assertion that the better 
course is to simply disaggregate the categories in the existing Form 
LM-2 to effect more detailed reporting. In response to specific 
comments, the Department has combined two proposed categories 
(``Contract Negotiation and Administration'' and ``Organizing'') into a 
single schedule entitled ``Representational Activities,'' added a 
category entitled ``Union Administration,'' combined the proposed 
categories for ``Political Activities'' and ``Lobbying'' into a single 
schedule, and eliminated the category entitled ``Other Disbursements.'' 
The categories that remain are tailored to reflect the activities 
performed by unions, and will allow union members to readily gauge 
whether the union is committing its resources in the sums and 
proportions they consider appropriate. Requiring itemization of major 
disbursements within the current categories would not serve this 
purpose.
    Union commenters faulted the proposal for failing to address the 
Department's prior position, articulated in 1993, that functional 
reporting imposed a very substantial burden on unions without 
significantly advancing a member's understanding of his or her union's 
operations and finances. There is no merit to the assertion that the 
Department's proposal failed to address the Department's earlier 
position. The NPRM described the Department's rulemaking efforts in 
1992 and 1993; its discussion addressed the same basic points that were 
the focus of the 1992 and 1993 rulemaking and outlined the reasons why 
the Department's current proposals are appropriate. The NPRM also 
identified aspects of the proposal that differ from the 1992 final 
rules, thereby providing the public with a full exposition of the 
Department's position and its views on the various points addressed in 
1992 and 1993.
    The commenters correctly noted that the Department's current 
proposals resemble the views expressed in support of the Department's 
1992 final rule more closely than the later concerns that led to the 
Department's reconsideration of functional reporting and the rescission 
of the final rule. Although the 1993 rulemaking identified some 
perceived problems with the 1992 final rule, which the Department 
addresses in the instant rulemaking, the tension between the positions 
was based largely on policy assessments as to the relative utility and 
burden associated with the change in reporting requirements. While the 
Department does not hold the same views on this issue as it did in 
1993, the statute provides--now, as in 1993--the Department latitude in 
determining the form and amount of detail that should be reported by 
unions. Most significantly, there have been advances in technology 
(including its availability and application) in the last 10 years, as 
computers and financial management programs have become much more 
widely used. Internet access is more commonly available and the benefit 
of making information available over the Internet has been generally, 
and congressionally, recognized. These changes make it possible to 
provide substantially more information to union members and the public 
with less burden on unions than the changes considered in 1992 and 1993 
would have imposed at that time.
    Union commenters challenged assumptions that underlie the 
Department's functional category proposal on two related grounds. 
First, they contended that unions are not required to collect and 
report their expenses in the categories prescribed by the proposed rule 
by either ``standard business practices'' as reflected in GAAP or by 
``existing [federal] forms'' such as the IRS Form 990. Second, the 
unions asserted that the categories proposed by the Department do not 
``describe the most common important purposes for which unions spend 
money.'' GAAP and the IRS Form 990, they assert, leave it to the 
reporting organization to identify what the organization believes to be 
its most important functions. The union commenters contended, in 
effect, that the Department seeks to impose one artificial, static 
functional reporting system on all unions without any regard as to how 
they presently account for their expenditures. In support of these 
arguments, the comments provided few, if any, examples of the most 
common purposes for which unions spend money, or appropriate reporting 
categories. The AFL-CIO argued that the relevant accounting standards 
provide for two basic types of expense classification. The first type 
is ``natural expense classification,'' which ``group[s] expenses 
according to the kinds of economic benefits received in incurring th[e] 
expenses,'' for example, ``salaries and wages, employee benefits, 
supplies, rent, and utilities'' (citing, AICPA Not-For Profits Guide 
514). The AFL-CIO asserted that the other basic type is ``functional 
classification,'' which ``group[s] expenses according to the purpose 
for which the costs are incurred.'' Id. at 513. ``The primary

[[Page 58394]]

functional classifications are program services and supporting 
activities.'' Id. The AFL-CIO then proceeded to argue that the 
categories proposed by the Department have no inherent rationality 
since some, like organizing and contract administration, relate to 
functions or programs, and others, like benefits, have no functional or 
programmatic relevance.
    As discussed, in Section II(D), the GAAP standards do not govern 
the content of LM Forms, and are not entirely consistent with the 
congressionally imposed disclosure requirements of the LMRDA, 29 U.S.C. 
431(b). Further, the Department disagrees with the assertion that the 
use of functional categories is either unauthorized or inappropriate in 
any respect. In the Department's view, the increased use of functional 
reporting categories in the Form LM-2 will promote transparency and 
accountability in the reporting of a union's financial condition and 
operations. The revised Form LM-2, utilizing both functional and 
``natural'' categories, will provide detailed information about 
financial transactions of labor organizations in an easily understood 
format. The new reports will be usefully organized according to the 
services and functions provided to union members. By using the new Form 
LM-2, members will be able to identify major receipts and disbursements 
for a variety of activities. The new Form LM-2 strengthens enforcement 
of the LMRDA by giving members and the public a more complete account 
of the financial operations of a union than provided by the current 
Form LM-2. Moreover, achieving this improvement has been made easier 
and less costly by technological advances that enable electronic 
recordkeeping and filing.
    Functional accounting is not a new concept to labor organizations. 
The current Form LM-2, through its use of categories, requires labor 
organizations to report certain disbursements by function. Although the 
types of functional categories are being updated to make them more 
useful to union members, it is unlikely that this would require Form 
LM-2 filers to make wholesale changes in their accounting systems. The 
Department has, however, included time in its burden hour estimates to 
account for acquiring any new or updated accounting software and 
modifying existing accounting, recordkeeping, and reporting systems. 
Moreover, functional accounting is required of not-for-profit 
organizations under the standards established by the FASB. Many of the 
labor organizations that submitted comments acknowledged that they use 
functional reporting as a management tool and none of the larger unions 
has claimed an inability to categorize receipts and disbursements. 
Labor unions are not-for-profit organizations and, as such, should 
utilize functional reporting in preparing financial statements. FAS 
117, ] 26. As stated by the FASB, ``[S]pecialized accounting and 
reporting principles and practices that require certain organizations 
to provide information about their expenses by both functional and 
natural classifications are not inconsistent with the requirements of 
this Statement.'' It also noted that not-for-profit organizations often 
provide that information in regulatory filings to the IRS and certain 
state agencies, which are available to the public. FAS 117, ] 3. The 
IRS requires not-for-profit organizations, including unions, to report 
their expenditures by certain categories and the IRS uses several 
functional categories that parallel, in many respects, the categories 
in the proposed Form LM-2. For example, both the Form 990 and the new 
Form LM-2 require political and lobbying disbursements to be reported.
    There is no merit to the contention that the proposed rule would 
unlawfully intrude upon the ability of unions to follow their own 
accounting procedures for their own internal purposes. The report calls 
for the submission of data in certain categories, but does not preclude 
the use of other, internal manipulations of the data. Unions may track 
expenses in any way they believe appropriate and, for their own 
purposes or the purposes of third parties (for example, as required by 
a financial institution for a loan or a state agency), they may report 
financial matters in the manner appropriate to that purpose. Further, 
contrary to some commenters' contentions, the Department's proposals 
effectuate the broad purposes of the LMRDA, while, at the same time, 
serving the law's purpose to ensure that members be fully apprised of 
their union's financial condition and operations. As noted above, these 
commenters have given insufficient weight to the Department's 
responsibility to determine the detail necessary to accurately disclose 
the unions' financial conditions and operations and to establish 
categories that will identify the purpose of disbursements, 29 U.S.C. 
431(b), and to ``[prescribe] the form of publications and reports'' 
required by Title II of the LMRDA, 29 U.S.C. 438.
    The argument that, because neither the IRS nor the Beck line of 
authority require labor organizations to collect or report information 
in the categories proposed by the Department, the Department cannot 
reasonably impose such a requirement is unpersuasive. These comments 
appear to overlook the Department's responsibility to require reports 
that best fit the disclosure purposes of the LMRDA, not a revenue 
statute or a methodology developed under a statute administered by the 
National Labor Relations Board (NLRB). Each agency has the 
responsibility to require information relevant to the role established 
by its enabling statute.
    The union commenters have provided no support for the proposition 
that the interests served by the LMRDA are obviated by other reporting 
obligations, internal or external. Similar reporting requirements apply 
in the regulation of securities, public utilities, and health care. In 
those settings, it would be inaccurate to suggest that a corporation 
could meet its responsibility under a particular securities, tax, 
employment or other statute simply by submitting a copy of a report 
filed with a particular agency without regard to whether it conformed 
to the purposes of the actual statute involved. The argument is also 
unpersuasive in the context of the LMRDA.
2. Beck Requirements
    A number of commenters expressed views regarding the effect of the 
Department's proposals on the obligation, imposed on some labor 
organizations by the National Labor Relations Act (NLRA), to allocate 
expenditures in a way that distinguishes between activities that are 
germane to the union's representational function and those that are 
not. See Communication Workers of America v. Beck, 487 U.S. 735 (1988). 
Labor organizations that receive dues from non-member ``agency fee 
payers'' in states permitting union security agreements requiring such 
payments as a condition of employment must make such an allocation to 
ensure that agency fee payers who object to paying the equivalent of 
full dues are not charged more than their fair per capita share of the 
union's costs involved in providing representational services to them. 
These reporting and allocation requirements are often referred to as 
Beck requirements, a shorthand reference to a leading Supreme Court 
case addressing the obligation of unions to individuals who pay agency 
fees to unions in lieu of membership dues.
    Comments generally supportive of the Department's various reporting 
proposals were received from trade associations, public interest 
groups, union members, agency fee payers, and individuals apparently 
unrepresented

[[Page 58395]]

by unions. Several commented that the proposed rule would make it 
easier for agency fee payers to enforce the unions' obligation to 
allocate between their representational and non-representational 
functions upon the request of agency fee payers represented by a 
particular union as required by Beck. In the current system, a union 
member states, union officials have a powerful incentive to classify 
non-representational activities as representational, and the existing 
reporting forms permit this to be done without detection. This problem, 
in the member's view, will be remedied by the Department's proposals, 
because they will enable an agency fee payer to identify the percentage 
of receipts used for non-representational activities. This member also 
asserted that the enhanced reporting would permit access to information 
without having to use a potentially adversarial process. Another 
commenter stated that while it generally approved of the Department's 
proposals, the Department should require unions to keep contemporaneous 
records in order to meet Beck standards.
    Other comments challenged the Department's proposals on the 
following grounds: first, that they represent an attempt to impose Beck 
requirements generally on unions, even though the NLRB, not the Labor 
Department, is responsible for Beck enforcement and the Beck 
requirements only apply to unions with agency fee payers; second, they 
will cause an unnecessary burden on unions that already prepare Beck 
reports; and third, the Department's proposal to establish categories 
that do not replicate Beck requirements will create confusion and 
promote unnecessary and harassing litigation.
    Beck requires affected unions, upon objection by an agency fee 
payer (a request by a member of the union does not trigger the 
obligation), to subtract from the amount of the dues required of 
members a sum that reflects the per capita share of the union's non-
representational activities. In general terms, the ``chargeable'' 
representational activities have been held to include such activities 
as collective bargaining, contract administration, grievance 
arbitration, business meetings and social events open to members and 
non-member employees, union publications (to the extent they reflect 
the union's representational activities), administration of benefits 
available to members and non-members alike, national conventions, and 
expenses of litigation related to negotiating and administering the 
agreement, handling grievances within the bargaining unit, fulfilling 
its duty of fair representation, handling jurisdictional disputes with 
other unions, and litigation before administrative agencies and the 
courts involving members of the unit. Also in general terms, the non-
chargeable activities have been held to include activities such as 
advocating political support or opposition in elections of government 
officials, lobbying, including promoting or opposing legislation, 
advertising relating to non-chargeable matters, administration of union 
benefits unavailable to non-members, union building fund activities, 
the publication of newspapers or similar activities (to the extent they 
report on non-representational matters), and litigation services that 
do not directly concern the unit. See generally The Developing Labor 
Law (4th ed. 2001) 1970-75, 2046-54; The Developing Labor Law (2002 
Supplement) 330-32; NLRB General Counsel Memorandum (Aug. 17, 1998), 
available at 1998 WL 1806351; NLRB General Counsel Memorandum (Nov. 15, 
1988), available at 1988 WL 236187.
    It is not and has not been the intent of the Department to collect 
information specific to the Beck requirements. The NLRB, not the 
Department of Labor, is responsible for enforcing compliance with Beck. 
At the same time, the partial overlap of categories under the proposed 
rule and those established by Beck is unremarkable. The Form LM-2 
functional categories for reporting a union's disbursements and 
estimating the time expended by union officers and employees in 
performing various union activities were designed to capture the 
various kinds of disbursements and activities associated with 
conducting union business. Beck seeks to identify union activities that 
are not germane to the representation provided to agency fee payers and 
therefore not properly assessed to agency fee payers if they object to 
subsidizing the union's non-representational activities. The 
information reported in the new Form LM-2 may be helpful to an agency 
fee payer to roughly evaluate his or her union's Beck compliance, but 
it is not designed as a substitute for the Beck-specific reporting 
requirements, which are established by the NLRB, as guided by judicial 
precedent. The Department takes no position on whether disclosure of 
the information required by the Form LM-2 satisfies Beck requirements. 
Similarly, Beck reports, principally because they lack the individual 
and transaction-specific information required by the revised Form LM-2, 
do not provide a useful alternative to the Form LM-2. The Department is 
not persuaded that the partial overlap between the Form LM-2 and Beck 
reports will lead to confusion among members or that such overlap will 
lead to an increase in litigation by agency fee payers.
3. Schedule 15 (Representational Activities)
    The NPRM proposed a Schedule 15 (Contract Negotiation and 
Administration) and a separate Schedule 16 (Organizing). The proposed 
Schedule for contract negotiation and administration called for 
reporting of disbursements for preparation for, and participation in, 
the negotiation of collective bargaining agreements and the 
administration and enforcement of collective bargaining agreements, 
including the administration and arbitration of union member 
grievances. The proposed Schedule for organizing required reporting of 
disbursements for activities in connection with becoming the exclusive 
bargaining representative for any unit of employees, or to keep from 
losing a unit in a decertification election or to another labor 
organization, or to recruit new members. Based on comments received 
from labor organizations and others, the Department has decided to 
eliminate the separate category for reporting organizing disbursements 
and to require that disbursements for organizing be reported in 
combination with contract negotiation and administration disbursements 
in a single Schedule entitled ``Representational Activities.''
    Several commenters expressed the view that organizing activities 
should be reported in the same category as contract negotiation and 
administration, both to avoid unduly burdening labor organizations that 
must meet Beck requirements and to avoid disclosing sensitive 
information regarding a labor organization's organizing strategy. Some 
union commenters asserted that it is inconsistent with NLRB practice 
and precedent to separate organizing from the category for collective 
bargaining/contract administration. The NLRB, they stated, recognizes 
that the two activities are sometimes tightly intertwined.
    Several labor organizations, including most notably the Building 
and Construction Trades Department of the AFL-CIO (BCTD), commented 
that it simply is not possible in the construction industry to separate 
disbursements made in connection with organizing efforts from 
disbursements made for contract negotiations and administration. In 
this regard, they refer to section 8(f) of the NLRA (29 U.S.C. 158(f)). 
This section provides, inter alia, that it is not an unfair labor 
practice for a construction industry employer to

[[Page 58396]]

enter into pre-hire collective bargaining agreements with a labor 
organization whose majority status has not previously been established 
and which agreement requires membership in the union as a condition of 
employment. In these ``top down'' bargaining situations, the BCTD 
explains, the terms and conditions of employment are negotiated and 
agreed upon before any employees express support for or actually become 
members of the union. The BCTD and others expressed the view that it is 
not possible in these situations to separate disbursements into 
contract negotiations differentiated from organizing.
    Further complicating the situation for building trades unions, 
these unions assert, is the fact that often these same unions also 
engage in traditional ``bottom up'' organizing. For such purposes, 
these unions would have to separately allocate disbursements for 
organizing and contract negotiations. Several commenters who supported 
the proposal to establish the organizing schedule argued that union 
members needed detailed information on their union's organizing 
activities to enable them to accurately assess their union's overall 
success or failure in its organizing efforts. The commenters argued 
that if, as the Department has concluded, separate allocations cannot 
be made in the pre-hire situation arising pursuant to section 8(f) of 
the NLRA, but separate allocations could be made for other traditional 
organizing efforts by the same union, a member would at best get an 
incomplete picture and at worst an inaccurate and misleading impression 
of the union's disbursements and overall effectiveness in organizing.
    Labor organizations generally opposed the creation of a separate 
category for organizing. Comments from officers of labor organizations 
at both the national/international and local levels expressed strong 
opposition to the proposal to create a new Form LM-2 schedule on which 
all major disbursements relating to a union's organizing efforts would 
be reported and then made publicly available over the DOL website. The 
common thread to these comments was a significant concern that 
employers would become privy to sensitive union information not 
otherwise available, such as organizing strategies or the extent of a 
union's financial commitment to a given campaign. As one union member 
who was active in organizing his workplace stated, the new requirements 
to list major disbursements within eight categories ``would do nothing 
to help union members achieve better representation but would literally 
put the union at a disadvantage when organizing or negotiating 
contracts with companies.'' These regulations, he argued, ``would give 
the company inside information to whether or not the union would have 
the ability to sustain a strike or the ability to fight unfair tactics 
by the company during organizing drives.''
    Several labor organizations commented that sensitive information of 
this type has generally not been available to members, except on a 
showing of just cause. See 29 U.S.C. 431(c). Moreover, they asserted 
that where just cause has been demonstrated, access to the information 
is given to union members only, whereas the Department's proposal would 
provide Internet access to this sensitive information to the world, 
regardless of the strength of the union's interest in confidentiality 
or the potential damage that release of this information might cause to 
the union--and without any showing of ``just cause.'' The AFL-CIO noted 
that unions would have no opportunity to protect their confidentiality 
interests by seeking protective orders. It further argued that 
information that the courts have held is not subject to disclosure, 
even when the Sec.  201(c) standard of just cause is met, cannot, a 
fortiori, be subject to routine annual disclosure under Sec.  201(b) of 
the LMRDA.
    Numerous labor organizations complained that under the Department's 
proposal unions would be required to list the names of union ``salts,'' 
individuals who receive subsidies from a union to assist in its 
organizational activities while working for an employer that is the 
subject of the organizing drive. Two specific concerns were raised by 
the commenters: (1) The listed individuals can be targeted by an 
employer and subjected to discharge or other retaliatory action; and 
(2) by identifying these individuals by name on the new schedule, 
employers would be able to learn of an organizing drive in its early 
stages and take action to undermine the union's efforts.
    In the view of the AFL-CIO, publication of detailed information 
about what types of investigators and consultants a union is using and 
for what purposes carried with it the potential to undermine the 
success of the union organizing efforts. In its view, the Department's 
concession that unions would not be required to reveal the ``name of 
the employer'' or the ``specific bargaining unit'' that is the subject 
of organizing activities is insufficient to protect the union's 
interest in the confidentiality of these campaigns. The AFL-CIO noted 
that with regard to smaller local unions (or larger unions attempting 
to organize a workplace in a new geographic area), employers would be 
able to easily discern from a labor organization's Form LM-2 what 
workplaces the union campaign is targeting and what steps the union is 
taking in pursuit of that campaign.
    Several organizations urged the Department to protect from 
disclosure information that, they asserted, could be used to reveal the 
target and location of an organizing drive. For example, by requiring 
that the schedule contain discrete data showing substantial 
disbursements to a hotel where union organizers are staying 
(particularly in a small town or remote location, or one with only a 
single industry or employer) the Department's proposal would enable an 
employer to learn of the organizing drive and initiate action to 
undermine the campaign. The unions stated that they attempt to keep 
such information from an employer whose workforce is being organized. 
The Steelworkers explained that until they receive a substantial 
majority of signed authorization cards, they do not disclose to an 
employer that they have an organizing drive underway.
    Another commenter, an employer association, suggested that in lieu 
of shielding the employer's name or the bargaining unit identity, the 
reporting unions should be given an opportunity to submit both redacted 
and unredacted versions of the Schedule and an accompanying 
``Confidential Treatment Request.'' Under this procedure, a reporting 
union could offer grounds to the Department in support of its request 
for identity exemption, and specify the time period sought for such 
exemption. The Department would then review the request, and either 
grant or deny the requested redactions before making the Form LM-2 
publicly available.
    Based on these comments, the Department has decided to eliminate 
the separate category for reporting organizing disbursements and to 
require that disbursements for these activities be reported in 
combination with Contract Negotiation and Administration disbursements 
in a single Schedule entitled ``Representational Activities.'' The 
Department agrees with the comments that organizing strategies deserve 
some level of protection. In crafting the final rule, the Department 
has balanced the legitimate need for members to be apprised of how 
union funds are expended for this important function with the need to 
minimize the risk of disclosing sensitive information. By combining the 
categories, the Department also meets the concerns expressed by the 
building trades unions

[[Page 58397]]

that they would be unable to allocate precise amounts to contract 
negotiations and organizing efforts.
    By combining these Schedules, the Department believes that an 
employer would be far less likely to be able to identify itself as an 
organizing target merely by examining Schedule entries. Unless one or 
more disbursements to an individual meet the threshold to constitute a 
``major disbursement,'' disbursements would be aggregated with other 
non-major disbursements for contract negotiations and administration 
and organizing, thus further shielding such data. Further, the 
confidentiality procedures, explained in Section III(b)(2), allow a 
labor organization to withhold any information that would disclose the 
recipient or target of an organizing expense in reporting the 
disbursement on the Form LM-2.
    The Department decided that this approach is preferable to the 
suggestion by one commenter that unions submit both a redacted and 
unredacted schedule for organizing expenses and a request that certain 
expenses be withheld from public disclosure. The statute requires the 
Secretary to publicly disclose the information it receives. 29 U.S.C. 
435. (``The contents of the reports and documents filed with the 
Secretary * * * shall be public information.'') Further, the concerns 
raised by the comments concerning sensitive information, 
confidentiality, and the burden involved in distinguishing organizing 
activities from contract negotiation and administration can be 
addressed without the need to redact a schedule, and thus more 
effectively serve the transparency objectives of the statute.
    Substantial case law under the NLRA recognizes the employee status 
of individuals paid by a union to seek employment with an employer in 
order to assist the union in organizing its workforce and the need to 
protect them from retaliatory conduct by their employer. See, e.g., 
NLRB v. Town & Country Electric, Inc., 516 U.S. 85 (1995); Willmar 
Electric Service, Inc. v. NLRB, 968 F.2d 1327 (D.C. Cir. 1992), cert. 
denied, 507 U.S. 909 (1993). At the same time, the individual's status 
as an employee of the union and the amount of the payments received by 
him affects the obligation of the union to disclose information that 
may reveal his identity. On both the existing and the revised LM forms, 
if a ``salt'' is paid $10,000 or more per year as an employee of the 
union, the union is obliged by statute to list him by name on the Form 
LM-2 and to report the amount of his compensation. If a labor 
organization makes payments to an individual for services as a ``salt'' 
in organizing an employer that exceed $5,000 but not $10,000, the labor 
organization may choose to refrain from disclosing specific information 
regarding such payments on the Form LM-2, but only if it indicates that 
this reporting procedure has been used and provides the underlying 
information to any union member who requests it. See Section III(b)(2).
    The Department disagrees with the view that it has applied the 
LMRDA more stringently to unions than to employers. Unlike the 
situation with regard to labor organizations, for over 40 years 
employers and their consultants have been statutorily required (29 
U.S.C. 433(a) and (b)) to include particular ``persuader'' information 
in their annual reports, while labor organizations have not. 
Implementation of this statutory scheme by the Department cannot be 
considered as evidence of either anti-union or anti-employer bias, and 
the suggestion of a double standard is unwarranted.
    The Department also rejects the comment that strike benefits should 
be reported in the same category as other representational activities. 
The AFL-CIO argued that because economic pressure devices, such as 
strikes, work stoppages and lockouts, are ``part and parcel of the 
system'' of collective bargaining, this exclusion is bound to create a 
seriously distorted presentation of the reporting union's collective 
bargaining disbursements. This argument is unconvincing. The amount 
that a labor organization spends on representational activities, 
including strike benefits, will be readily apparent by adding the total 
disbursements in both schedules together. On the other hand, only by 
maintaining a separate line item for Strike Benefits will union members 
be able to discern the true cost of the use of this economic weapon.
    Finally, we disagree with the comment that a union's compelled 
disclosure of information relating to legal fees associated with an 
organizing campaign would improperly intrude upon the union's attorney-
client privilege. This concern is misplaced, as this privilege does not 
generally extend to the fact of attorney consultation, retention, or 
employment, including the payment and amount of fees. See McCormick on 
Evidence, Sec.  90 (5th ed. 1999, updated 2003). Further, while the 
privilege might protect the identity of a client when sought from an 
attorney, a client can be required to divulge the name of its attorney, 
which would be relevant here. Id.
4. Schedules 16 (Political Activities) and 17 (Lobbying)
    The Department proposed separate Schedules on the Form LM-2 for 
reporting disbursements for ``political activities''--intended to 
influence the selection, nomination, election, or appointment of anyone 
to a public office, or a particular outcome in a ballot initiative, or 
for material assessing a political candidate's views on issues--and for 
``lobbying''--for the purpose of passing or defeating new legislation, 
advancing the repeal of existing laws, or the promulgation of rules or 
regulations (including litigation expenses). The Department received 
some comments supportive of the proposed category for political 
activities. Labor organizations did not oppose the Schedules and the 
AFL-CIO did not challenge (apart from its general opposition to any 
functional reporting) the Department's premise that such information 
should be reported. The AFL-CIO, however, contends that the separate 
``political activities'' and ``lobbying'' Schedules should be combined 
into a single category. Based on the concerns expressed by comments 
from labor organizations and others, and for the reasons described 
below, the Department agrees that the two Schedules should be combined 
into a single revised Schedule 16, ``Political Activities and 
Lobbying.''
    One commenter stated its belief that the categories are closely 
related to each other and that each is likely to draw a relatively 
insignificant portion of the reporting union's resources. It explained 
that political activity and lobbying by unions typically involve 
communications with, and mobilization of, the union's membership 
concerning issues of interest to the membership. Lobbying, as distinct 
from membership mobilization, it argued, thus is likely to consume a 
relatively small amount of union resources. The AFL-CIO added that the 
Department's proposal to require the separate reporting of ``political 
activity'' and ``lobbying'' is exacerbated by the requirement that time 
estimates be recorded in 10% increments. It asserted that many unions 
have programs that are at least as important to their members, and 
often consume more resources, than either ``political activity'' or 
``lobbying.'' Some labor organizations noted that the Department's 
current reporting rules do not require that payments by a political 
action committee be reported if such information already is reported to 
federal, state, or local government agencies. The proposal, it argued, 
layers another burden on the local unions,

[[Page 58398]]

adding unnecessary administrative time and cost.
    Several commenters supported the itemization of political 
disbursements by unions without distinguishing between electoral 
politics and lobbying, the distinction crafted by the Department's 
proposal. No commenters expressed any opposition to combining the 
categories. A labor policy group supported the Department's expansive 
definition for political activities, recognizing that under the 
definition unions ``would be required to report any and all 
expenditures that are made for any type of political activity, 
including political activity directed at a union's own membership.'' It 
asserted that union members deserve to know the nature and extent of 
political activities, lauding the Department's efforts at transparency. 
The same commenter also supported the Department's proposal with regard 
to the reporting of lobbying expenses. In this connection, it asserted 
that a labor organization, as a practical matter, can avoid reporting 
its lobbying and political expenses to the IRS. The commenter supported 
the Department's effort to require unions to follow the same reporting 
requirements as generally applicable to tax exempt organizations (but 
not unions) under the IRS rules. It suggested, however, that the 
Department clarify the meaning of ``lobbying'' so that it includes 
``any attempt to influence the general public, or segments thereof, 
with respect to public policy and legislative matters.'' Another policy 
group, while supportive overall of the proposal, asserted that the 
Department's proposed categories need to be modified to expressly 
include ``grassroots lobbying'' and ``issue advocacy'' by unions.
    The comments support the Department's view, embodied in its 
proposal, that the itemization and aggregation of disbursements 
undertaken by unions in the political arena will provide information 
that is useful to union members and allow them to better understand the 
amount and purpose of their union's activities in this area. This 
information will supplement the limited information now available to 
members under other statutory programs. See, e.g., Federal Election 
Campaign Act (FECA), 2 U.S.C. 431; Lobbying Disclosure Act of 1995, 2 
U.S.C. 1601; IRS Form 990. While there are similarities between the 
information required under these other reporting regimes and the LMRDA, 
Form LM-2 is designed for the special purpose of providing meaningful 
information to union members who are not necessarily informed regarding 
the various exceptions and interpretations applicable to these other 
regimes. The Department has devised a definition, reflected in the 
examples set forth in the Instructions to Form LM-2, expressly designed 
to provide a reasonable amount of usable information to union members.
    The revised Form LM-2 is intended to require unions to report many 
of the disbursements that would not otherwise be reported. Labor 
unions, unlike most tax exempt organizations under 26 U.S.C. 501(c), 
are not required to report lobbying expenses to the IRS. See 
Instructions for Form 990 (for line 85); Judith E. Kindall and John 
Francis Reilly, Lobbying Issues 336 (IRS publication available at IRS 
Web site), see also Rev. Proc. 95-35 (Aug. 7, 1995); Rev. Proc. 98-19 
(Feb. 2, 1998). In contrast, labor organizations must include in 
Schedule 16 (Political Activities and Lobbying) ``disbursements for 
political communications with members (or agency fee paying non-
members) and their families, registration, get-out-the-vote and voter 
education campaigns, and the expenses of establishing, administering 
and soliciting contributions to union segregated political funds (or 
PACs) and other political disbursements.'' Under the revised Form LM-2, 
labor organizations also are required to report disbursements 
supporting their dealings with the executive and legislative branches 
of the Federal, State, and local governments and with independent 
agencies and staffs, including disbursements for advocating or opposing 
legislation (including litigation challenging such legislation), and 
advocating or opposing regulations (including litigation challenging 
such regulations). Thus, the Form LM-2 will gather information not 
otherwise reported, and further, the activities that must be reported 
in the Form LM-2 are much broader than those included in the IRS 
definition and easier to apply than the more nuanced IRS application 
(as evidenced by the three pages of instructions the IRS devotes to 
reporting membership dues and lobbying expenses). Labor organizations 
also will be required to report disbursements on the Form LM-2 that 
would not be reported to the FEC because they are directed only at the 
union's employees and members and their families. Viewed from this 
perspective, the Form LM-2 does not duplicate any reports filed by 
unions with the IRS or the FEC.
    The Department believes that the unions' comments understate the 
overall amount of disbursements and officer and employee time that will 
be reported as lobbying or political activity. In part, this may be 
based on the unions' misapprehension of the proposal. As discussed 
above, the Department's proposed schedule is more comprehensive than 
the FEC and IRS requirements that limit the activities that must be 
reported. For example, under the Department's proposed and final rules, 
unions are required to report funds that they use in setting up a PAC 
and raising funds for it, as well as lobbying activities normally 
associated with ``governmental relations'' and ``member 
communications.'' Further, the Department's decision to combine the two 
Schedules will increase the likelihood that the Schedule will be used 
to report a sufficient amount of information to prove useful to union 
members.
    As discussed, the revised Form LM-2 will provide union members with 
a better understanding of their union's political activities, providing 
them a measure of the union's financial and human resources dedicated 
to these activities. Upon consideration of the comments, however, the 
Department is persuaded that there is merit to the suggestion that the 
two schedules should be combined into a single schedule. Distinguishing 
between ``political activities,'' in the election-specific sense of 
that term, and ``lobbying'' is not always easy. And, for most union 
members, the distinction is likely to be much less important than being 
assured that they can ascertain the purpose and amount of their union's 
resource disbursements in the political arena. In the Department's 
view, this new schedule will provide meaningful information to union 
members without requiring unions to submit separate schedules for this 
purpose. Thus, the Department has decided to include a single schedule 
(16) for political activities and lobbying in the revised Form LM-2.
5. Schedule 20 (Benefits)
    This category, which tracks a category in the current Form LM-2, 
captures information relating to all direct and indirect benefit 
payments made by the union, including, for example, disbursements 
relating to life insurance, health insurance, and pensions. Direct 
payments are made from the union's funds directly to its officers, 
employees, members, and their beneficiaries. Indirect disbursements 
include, for example, a union's payment of the premium on group life 
insurance to a separate and independent entity such as a trust or 
insurance company. The Department proposed that labor organizations 
would be required to separately identify all ``major''

[[Page 58399]]

disbursements during the reporting period in this category.
    The Department received only a few comments specific to this 
category. The AFL-CIO opposed the collection of benefits to employees 
and members in a single category. In its view, ``employee benefits'' is 
a ``natural expense classification,'' and the inclusion of ``member 
benefits'' cannot be justified on the grounds that the schedule has 
been amended to convey more information about union program activities 
or supporting services. One labor policy group recommended that 
``benefits'' should be removed as a category and, instead, reported as 
``other disbursements.'' The same group stated that unions should have 
to specifically identify other disbursements in order to minimize 
embezzlement. Several comments related to the issue of itemization, 
however, noted that a requirement to disclose specific information 
about benefit payments could result in unwarranted invasions of the 
privacy of individuals.
    In light of the comments received, the Department is persuaded that 
the privacy of individual benefit recipients, including those receiving 
payments for medical procedures, insurance or pension claims, or burial 
benefits, should be protected. Accordingly, the Department has decided 
to retain the current schedule for reporting these types of 
disbursements, rather than using an itemized schedule, and all payments 
to individuals for such purposes should be reported only on this 
schedule. A reporting labor organization, thus, will be required to 
report an aggregate amount of any direct benefit disbursements, which 
are those made to officers, employees, members, and their beneficiaries 
from the union's funds, and need only identify the recipients of such 
disbursements by a general description, for example, ``union members.'' 
Indirect disbursements--those made to a separate and independent 
entity, such as an insurance company that pays benefits to covered 
individuals--will also be reported in the aggregate and the entity to 
which the payment is made will be identified by a general descriptive 
term. These changes also address the comments made by labor 
organizations concerning the reporting burden.
    The Department is not persuaded, however, that this schedule should 
be modified in any other respect. As discussed in Section II(D) and 
Section III(C)(I), accounting principles do not restrict a regulatory 
agency from combining ``natural expense'' and program functions in a 
report. Moreover, a union's aggregated disbursement of benefits 
provides information that may be of interest to members as a measure of 
the union's ``fixed expenses,'' allowing them to evaluate the cost-
benefit of the policies providing for the benefit payments.
6. Schedules 19 (Union Administration) and 18 (General Overhead)
    The Department proposed a Schedule for general overhead, which 
would include disbursements for overhead that do not support a specific 
function, such as support personnel at the union's headquarters, and 
that, therefore, cannot be reasonably allocated to the other 
disbursement schedules. Several labor organizations noted that the 
categories proposed by the Department would force a large portion of 
the union's important and recurring activities into overhead or other 
expenses. The SEIU estimates that this latter category will contain 90% 
of all its disbursements. Several labor organizations expressed the 
fear that reporting disbursements in the manner proposed by the 
Department will provide misleading information that will be used by 
those antagonistic to unions to suggest that the union is diverting its 
funds to interests unconnected with the union's core representational 
function. Several labor organizations sought clarification concerning 
particular activities. In the AFL-CIO's view, for example, the 
Department seems to indicate that certain governance expenses, like 
meetings and conventions, are to be reported as ``general overhead 
expenses,'' even though accounting principles counsel in favor of 
including such expenses as ``general management expenses.'' In this 
regard, the AFL-CIO states that under Beck standards union governance 
activities are treated as entirely chargeable whereas those same 
standards provide that union overhead costs generally should be 
allocated between chargeable and non-chargeable categories. Several 
commenters expressed the view that the categories prescribed by the 
Department's proposal fail to account for many basic, recurring union 
activities.
    In response to these comments about the large number of 
disbursements relating to union administration, the Department has 
added a new Schedule 19 (Union Administration) to capture this 
information. In this schedule, labor organizations will report 
disbursements relating to the nomination and election of union 
officers, the union's regular membership meetings, intermediate, 
national, and international meetings, union disciplinary proceedings, 
the administration of trusteeships, and the administration of 
apprenticeship and member education programs (other than political 
education, as discussed above). By adding this category, labor 
organizations will be able to accurately characterize the disbursements 
made for the many activities they undertake because of the requirements 
of the LMRDA or other activities associated with union administration.
    With the creation of this new category, there no longer is a need 
for a category designated simply as ``Other Disbursements,'' and the 
Department will eliminate this category from the Form LM-2. The 
``General Overhead'' category will be retained. This schedule includes 
disbursements that do not support a specific function--for example, 
disbursements to support personnel, such as maintenance and security 
staff at the union's headquarters--and that, therefore, cannot be 
reasonably allocated to the other disbursement schedules. Wherever 
possible, however, the salary paid to support staff and other 
disbursements for overhead that the union tracks in relation to 
specific programs or functions should be allocated to the relevant 
category. For example, if a union has an organizing department and a 
political affairs department and currently apportions telephone and 
utilities payments to both functional schedules, those disbursements 
should be allocated to the corresponding schedule. Similarly, the 
salary paid to other support staff should be allocated at the same 
ratio as the program staff they support. For example, if the union's 
secretary-treasurer employs a staff of ten employees and the secretary-
treasurer reports 60% of his time on activities relating to union 
administration, 10% on political or lobbying activities, and 20% on 
representational activities, the staff salaries should be allocated to 
the corresponding schedules using these percentages rather than 
reporting the salaries as ``general overhead.'' If the labor 
organization does not currently apportion disbursements for utilities 
or similar expenses according to program or function, it will not be 
required to do so on the Form LM-2, but may choose to do so to provide 
greater clarity for its members. In any event, the labor organization 
should accurately describe the purpose of the disbursement, whether it 
is reported in a specific functional category or as ``General 
Overhead.''
7. Schedule 17 (Contributions, Gifts and Grants)
    The existing Form LM-2 requires reports of all disbursements for 
contributions, gifts and grants during

[[Page 58400]]

the reporting year. The NPRM proposed that labor organizations be 
required to separately identify any ``major'' receipts during the 
reporting period. Although the Department proposed no changes to this 
category, a few comments specific to this category were received. The 
AFL-CIO asserted that the Department was mistaken in establishing a 
separate category for ``contributions, gifts and grants.'' It noted 
that such funds, as recognized by the Department itself in its 
proposal, should be reported in any specific services category to which 
they relate (not as part of the residual schedule). The AFL-CIO 
asserted that this recognition by the Department evinces that the 
schedule does not constitute a separate major program service. The AFL-
CIO also submitted a report prepared by Dr. Ruth Ruttenberg as an 
attachment to its comments, which argued, based on a survey of 65 
national and international AFL-CIO affiliates, that only 60% of all 
reporting national and international unions capture the required data 
and of these unions ``less than 18% of reporting unions are currently 
able to report contributions to an entity aggregating to $2,000 or more 
and then allocate the disbursements by prescribed functional 
category.''
    These particular comments appear to reflect a misunderstanding 
about what unions now are required to report under the current Form LM-
2. First, unions are currently required to report information about 
disbursements for ``contributions, gifts and grants,'' thus calling 
into question the validity of the statement that only approximately 40% 
of unions capture data related to this category. Second, the reported 
inability of a few unions to report contributions at the lowest 
proposed threshold level and then ``allocate the disbursement by 
prescribed functional category'' suggests that the Ruttenberg report 
confuses this aspect of the Department's current proposal with the 
Department's 1992 reporting rule. While that rule contained such a 
requirement, the Department's current proposal requires only that 
contributions, gifts and grants be reported in Schedule 17, without any 
further allocation to any additional ``functional'' categories. Other 
aspects of the AFL-CIO's Ruttenberg report are discussed below.
    Some commenters who supported the proposal suggested some 
modifications. One policy group recommended that ``contributions, 
gifts, and grants'' should be removed as a category and, instead, 
should be reported as ``other disbursements'' and that unions should 
have to specifically identify other disbursements in order to minimize 
embezzlement.
    In the Department's view, it is appropriate to keep this schedule. 
As noted in the Department's proposal, such funds should be reported in 
the other functional categories as appropriate (and, where in excess of 
the $5,000 threshold, itemized as a contribution, gift, or grant). 
Nonetheless, there will be some disbursements that cannot be easily 
allocated to another functional category. By keeping this category, 
union members will be able to more easily identify such disbursements. 
If the reported aggregated amount warrants further inquiry, members may 
request further information from the union to determine whether such 
voluntary payments conform to the union's internal rules and to 
evaluate whether they were made for legitimate and worthy purposes.
8. Job Targeting
    The Department received a few comments requesting that the 
Department establish an explicit requirement that unions report 
particular details for certain ``job-targeting funds'' (and funds 
serving the same purpose, but labeled as ``industry advancement,'' or 
``market recovery'' funds). One commenter asserted that these funds 
have become widespread in the construction industry and that express 
reporting requirements are essential to correct widespread violations 
of the Davis-Bacon Act. The commenter asserted that the Labor 
Department, the NLRB, and two courts of appeal (D.C. and Ninth 
Circuits) recognize that job targeting programs are antithetical to the 
purposes of the Davis-Bacon Act because they represent an unlawful 
payment from the workers' wages to the contractors performing Davis-
Bacon jobs and tend to distort local prevailing wages. The commenter 
argued that the Department has allowed this practice to continue 
unchecked. As a result, according to the commenter, millions of dollars 
are being misappropriated by unions from their members' Davis-Bacon 
wages, through the device of compulsory dues (as well as payroll 
deductions), and returned to the benefit of employers via job targeting 
funds.
    The commenter recommended that the Department require unions to 
report: the employers receiving the job targeting funds; the amounts 
paid to each employer; the project(s) for which the employer received 
the funds; and the source of the funds. As an alternative, the 
commenter suggested that such accounting could be avoided if a union 
certifies under penalty of perjury that no funds used in a job 
targeting program have been derived from wages paid to employees on 
Davis-Bacon covered projects. The commenter also asserted that similar 
modifications should be made to the Department's T-1 proposals.
    The Department has determined that it would be inappropriate in 
this rulemaking to require reporting requirements specific to job 
targeting funds. In the Department's view, receipts and disbursement of 
job targeting funds that exceed the itemization threshold will be 
disclosed as a result of the general reforms implemented by this rule. 
Additionally, the Department notes that the NPRM made no reference to 
the possibility of creating reporting requirements specific to job 
targeting funds. The unions and the organizations that engage in job 
targeting initiatives have an obvious interest in whether specific 
reporting requirements should apply. They should be provided a full 
opportunity to address this issue before the Department promulgates a 
rule specific to the concern identified by the commenter. If, however, 
a labor organization has an interest in, and contributes $10,000 or 
more to, an entity that meets the definition of a trust and that entity 
makes targeted disbursements for the purpose of increasing employment 
opportunities for its members, the labor organization must file a Form 
T-1 if the entity has $250,000 or more in annual receipts.

D. Schedules 1 and 8--Accounts Receivable and Payable Aging Schedules

    The Department proposed the creation of new aging schedules for 
accounts receivable and accounts payable that would require labor 
organizations to report: (1) Individual accounts that are valued at 
$1,000 or more and that are more than 90 days past due at the end of 
the reporting period or were liquidated, reduced or written off during 
the reporting period; and (2) the total aggregated value of all other 
accounts (that is, those that are less than $1,000) that are more than 
90 days past due at the end of the reporting period or were liquidated, 
reduced or written off during the reporting period.
    A number of comments criticized as too low the $1,000 threshold for 
itemizing individual accounts payable and receivable that are more than 
90 days past due at the end of the reporting period. Some unions with 
substantial receipts asserted that the Department was mistaken in 
stating that ``[t]he threshold of $1,000 eliminates the

[[Page 58401]]

burden of individually reporting routine collections of dues and other 
fees,'' 67 FR 79285. The unions stated that union dues would routinely 
be reported on the accounts receivable aging schedule under the $1,000 
threshold. Some unions stated that for unions with substantial dues it 
is not that unusual for union members to fall more than $1,000 behind 
in dues payments. Unions stated that the itemization of $1,000 accounts 
would be unduly burdensome (resulting in thousands of small entries), 
would invade the privacy rights of union members, and would be of 
little informational value. One organization commented that in the 
context of Schedule 5 (individual marketable securities), the notice of 
proposed rulemaking stated, ``$1,000 can now be considered a de minimis 
amount.'' 67 FR 79285. This organization suggested that the Department 
set the thresholds for Accounts Receivable Aging Schedule (Schedule 1), 
Accounts Payable Aging Schedule (Schedule 8), and Investments Other 
Than U.S. Treasury Securities (Schedule 5) at $5,000 in order to be 
consistent. Several other unions advocated raising the accounts payable 
and receivable threshold to at least $5,000. One commenter proposed a 
new threshold of $10,000. On the other side, one organization asserted 
that the $1,000 threshold was too high and should be lowered to require 
disclosure of smaller accounts. One organization stated $1,000 was the 
correct level, and one union stated that the requested information 
would not be a burden at the $1,000 level. Finally, a few unions 
recommended eliminating the dollar amount altogether and replacing it 
with an alternative threshold, such as, for example, 10% of the union's 
aggregate receipts. These commenters noted that such an approach is 
consistent with the Department's regulation of employee benefit plans 
investments.
    In response to these comments, the Department has decided to raise 
the threshold for itemization in Form LM-2 Schedules 1 and 8 to $5,000. 
This dollar threshold is consistent with the weight of the comments and 
corresponds with the itemization threshold developed for other 
disclosure requirements under Form LM-2 including: (1) Investments 
Other Than U.S. Treasury Securities (Schedule 5); and (2) Itemization 
of Receipts and Disbursements (Schedules 14-21). In the Department's 
view, the higher threshold will significantly reduce the burden 
identified by some unions of having to itemize accounts, such as 
individual union dues receivable, which in their view are relatively 
insignificant in light of the very substantial finances of some unions. 
By setting the threshold at $5,000, the interests of union members will 
still be adequately served by ensuring the disclosure of significant 
union accounts that have not been paid or collected in a timely manner.
    Several unions also broadly criticized the itemization requirement, 
disputing that itemization would benefit anyone. These commenters 
stated that reporting aggregate numbers for accounts payable and 
receivable would be far less burdensome to unions without diluting the 
value of the information to members. The commenters explained that 
accounts more than 90 days past due are relevant, if at all, only as 
they relate to an individual union's overall cash flow. Several 
organizations stated that there is no analogous requirement of 
itemization placed on public companies, as the SEC requires only 
aggregate reporting. Itemized accounting is also inconsistent with 
GAAP, these commenters argued. Finally, a number of unions proposed an 
alternative that unions disclose only those accounts payable or 
receivable that are liquidated or written off at the end of the 
reporting period.
    In the Department's view, itemized disclosure is important because 
it provides a vital early warning signal of financial distress. In 
setting the reporting threshold at 90 days, the Department took into 
account the typical payment cycle of 30 days for most accounts and 
determined that an account unpaid after three payment intervals 
warrants ``flagging'' as a matter of good business practice. Union 
members similarly will benefit from this information as a gauge of 
their union's overall fiscal management and provide them with the 
ability to identify particular transactions or a series of transactions 
that may merit further review. Although there is no general accounting 
principle that holds that 90 days is a significant time period, it is a 
benchmark often used, inasmuch as the normal pay cycle for accounts is 
closer to 30 days. As one commenter pointed out, the Washington 
Teachers' Union had failed to timely pay many of its bills in the years 
leading up to the discovery of embezzlement and misappropriation of 
funds by union officials.
    As the commenter noted, early reporting of delinquent accounts 
payable might have prevented the fraud against the teachers' union 
before millions of dollars were diverted. The Department's own 
investigations in other cases reveal situations where a union's failure 
to pay its per capita taxes is part of a pattern of delinquency on 
accounts that may be symptomatic of embezzlement by union officers or 
employees. Under the new schedules, such delinquencies would have been 
reported and such disclosure might have deterred the fraud, in the 
first instance.
    Itemization of delinquent accounts is also preferable to either 
aggregate reporting or sole itemization of liquidated accounts in that 
it provides union members with a more detailed picture of the union's 
finances, including with whom the union conducts business and the 
manner in which that business is conducted. The itemization requirement 
is tailored to a union member's legitimate interest in knowing, for 
example, whether the union continues to do business with an entity that 
fails to pay its debts or whether the union continually falls behind in 
payments to a certain vendor.
    Some unions complained that the ordinary interaction between 
national and international unions and their locals regarding per capita 
tax payments routinely results in delayed payment of locals' per capita 
taxes until more than 90 days after the tax is technically due. 
Reporting these payments on the accounts receivable schedule, they 
argued, would be burdensome and uninformative. The Department believes 
that a national or international union may set the specific date (and 
manner of collection) of these per capita tax payments, but once the 
date is chosen, that date controls when the per capita payment is due. 
If, at the end of the reporting period, a local union has failed to pay 
$5,000 or more for 90 days or more past the specified date--
irrespective of the customary interaction between union and local--that 
delinquent account must be disclosed on the Form LM-2. The union is 
free to provide any explanatory information concerning the delayed 
payment along with these per capita aged accounts.
    Several unions also criticized the accounts payable and receivable 
schedules on the basis that these schedules require accrual-based 
accounting and many unions only keep accounting records on a cash 
basis. Many union accounting systems, other commenters argued, track 
only income and expenses, not receipts and disbursements. Moreover, one 
accounting firm commented that unions that operate on a cash basis 
system will have to review their books and records to tabulate each 
individual account irrespective of the precise threshold for itemized 
reporting. As noted above, the LMRDA itself requires some accrual basis 
accounting information, such as assets and liabilities. See 29 U.S.C.

[[Page 58402]]

431(b)(1)-(3). Because the current Form LM-2 requires this information, 
the new Form LM-2 imposes no qualitative change in the nature of union 
financial disclosure, even if the specific schedules for accounts 
payable and receivable are new. Moreover, no unions will be forced to 
manually review previous books and records to identify delinquent 
accounts because the new rule only applies to fiscal years beginning 
January 1, 2004, or thereafter. Every union will thus have 
approximately three months (at least, and as many as 14 months 
depending on the union's fiscal calendar) from publication of the rule 
to make any necessary adjustments to their record keeping practices 
before the first fiscal year for which such information must be 
reported even begins.
    One union asserted that the Secretary lacks authority to require 
itemization of accounts payable and accounts receivable and that the 
Secretary is only authorized under section 201(b) of the LMRDA to 
require disclosure of categories of financial information--not itemized 
information. A number of unions similarly commented that the underlying 
individual financial data composing the aggregate categories is already 
available to union members upon a showing of just cause under 29 U.S.C. 
431(c). The Department's response to these arguments is set forth 
above.
    Several commenters raised concerns about individual privacy if 
unions were forced to itemize accounts payable and receivable over 
$1,000, including concern that, for example, union members owing dues 
would be identified by name on the Department website. Commenters 
requested therefore that the Department clarify that all union dues--
both individual and per capita--are exempt from the accounts receivable 
aging schedule as suggested by the notice of proposed rulemaking. The 
Department notes the increased threshold of $5,000 should eliminate 
nearly all concerns about individual union dues appearing on the 
accounts receivable schedule. It would be unusual--and likely take 
years--for a union member to become more than $5,000 delinquent on 
union dues. If a union member is more than 90 days delinquent on dues 
in excess of $5,000, that fact should be disclosed. Per capita tax 
payments do not implicate privacy concerns and, as discussed above, 
must be disclosed when an account is over 90 days past due and exceeds 
$5,000.
    Several unions contended the accounts payable aging schedule will 
falter on its stated purposes of deterring financial fraud because, 
irrespective of what the schedule looks like, union insiders who wish 
to embezzle money or to defraud the union will willfully evade 
Department reporting requirements. Commenters stated that corrupt 
officials are not likely to record their activities on disclosure 
forms. The Department acknowledges this problem--one that is a 
recurring concern in any reporting or disclosure system. While it is 
true that even the most thorough disclosure form will not be entirely 
effective in eradicating fraud, the new requirements significantly 
advance the cause by making financial fraud more difficult to hide. The 
new financial disclosure forms require greater specificity and 
accountability for union funds across the board, including delinquent 
accounts payable and receivable. In the Department's view, the more 
detailed reporting required by the revised Form LM-2 will allow the 
Department and union members to more closely scrutinize a union's 
finances and more easily identify ``gaps'' or apparent inconsistencies 
in reports. The greater the risk to the actual or would be perpetrator 
that improper conduct will be discovered, the less likely such conduct 
will occur or go undetected. The revised disclosure forms are thus a 
critical part of the oversight by the Department and union members over 
the financial operations of unions. Both this Department and the 
Department of Justice, in prosecuting criminal fraud, rely heavily on 
union members to review and evaluate the financial disclosures of their 
unions and report any suspected activity for investigation, as may be 
appropriate.

E. Schedule 5--Investments Other Than U.S. Treasury Securities

    The Department's proposed Schedule 5 required a labor organization 
to list: each marketable security that has a book value of more than 
$5,000 and constitutes more than 5% of the total book value of all the 
union's marketable securities; and each other investment (e.g., 
mortgages purchased on a block basis or investments in a trust) that 
has a book value of more than $5,000 and constitutes more than 5% of 
the total book value of all the union's other investments. The current 
Schedule 2 of the Form LM-2 requires labor organizations to list such 
securities and investments if they have a book value of $1,000 and 
exceed 20% of the total book value of the respective securities and 
investments of the union. The Department invited comments regarding 
whether the two thresholds of the proposal are appropriate.
    None of the comments indicated that the Department's proposal would 
constitute a significant burden on reporting labor organizations. 
Rather, the comments expressed various views of the usefulness of the 
information that would be disclosed under the Department's proposal as 
compared to information that would be disclosed under alternative 
thresholds suggested by the comments.
    Two local labor organizations stated that the itemization of 
marketable securities under the Department's proposal would pose no 
difficulty for reporting labor organizations, but asserted that the 
schedule would provide no information that would assist union members. 
In the view of these locals, the existing schedule on the current Form 
LM-2 was adequate. One commenter stated that the information required 
to be reported under the Department's proposal would be intrusive 
without providing any useful information.
    The AFL-CIO expressed the view that the $1,000 threshold of the 
current Form LM-2, given contemporary financial reality, could be 
considered de minimis, and that only more substantial investments 
should be required to be itemized under the Department's proposal. The 
AFL-CIO also suggested that any lower threshold might exceed the 
Department's authority because, in the AFL-CIO's view, the Department 
is constrained to require unions to report only information material to 
the financial condition and operations of unions. In its view, most 
transactions lower than $1,000 would not be material to even a union 
with meager revenues.
    A trade association supported the Department's proposal to raise 
the threshold for reporting individual securities and other investments 
to $5,000. In the association's view, investments worth only $1,000 
should be considered de minimis. The association further suggested that 
the Department should also set a $5,000 threshold for individual 
accounts to be reported in Schedule 1--Accounts Receivable Aging 
Schedule and proposed Schedule 8--Accounts Payable Aging Schedule, two 
new schedules proposed by the Department. A labor relations foundation, 
contrary to the Department's proposal to raise the threshold dollar 
amount to $5,000, argued that $1,000 was not de minimis and that a 
higher threshold would invite corruption.
    Two intermediate labor organizations agreed that $5,000 was 
appropriate as a dollar threshold, but they urged the Department to 
raise the percentage threshold from 5% to 15% of the total book value 
of the reporting labor organization's marketable securities and

[[Page 58403]]

other investments. Two other comments from local labor organizations 
recommended that the threshold for requiring itemization of individual 
investments be based solely on a percentage of the total book value of 
all of the union's marketable securities or other investments. Finally, 
the comment of a firm of certified public accountants also recommended 
a single threshold but suggested that the threshold be based solely on 
the book value of the individual security or other investment. The 
commenter recommended that such a threshold be set at a book value of 
between $25,000 and $100,000.
    Upon careful consideration of the varying views on reporting 
investments, the Department has concluded that the proposed dual 
thresholds of $5,000 and 5% are appropriate to provide union members 
with useful information about the union's investments without 
unnecessarily burdening unions. The Department has not been persuaded 
that it should require unions to report individual union investments 
with less than a book value of $5,000. The Department believes that the 
current threshold of $1,000 (on Schedule 2 of the current Form LM-2), 
especially considered in light of the asset price increases that have 
occurred since 1962, when the reporting threshold was set at that 
level, would require a union to report holdings too small to provide 
significant, useful information to union members. This would be true 
whether such holdings represented at least 20% of the union's total 
investments (in each of the covered investment categories: ``marketable 
securities'' and ``other investments''), the requirement prescribed by 
the current From LM-2, or as little as 5% of the union's total 
investments, as proposed by the Department.
    Under the Department's proposal, a union is required to report for 
each of the two investment categories its nineteen largest investments, 
if any, over $5,000, as measured by the book value of the investments. 
For example, unions with total marketable securities valued at less 
than $20,000 would only have to report a maximum of four holdings in 
each category.
    The Department does not find persuasive the comments that argued 
that the Department's proposals were intrusive, not useful, or not 
material. As noted above, because only investments that exceed 5% of 
the union's holdings are reported and no union can have more than 19 
such investments (5% x 20 = 100%), the proposed Schedule 5 will never 
require any labor organization to disclose to members of the labor 
organization more than 19 of the largest marketable securities and 19 
of its largest other investments. By providing this information to 
union members, they will be able to make their own judgments regarding 
the value and appropriateness of the union's holdings and thereby the 
soundness of that important aspect of their union's financial 
operations and condition.
    The Department also has concluded that neither of the proposed 
thresholds should be either raised or deleted. Raising the threshold 
percentage for proposed Schedule 5, for example, from 5% to 15% of the 
total book value of a labor organization's marketable securities and 
other investments would require a labor organization to list at most 
six marketable securities and a maximum of six other investments 
(because 15% x 7 = 105%), rather than a maximum of nineteen of each 
type. Reporting these few investments would portray a limited picture 
of a union's numerous and very diverse investments. The 5% threshold 
will disclose to union members a fuller, more accurate picture of the 
soundness of the union's selection of investments and of that important 
aspect of the overall financial condition and operations of the union 
without imposing a significant reporting burden on the organization.
    Similarly, raising the book value threshold of individual 
marketable securities and individual other investments to amounts from 
$25,000 to $100,000 would foreclose disclosure of all but the very 
largest union holdings. Especially among labor organizations that file 
the Form LM-2 or other Form LM-2 filers without extensive investment 
holdings, thresholds set at book values of $25,000 to $100,000 might 
except any investment from being disclosed. In the Department's view, 
members of such unions would have a substantial interest in examining, 
and reaching conclusions regarding, the value and appropriateness of 
the union's limited holdings and the implications with respect to the 
general condition and operations of the organization.
    As indicated above, two commenters recommended that the Department 
adopt a single threshold based on a percentage of the total book value 
of the union's investments as the basis for determining when a union 
must report individual investments for both marketable securities and 
other investments. The Department recognizes that in some circumstances 
the use of a single threshold percentage, such as the Department's 
proposed threshold of 5% of the total book value of investments, would 
not change the number or mix of marketable securities and other 
investments that would be itemized under the Department's dual 
thresholds of 5% and $5,000. The Department believes that ordinarily 
the disclosure of an investment equal to 5% of a labor organization's 
total holdings would provide useful information to members regarding 
the soundness and appropriateness of a union's management of that 
aspect of its financial affairs.

F. Schedules 11 and 12--Disbursements to Officers and Employees

    The Department received more than 150 comments on its proposal to 
revise the information to be reported by unions about disbursements to 
their officers and employees and to require unions to report, by 
estimation and category, how these individuals expend their working 
time on behalf of the union. The Department proposed that unions would 
report for each officer and certain employees (all those paid a yearly 
salary of more than $10,000) their net salaries and the amounts of 
withholdings for each individual, along with the amount of taxes paid 
by the union in connection with the individual's compensation. Under 
the current report, only gross salaries are required to be reported for 
each officer and employee. Withholdings and taxes are reported, but 
only on an aggregated basis.
    The Department also proposed to require unions to provide an 
estimate of the time expended by their officers and employees in each 
of eight functional categories prescribed generally for union receipts 
and disbursements. The Department proposed that unions report each 
individual's work time, per category, rounded to the nearest 10%. The 
proposed categories are discussed in greater detail at Section 
III(C)(1). In 1992, the Department issued a final rule, later 
rescinded, that also would have required unions to identify, on an 
individual-by-individual basis, how their officers and employees 
expended their work time. The 1992 rule also required unions to report 
disbursements, including officer and employee salaries, in various 
categories. That rule, however, required unions to report the actual 
percentages of time expended by the officers and employees in each of 
the categories.
    The Department's current proposal also invited comments on whether 
unions should be required to more exactly calculate, by category, how 
the officers and employees expended their time. The Department inquired 
whether a precise accounting of their time would be more useful to 
union members than the proposal to allow estimates that are rounded to 
10%.

[[Page 58404]]

    Several commenters supported the Department's proposal. One 
commenter stated that an estimate of the amount of time spent by union 
employees and officers in performing their various duties will provide 
significant new evidence to union members about the priorities of their 
union leadership. Together with the proposed requirement that unions 
report receipts and disbursements by functional category, a commenter 
wrote, these requirements will provide information that will be very 
helpful to employees in making decisions about whether to support or 
join a union. Another commenter asserted that the estimates would 
enable union members to understand how their leaders are spending their 
time and help ensure that union leadership is acting in the interests 
of its membership.
    A trade association stated that it strongly supports the 
Department's proposal, adding, however, that unions should be required 
to identify more specifically any time allegedly spent in the category 
of ``other disbursements.'' One local union stated that the estimation 
requirement strikes the right balance between the need for information 
and the burden imposed on labor organizations. The same union, however, 
stated that it would object to any requirement for more detailed time 
keeping than proposed by the Department.
    Another commenter asserted that the time reports would enable 
agency fee payers to quickly identify the percentage of time used for 
non-representational matters and, therefore, determine whether their 
agency fees have been properly calculated. In this commenter's view, 
the proposed changes would reduce the burden on unions to defend suits 
from agency fee payers attempting to determine the proper amount of 
their agency fees.
    One labor consultant expressed the view that implementation of the 
proposed functional time reporting proposal would not result in 
significant and costly changes to most unions' accounting systems. He 
stated that many unions already have their officers and employees 
completing activity report forms or time sheets that categorize their 
time into major program areas and that the automated accounting systems 
used by these unions can be modified easily, if necessary, to conform 
to the Department's proposed categories. He added that unions that do 
not utilize time reporting systems could adopt the policies and 
procedures followed by unions with systems already in place. The same 
commenter asserted that officers should be required to report actual 
time, not estimated time.
    A labor policy group expressed the view that the timekeeping 
requirement would be burdensome, especially for larger unions. It 
nonetheless supported the Department's proposal because the salaries 
and duties of a union's officers and employees are an important part of 
union expenditures and reflect the priorities established by union 
leadership.
    Unions generally opposed the proposal, typically for the same 
reasons they objected to the Department's proposed requirement that 
they categorize their receipts and disbursements by functional 
category. See discussion at Section III(C)(1). One international union 
predicted that if the contemplated changes are adopted: (1) Union 
officers would be prevented from fulfilling their responsibilities; (2) 
unions would be forced to hire employees to track disbursements and 
allocate expenditures; (3) local unions would have to reconfigure their 
accounting systems; (4) union officers and employees would have to be 
trained on how to translate their daily activities to fit the 
categories; (5) unions would become the target of inappropriate 
government intervention; and (6) union officers would be subjected to 
criminal penalties for inadvertent discrepancies in completing the 
form.
    The AFL-CIO stated that there is no way to ``exactly calculate'' 
how officers and employees spend their time. The AFL-CIO submitted a 
survey that, it contended, demonstrates that any attempt to require 
something more exact than good faith estimations would impose 
significant new costs on unions. According to its survey, only 4% of 
the unions that responded now have the capability to allocate officer 
and staff time by the functions proposed by the Department. The AFL-CIO 
stated that only 10%-20% of responding unions stated that they have any 
type of electronic systems to keep track of officer or employee time by 
category.
    The AFL-CIO noted that any requirement that unions maintain 
contemporaneous timekeeping records would greatly increase the burden 
on the union without any corresponding gain in the value of the 
information obtained. The AFL-CIO also contended that the Department's 
authority does not extend to prescribing particular types of 
recordkeeping. Another union complained that the recordkeeping 
requirement would limit the services provided by the union. It 
estimated that even if recordkeeping requires only 20 minutes per day 
to perform, this translates into the loss of many hours that could be 
devoted to delivering services to the union's members.
    One commenter expressed the view that the provision for reporting 
in 10% increments does not relieve any of the administrative burden 
imposed by the Department's timekeeping proposal. In its view, detailed 
records must be kept just to approximate the time expended by each 
officer or employee. The commenter stated that it is unfair to require 
union officers and staff to keep time records, when, in its view, this 
obligation is not required of top business executives or government 
officials.
    One commenter stated that the Department's proposed schedules fail 
to reflect the wide variety of tasks performed by the union officers in 
order to serve their members' interests, e.g., attending union 
meetings, preparing newsletters, providing union-sponsored health/
safety services, and operating job training and enhancement programs. 
According to this commenter, the proposed categories are misleading in 
that they suggest that besides collective bargaining, union officers 
and employees only participate in political and lobbying activities. 
This commenter suggested that all of the other activities would be 
considered as ``other'' suggesting that the individuals spend the 
majority of their time on matters less significant to members.
    The AFL-CIO contended that two of the categories proposed by this 
Department (``benefits'' and ``contributions, gifts, and grants'') have 
no employee activity associated with them. These are pure expense 
categories, and the only employee activity associated with them will be 
the relatively minor activity connected to disbursement. Thus, in the 
AFL-CIO's opinion, it is highly misleading to include these as two of 
the eight categories in which officer and staff time is allocated. In 
its view, two other categories (``general overhead'' and ``other'') are 
largely residual and do not relate directly to any major union 
programs. By narrowing the choice of program categories to only four 
categories--contract negotiation and administration, organizing, 
political and lobbying--it asserts that the form will inflate the 
amount of staff time reported as ``other.''
    One individual commenter asked the Department to clarify whether an 
individual should record all the time he or she expends on union 
business (typically 60 hours or more per week in his estimate). This 
commenter questioned the proper reporting of attendance at a Labor Day 
parade on a legal holiday or a political rally that takes place during 
regular working hours. Another commenter questioned

[[Page 58405]]

the proper reporting of time spent by an officer attending a funeral 
for an employer representative on a joint union-employer committee.
    A union sought clarification whether a union can report all the 
hours worked by its support staff (e.g., receptionists, stenographers, 
secretaries, and mail room personnel) under a single category, or is 
required to provide an estimate for each individual by each of the 
functional categories.
    The AFL-CIO contended that the proposed rule has the potential for 
reporting misleading information. In this regard, it states that the 
NPRM, but not the proposed instructions, indicates ``[t]he time 
allocated among the categories for each officer [or employee] should 
total 100% of that [individual's] time.'' This possible requirement, 
coupled with the 10% increment for estimates, creates the risk of 
distorting how the individual spends his or her time. The AFL-CIO posed 
the question of how a union should report an employee's time if she 
spends 85% to 90% of her time on ``contract negotiation and 
administration,'' 5% to 7% of her time on ``political activities,'' and 
the same amount of her time on ``lobbying.'' A union expressed concern 
about the liability of union officials who will be required to sign the 
union's report. In its view, it is unfair to impose this obligation 
upon the reporting officials, given what it considers the subjective 
nature of the reporting and the official's inability to verify any 
estimates provided by other individuals.
    The Department believes that requiring unions to report the 
estimated amount of time expended by their officers and employees will 
provide useful information to their members. It will enable members to 
determine better how the union utilizes its human resources. A union's 
own labor costs represent a substantial portion of its yearly 
disbursements, and the allocation of the time expended by the officers 
and employees serves the same purpose as the allocation of a union's 
other disbursements. Moreover, by reporting how its officers and 
employee spend their time, by functional category, union members are 
better able to gauge the union's total investment of resources--labor 
and capital--to a group of activities. Based on its review of the 
entire record, the Department concludes that such reporting will not 
impose undue burden on the union or the individuals on its payroll. 
While union officials will be required to exercise judgment in making 
the necessary estimates, it should be remembered that only a good faith 
estimate, not precise reporting, is required. Union officials should be 
guided by the purpose of the reporting requirement--providing accurate 
information to union members--in deciding how best to characterize 
their activities for reporting estimated time. Finally, no official who 
makes a good faith, reasonable effort to accurately report estimated 
time need fear criminal liability, even if the estimate proves arguably 
inaccurate. See 29 U.S.C. 439.
    The Department has determined, as a general rule, that it is 
unnecessary to impose on unions a requirement that they report their 
time on a more precise basis than a 10% estimation. The Department is 
not requiring unions to keep detailed time records. The labor 
organization need only estimate the time spent on each activity. It is 
up to the labor organization to determine the least burdensome way to 
provide the information. However, the Department believes the 10% 
estimation will be sufficient to enable members to evaluate how the 
time of the union's officers and employees is directed and whether it 
reflects an appropriate use of the union's financial resources. To 
avoid the misperception that a union's officers and employees spend no 
time in a category (or categories)--a possibility if time in a category 
is less than 5%--we have revised the instructions to provide that where 
the time reported by an individual in an activity is less than 5% of 
his total work time, he should use his or her best estimate to the 
nearest percentage and report this amount. Similarly, in reporting 
aggregate totals of time, the union, instead of rounding down to zero, 
must report its best estimate to the nearest percentage and report this 
amount. This change should enable unions to ensure that reported time 
estimates add up to 100% for each employee and this requirement has 
been made clear in the instructions.
    The Department does not believe that allowing unions to customize 
categories or establish subcategories of existing categories, as some 
commenters proposed, would promote the purposes of the statute. As 
discussed in further detail above with respect to the use of functional 
categories for reporting disbursements, a ``customizing'' approach 
would result in vast differences in reporting formats from union to 
union. This divergence would eliminate a baseline of comparison, result 
in confusion, and decrease the value of information reported to members 
and the public. Similarly, the concerns about the difficulty of 
attesting to the time estimates appear to be overstated. The union 
should be able to determine without difficulty the manner in which time 
estimates are to be made. So long as the union has a reasonable 
operating procedure in place and takes reasonable steps to ensure that 
officers and employees are following that procedure, the individual 
responsible for submitting the report generally has no reason for 
concern. Only ``willful'' violations--actions that are intentional or 
taken in reckless disregard of legal requirements--will give rise to 
liability. See 29 U.S.C. 439. While the responsible official's 
reporting duties have increased, the standard by which this duty is 
measured has remained unchanged.
    The final Form LM-2 instructions have been revised to clarify how 
particular activities should be reported and how some common multi-task 
activities may be allocated. See Section III(C). As discussed in the 
final instructions, union officers and employees should provide 
estimates based on the total number of hours they work on union 
business, not merely the first 40 hours or other measure of an 
individual's paid workweek. Despite the Department's efforts to provide 
clear instructions, the quality of the estimates reported will 
ultimately depend upon the care taken by the reporting unions in making 
them. Nevertheless, the Department believes that permitting unions to 
estimate the time spent in specific activities provides a appropriate 
balance between the dual objectives of providing as much useful and 
relevant information to union members while reducing, to the extent 
practicable and appropriate, any burden on reporting unions. Reporting 
unions will be encouraged to provide information that is objective, 
accurate, and reliable because they will want their members to be aware 
of the time spent by their union's officers and employees in activities 
on their behalf. Moreover, because the information will be presented in 
a clear and complete manner, union members will be in a position to 
determine whether the time reported appears to be appropriate and 
accurate, thus encouraging unbiased reporting. Because union members 
elect their officers and are responsible for the governance of their 
union, even estimated reporting of the manner in which officers and 
employees spend their time will be far more useful than the total lack 
of any such information in Form LM-2 prior to these revisions. 
Accordingly, even though allocating time by estimated percentages is 
not as precise as exact measurements of time, the fact that the 
estimates will be reviewed with interest by union members is itself an 
incentive that is

[[Page 58406]]

likely to ensure the quality of the information reported.
    Several commenters opposed the $10,000 salary threshold. The law's 
purpose, as stated by one commenter, was to require unions to report 
the salaries of only their highest paid officers and staff. Under the 
Department's rules, however, unions are required to report the salaries 
of virtually all their employees. The $10,000 threshold is established 
by statute, 29 U.S.C. 431(b), and therefore the Department is without 
authority to change the threshold amount.
    No commenters specifically supported the proposal to require unions 
to report the net pay, withholdings, and tax payments for each officer 
and employee, but a number of comments opposing the proposal were 
submitted. An international union argued that the proposed reporting of 
net salaries is contrary to standard business practices and 
governmental regulations involving an organization's payroll. It 
asserted (as did one individual) that no other profit or nonprofit 
organization reports net wages. Moreover, it observed that a publicly 
traded corporation is required only to disclose the gross compensations 
of its chief executive officer (CEO) and four senior executive officers 
if, and only if, that compensation exceeds $100,000.
    The AFL-CIO stated that the Department's current requirement that 
unions report the gross salaries of their officers and employees 
provides members with sufficient information to meet any legitimate 
purpose under the LMRDA. It contended further that the LMRDA provides 
no statutory authorization for the Department to collect this type of 
personal financial information about union officers and employees. In 
this regard, it asserted that the statute does not authorize the 
Department to inquire, even indirectly, into such matters as whether an 
individual officer elects to purchase supplemental insurance or 
allocates substantial portions of his or her paycheck to the United 
Way.
    Based on the concern that the Department's proposal could interfere 
with the legitimate privacy interests of union officers and employees, 
the Department has determined that the better course is to maintain the 
current practice of requiring unions to report the gross salary (before 
taxes and other deductions) for each officer and employee, on an 
individual basis. Accordingly, in keeping with the current Form LM-2, 
Schedules 11 and 12 have been adjusted to reflect this change and a 
line item added to Statement B on which the reporting labor 
organization will report the aggregate amount of withholding taxes and 
other payroll deductions from all salaries, the total disbursed, and 
the total withheld but not disbursed. This change will protect 
individual privacy and also reduce the union's reporting burden for 
these schedules. The reporting union must then allocate each officer's 
and employee's gross salary, based on a good faith estimate, rounded to 
the nearest 10%, among five specified schedules (Representational 
Activities, Political Activities and Lobbying, Contributions, General 
Overhead, and Administration).

G. Schedule 13--Membership Categories

    Several commenters indicated their support for the Department's 
proposal to require unions to report the total number of members 
according to various types of membership categories. These commenters 
agreed that the newly required information would be useful to union 
members. A number of commenters, including several International 
unions, disagreed with the proposed changes to the unions' annual 
reporting requirements. Some commenters expressed doubt about the 
authority of the Department to require unions to submit detailed 
demographic information in their annual reports. Others expressed doubt 
that union members were interested in the more detailed membership 
information. Some commenters, while supporting the basic approach of 
the NPRM, suggested that the Department require unions to report 
information in additional categories. These suggested categories 
included information on:
    [sbull] Members working on projects covered by the Davis-Bacon Act
    [sbull] All employers with whom the union has collective bargaining 
agreements (CBA)
    [sbull] The length and duration of each CBA
    [sbull] The number of employees in each covered bargaining unit
    [sbull] Male and female members
    [sbull] Members in each state for unions that cover more than one 
state.
    The purpose of the Department's proposed Schedule 13 is to give 
members a clearer sense of the current health and future viability of 
their union and to give members a sense of what changes should be made 
to the union in order to improve the organization. Over time, this 
information will enable members to judge how effectively their dues are 
being spent on organizing and if any additional resources should be 
devoted to that activity. None of the proposed additional categories 
appears to advance these goals. Consequently, the Department has 
decided not to require labor organizations to report membership in 
these categories.
    Most comments indicated that, contrary to statements in the NPRM, 
unions do not currently keep membership information in the categories 
required by the new Schedule 13. Commenters provided several examples 
of different methods of categorizing members, including:
    [sbull] The International Union of Operating Engineers (IUOE) does 
not maintain information on members by category.
    [sbull] The American Federation of Teachers (AFT) tracks members, 
for accounting purposes, by ``full membership equivalents.''
    [sbull] The International Brotherhood of Electrical Workers (IBEW) 
tracks members by industry.
    [sbull] The building trades unions do not track apprentice, retired 
or inactive members.
    [sbull] One union indicated that they classify members as 
``active'' and ``retired.''
    [sbull] Retired members in the United Association of Plumbers (UA) 
maintain active status (and pay dues) to maintain certain benefits.
    It thus appears that while each union maintains membership 
information in some manner, it may not maintain that information in the 
precise categories contemplated by the proposed new Schedule 13. Union 
commenters also indicated that, because they do not maintain membership 
information in the categories contained in the new Schedule 13, it 
would be similarly difficult for unions to report the total amount of 
dues paid by each of the various categories of members and the amount 
that the union paid or received in per capita dues for each category.
    While the Department continues to believe that information 
regarding the number and type of members of a reporting labor 
organization is information that is important to the members of that 
organization, the Department also agrees that each labor organization 
should be able to maintain such information in the manner that the 
union believes will be most useful to it as an institution. 
Accordingly, the Department has concluded that each reporting labor 
organization should be permitted to name and report on its own 
categories of members so long as the union provides a definition of 
each category in Item 69 (Additional Information). For example, if a 
union feels that it is best for it to maintain membership statistics on 
``active,'' ``retired'' and ``apprentice'' members,

[[Page 58407]]

then it should report that information in the appropriate place on the 
schedule and provide a definition of each category in Item 69. The 
union will not be required to manufacture or report information for 
membership categories it does not keep.
    This change will address the most prominent areas of concern 
highlighted by the comments. First, unions, and their members, 
presumably have some interest in the statistics if the union is already 
keeping them. Second, it should be no great burden for unions to report 
membership statistics that they are already keeping in the normal 
course of business. The Department recognizes that the requirements for 
reporting membership in the final rule may not disclose as much 
information to the members as the original proposal. The Department 
believes, however, that the final rule will disclose more needed 
information to the members concerning their unions without undue 
burden.
    At least one organization, a provider of information regarding 
labor organizations to companies, labor attorneys, union democracy 
groups and academics, cited the tendency of labor organizations that 
have national, intermediate and local bodies to double-count members 
and to report the same persons as members of more than one of the 
related organizations. This practice, according to this commenter, can 
give members an inaccurate picture of a labor organization's overall 
strength and is due, at least in part, to the differences in the 
definition of ``member'' used by different labor organizations. In this 
regard, the Department notes that the statute defines the term 
``member'' to include

any person who has fulfilled the requirements for membership in such 
organization, and who neither has voluntarily withdrawn from 
membership nor has been expelled or suspended from membership after 
appropriate proceedings consistent with lawful provisions of the 
constitution and bylaws of such organization.

    29 U.S.C. 402(o). Every labor organization should use this 
definition to determine whether an individual is a member of the labor 
organization for purposes of Schedule 13. Applying this definition, 
however, may well result in two or more labor organizations reporting 
certain individuals as members because those individuals pay dues to, 
and fulfill all other requirements for membership in, a local labor 
organization and in an affiliated intermediate and/or national or 
international labor organization. In fact, membership in an affiliated 
local labor organization may well be a requirement for membership in an 
intermediate or international union. In some respects--as where, for 
example, an international union derives substantial support and funding 
from the members of affiliated subordinate unions--such ``double 
reporting'' may not necessarily be an inaccurate reflection of the 
financial health of the labor organization.

H. Mandatory Electronic Filing

    For several years, and with substantial Congressional urging, 
assistance and leadership, the Department has pursued the development 
and implementation of electronic filing of annual reports required by 
the LMRDA, along with an indexed and easily searchable computer 
database of the information submitted, accessible by the public over 
the Internet. See H.R. Conf. Rep. 105-390, 1997 U.S.C.C.A.N. 2061; H.R. 
Conf. Rep. 105-825; H.R. Conf. Rep. 106-419; H.R. Conf. Rep. 106-479; 
H.R. Conf. Rep. 106-1033; H.R. Conf. Rep. 107-342, 2002 U.S.C.C.A.N. 
1690; H.R. Conf. Rep. 108-10, 2003 U.S.C.C.A.N. 4. In furtherance of 
that goal, the Department proposed that all Form LM-2 annual reports be 
filed electronically and proposed to develop software to enable that 
process.
    The Department received several comments, including comments from 
members of Congress, accountants, and other organizations, that 
supported mandatory electronic filing. The commenters indicated that 
electronic filing is consistent with the recordkeeping requirements for 
human resource professionals working under other federal statutes and 
would bring the financial disclosure requirements of unions under the 
LMRDA into the modern era. The commenters pointed out that millions of 
people of all economic groups now conduct their financial business, 
including managing their 401(k) and IRA accounts, on the Internet. The 
commenters explained that mandatory electronic filing would also be 
consistent with the Congressional directives to ESA every year since 
1997 to establish an electronic filing system to provide greater public 
access to the materials filed under the LMRDA.
    A few commenters did not think the Department's proposal went far 
enough. These commenters suggested that all unions, even those with 
receipts of less than $200,000, be required to file their LM forms 
electronically. In addition, at least one commenter suggested that 
labor organizations be required to provide a link on their own website 
to the union's electronically posted LM form, whether located at the 
Department's LM website or elsewhere on the union's website. Many labor 
organizations, however, expressed their disagreement with the proposal 
that unions begin to file Form LM-2 and Form T-1 electronically after 
the issuance of the final rule. These commenters indicated that 
mandatory electronic filing would be a considerable burden to unions, 
particularly those unions with volunteer or part-time officers and 
staff. The union commenters noted that the Department's claim that 
electronic filing will be more efficient is untested, particularly 
because the software that will allow unions to transfer their 
electronic data to the reports is not yet available. One commenter also 
noted that the Department had indicated in a Government Accounting 
Office (GAO) report that any electronic filing of reports should be 
voluntary. The Department notes that its earlier views were shaped by 
the less mature technology that then existed and without the benefit of 
continued and repeated Congressional urging to make all such reports 
available on line. The Department's present view is shaped by today's 
technology, its impact on the ability to obtain, process, disclose, and 
utilize information, as well as the increased awareness of the 
importance of transparency to the governance of institutions.
    In addition, several unions commented that the Department has 
overestimated unions' capability to file reports electronically. For 
example, the International Union of Operating Engineers (IUOE) stated 
that despite a concerted effort on their part to have locals file their 
per capita reports electronically, only 21 of the 147 IUOE locals do 
so. In addition, the International Longshoremen's Association (ILA) 
reports that none of its over 100 locals that file LM-2 reports 
currently files electronically. A survey conducted by the AFL-CIO 
indicates that only 14% of the national and international unions and 
only 9% of the local unions file their Form LM-2 reports 
electronically. The Department notes, however, that, in fact, a much 
smaller percentage of unions have actually filed their Form LM-2 
reports electronically, a circumstance that is hardly surprising 
inasmuch as this filing option did not exist until December of 2002, 
when the Department's system became able to utilize digital signatures. 
The Department's experience further reflects that far more of the 
reports filed in paper are actually prepared electronically, even 
though they are submitted by mail to the Department. The fact that the 
AFL-CIO reports many more reports filed electronically than

[[Page 58408]]

actually have been filed suggests confusion on the part of those asking 
the survey questions, or those answering them, or both.
    The unions that commented stated that it would be expensive and 
perhaps not feasible for them to develop the new accounting systems, 
purchase the new computers, and train their staff to make the 
changeover to electronic filing within the timeframe required by the 
proposed effective date. For example, the United Food and Commercial 
Workers (UFCW) estimates that it will cost two million dollars and take 
two years to make the necessary changes. Similarly, a study conducted 
for the AFL-CIO estimates that it will take two to four years for 
unions to make the conversion to electronic filing. Therefore, the 
commenters suggested that the Department conduct a pilot program during 
which some, but not all, unions are required to file electronically. In 
the alternative, the commenters suggested that the Department devise a 
phase-in period during which the requirement for electronic filing is 
postponed, giving unions time to adapt their systems and train their 
people to meet the new requirements.
    These comments suggest that the relevant issue with respect to 
electronic filing is not whether it should be required, but rather how 
and when it should be accomplished. Indeed, in light of the 
Congressional direction that these reports should be filed and made 
available electronically, and the delay and expense attendant to 
scanning paper forms in order to make them available on the Internet, 
electronic filing is clearly necessary and beneficial. In response to 
numerous comments arguing that more lead-time is required, the 
Department has modified the proposed effective date for electronic 
filing, but remains firmly convinced that the technological concerns 
associated with electronic filing are overstated.
    First, the electronic filing requirement applies only to the 
largest labor organizations, those that have over $250,000 in annual 
receipts. Thus, 4,732 unions (about 19% of the total) will be required 
to file their reports electronically. Unions with annual receipts less 
than this threshold (62,668 or about 81% of the total) will not be 
subject to this requirement. See discussion in the Paperwork Reduction 
Act analysis (Section V(F), from which these numbers are derived. These 
unions, which are less likely than the larger unions to have full-time 
staff familiar with electronic bookkeeping and reporting, can still 
file the simpler Form LM-3 or Form LM-4 reports manually, if they wish. 
The technical feasibility study performed by SRA for the Department 
indicated that the proposal could be implemented with relative ease, 
and this understanding is consistent with the Department's own 
familiarity with recordkeeping software and union recordkeeping 
practices. While the AFL-CIO disputes the number of current electronic 
filers of Form LM-2, it argues that there are actually nearly twice as 
many electronic accounting programs in use by labor organizations than 
the Department assumed. In fact, many of the larger labor organizations 
that commented on the proposal argued not that they were unfamiliar 
with electronic accounting programs but that their own sophisticated 
programs capture different data than that required by the Department's 
proposal.
    The NPRM noted a substantial number of filers using the 
Department's software to complete the existing LM reports; in fact, 
more recent data indicate that 76% of the Form LM-2 reports filed in 
2002 were completed using the Department's software. The AFL-CIO 
figures cited above, indicating that far fewer labor organizations use 
the software, cannot refute the Department's actual usage data. First, 
the Department's data is based on review of all reports filed during 
the year, whereas the AFL-CIO survey is based upon questions answered 
by a relatively small number of filers. Second, the AFL-CIO provided 
only survey results, not the actual survey instrument, and there is 
little information provided by which to assess its validity. Finally, 
as noted above, if the AFL-CIO's assertions regarding its numbers are 
read literally, they are higher, in some respects, than the 
Department's own numbers, indicating, at best, some confusion on the 
part either of those asking the AFL-CIO survey questions, or those 
answering them, or both.
    The most comprehensive response to the SRA technical feasibility 
report, a study performed by Beaconfire Consulting, Inc., was submitted 
along with the AFL-CIO's comment. This study does not claim that labor 
organizations cannot file their annual Form LM-2 reports 
electronically, but that the Department has underestimated the cost and 
time involved in converting to an electronic filing system. Most of the 
issues raised by the Beaconfire study relate not to the cost of 
compliance for labor organizations, but rather to the cost to the 
Department to develop the software that will allow labor organizations 
to submit their reports electronically. The Department is committed, 
however, to taking the steps necessary to effectuate the new system 
with minimal problems.
    Although the Beaconfire study also suggests that costs to labor 
organizations may be higher than the Department assumed, Beaconfire 
acknowledges that their figures, like those developed by SRA, are 
merely estimates. Beaconfire assumed, without explanation, that the 
average data file to be transmitted by unions to the Department will be 
substantially larger than the size assumed by SRA. SRA, by contrast, 
stated that it extrapolated file size requirements based on the data 
types and volume currently being reported on Form LM-2, taking into 
account the fact that data volume varies significantly from union to 
union. For data that is not currently being reported, SRA made ``worst 
case'' assumptions that it viewed as conservative. See Technical 
Feasibility Study for an On-Line Financial Downloading System, SRA, 
Sec. 3.4.1. Without an explanation of Beaconfire's contrary 
assumptions, it is difficult to assess their validity, particularly in 
light of the recognized incentive on the part of regulatees ``to 
inflate cost estimates in the hope of securing a less stringent 
regulation.'' McGarity and Ruttenberg, Counting the Cost of Health, 
Safety, and Environmental Regulation, 80 Texas Law Review 1997, 2044-45 
(2002).
    In addition, the Beaconfire study fails to recognize that the 
information required by the new Form LM-2 is not structurally complex 
or fundamentally different from the information that has been reported 
on the current form. The study, which notes problems encountered in the 
initial development of the Department's e.LORS program, also fails to 
take into account the Department's plans to leverage existing hardware 
and software components and to integrate the enhanced reporting system 
into the Department's existing infrastructure.
    In revising its estimates of the likely cost of compliance with 
this rule, and in particular of compliance with the requirement that 
labor organizations file the Form LM-2 electronically, the Department 
carefully considered the information in the record regarding the 
existing capabilities of labor organizations. The AFL-CIO submitted 
survey data from its affiliates that suggests: 12.5% of local unions do 
not use computer accounting software; 21% of national and international 
unions and 33% of local unions would need new hardware; 62% of national 
and international unions and 75% of local unions would need new or 
upgraded software; and 14% of all unions said it

[[Page 58409]]

would be impossible to expand the recordkeeping capacity of their 
current accounting systems to accommodate the additional data required 
by the proposed rule. The AFL-CIO survey also found that all national 
and international unions maintain their accounting data on in-house 
computer systems--but many of those systems are incapable of 
interfacing with the Department's software. Information submitted by 
the AFL-CIO also suggests, however, that: 79% of national and 
international unions and 67% of local unions will not need any new 
computer hardware; 38% of national and international unions and 25% of 
local unions will not need any new or upgraded computer software; and 
86% can expand their current accounting systems to include the 
additional fields to accommodate functional reporting. Moreover, 
raising the Form LM-2 filing threshold to $250,000 will enable 501 of 
the smallest filers, and those most likely to have software and 
hardware issues, to file the less burdensome Form LM-3. Further, as 
identified in the technical feasibility study performed by SRA, the 
Department is committed to developing reporting software for LM-2 
filers that is compatible with the major export formats available in 
commercial, off-the-shelf accounting software. Finally, in the event 
that a labor organization encounters severe difficulties, the hardship 
exemption will be available for its use.
    One union noted that it is going to be very difficult and maybe 
impossible for unions using a commercial off-the-shelf bookkeeping 
system (Quickbooks, Peachtree, etc.) to find a way to incorporate these 
details into their accounting databases. Almost all unions, it 
observed, will have to do special programming to find a way to do this. 
For the integrity of all the other accounting functions, the system 
must show the payee of the check (e.g., American Express), but for the 
revised Form LM-2 the system will have to ignore that vendor and 
instead insert the names of the hotels, airlines, restaurants, etc. 
Finally, one union asserted that the Department's burden estimates are 
completely mistaken, and are based on alleged efficiencies to be gained 
from using software that the Department purports will seamlessly export 
financial data. In its view, it is impossible to determine which, if 
any, financial software packages will be compatible with the 
Department's software. There is no way, in its opinion, to comment 
meaningfully on the burden associated with the proposed rule without 
knowing how the software will work.
    In light of all of these concerns, the Department reassessed its 
estimate of the burden and cost of complying with this revision of Form 
LM-2 and revised its estimate significantly upward. The Department has 
never contended that the changes would be without cost; the real 
question is whether the increase in cost, once it is accurately 
measured, is justified by the increased benefits to union members. The 
Department has concluded, on balance, that technological advances have 
made it possible to provide the level of detail necessary for union 
members to have a more accurate picture of their union's financial 
condition and operations without imposing an unwarranted burden on 
reporting unions.
    OLMS staff who review the reports filed and provide compliance 
assistance to unions have found that a majority of unions required to 
file Form LM-2 use computerized recordkeeping systems and have embraced 
the technology necessary to provide reports in electronic form. Several 
OLMS field offices report that even smaller unions that file Form LM-3 
reports keep electronic books. The development of electronic software 
that will permit unions that keep their records electronically to 
import data from their programs to the Form LM-2 software should reduce 
the burden of reporting financial information with the specificity 
required by the final rule. While labor organizations have not 
previously been required to report all of this information, they have 
been required to make judgments regarding the appropriate 
characterization of disbursements in order to report those 
disbursements by category in the current form. Once the necessary 
adjustments have been made to electronic recordkeeping systems, no 
additional burden will be entailed by the need to make similar 
judgments with respect to fewer categories. Labor organizations that do 
not currently maintain electronic books, or that use accounting 
software that proves incompatible with the software developed by the 
Department, will experience an increased burden.
    The Department has given serious consideration to the comments 
suggesting that the Department employ a pilot program before 
implementing a final rule or allow a delayed phase-in of the electronic 
reporting requirement. As explained (and further elaborated below), the 
Department's final rule builds upon the existing technology used by 
large and small businesses, labor unions, and other organizations to 
manage their finances. This technology has been available for several 
years and is used by many individuals to manage their family finances. 
As discussed elsewhere, the changes that need to be made by unions in 
their bookkeeping and accounting practices are incremental ones. The 
Department believes that most unions' existing financial software will 
accommodate the minimal changes required to comply with the rule. For 
data entry purposes, the only changes required will be the modification 
of the categories and fields to chart the union's accounts in a way 
that tracks the reporting categories. While the Department acknowledges 
that it will take the individuals responsible for tracking each union's 
financial matters some time to familiarize themselves with the 
instructions in order to modify categories, the actual time required to 
add the modified accounts to the tracking software will be nominal 
(from a few days to a week or more). Similarly, as discussed below, 
there is no apparent obstacle for unions to comply with the actual 
electronic submission of the information to the Department, an 
obligation that no union will have to meet until about 18 months after 
the publication of the final rule.
    After considering the comments regarding implementation, the 
Department has chosen to delay the effective date of the rule to 
provide additional time for all labor organizations to make the 
adjustments necessary to record the information required. The 
Department believes that a pilot program is unnecessary. If the 
technology was not mature or the rule was introducing a concept or 
requirement unfamiliar to unions, a pilot program might have served a 
useful purpose. The rule, however, relies on mature technology that is 
in common use among unions, businesses, and other organizations. The 
Department's investigative and audit experience reflects that unions 
are well experienced in tracking receipts and disbursements and 
reporting this information to members. Unions also have demonstrated 
considerable proficiency in using software to obtain these results.
    For similar reasons, the Department believes it unnecessary to 
phase-in the new rule. As discussed, the Department does not believe 
that unions will encounter significant problems in revising their 
current bookkeeping and accounting procedures to meet the reporting 
requirements. And, to the extent unions are concerned about the actual 
submission of the data to the Labor Department, that will not occur

[[Page 58410]]

until about 18 months after this rule issues (and then only for unions 
that have fiscal years beginning on January 1, 2004). Moreover, the 
rule has a built-in ``phase-in'' component that will allow for 
adjustments to be made, if and when problems arise. Because each labor 
organization's filing date is dependent on its chosen fiscal year, the 
filing of annual financial reports is staggered throughout the year.
    In the event that any labor organization encounters serious 
difficulties with electronic filing, the hardship exemption will be 
available. The Department proposed a hardship exemption modeled after 
the procedures used by the SEC (17 CFR 232.201-202) and invited 
comments regarding whether the hardship exemption procedures are 
appropriate and whether there are any alternative procedures that might 
better address legitimate problems. International unions commented that 
the hardship exemption should be broadened to permit a reasonable 
phase-in period and that smaller Form LM-2 filers be given permanent 
exemptions because of the burden and cost of electronic filing. Trade 
associations, on the other hand, argue that hardship exemptions should 
be narrowly limited and that labor organizations should be required to 
affirmatively prove hardship. Some commenters asked for clarification 
of the standards to be used when evaluating hardship claims. An 
attorney for a local union expressed concerns over the possible 
criminalization of innocent errors given the present lack of clear 
guidance on the proposed rule. One association commenter suggested that 
individual union members be permitted to appeal the grant of an 
exemption to their union.
    The Department has decided to retain the hardship exemption and not 
to attempt to define with more particularity the circumstances in which 
it might be available. The exemption was left deliberately broad in 
order to permit accommodation of a wide range of variable situations. 
Moreover, the Department is unaware of any problem experienced by the 
SEC in using a similar formulation. If, however, unions have serious 
difficulty with electronic filing, the hardship exemption presents a 
fail-safe option for any reporting labor organization that needs it. 
With respect to the suggestion that a union member be allowed to 
challenge his or her union's exercise of the hardship exemption, the 
Department does not believe that such an appeal would be practical. 
Exemptions will be granted only upon a proper showing of need by the 
union and the exemption will be only temporary. As noted above, the 
concerns expressed about ``criminalization'' of innocent mistakes are 
misplaced because sanctions are available only for willful violations 
and thus depend upon intentional or reckless actions by responsible 
officers.
    Finally, the Department continues to be fully committed to 
providing extensive compliance assistance at all stages of 
implementation. OLMS is developing compliance assistance materials 
outlining and explaining the changes to Form LM-2 and new Form T-1 and 
will present seminars and workshops advising union officers of the new 
reporting requirements. Contemporaneously with the publication of this 
rule, the Department is making available a Data Specifications Document 
that will enable the unions' staffs to prepare their bookkeeping 
systems in order to submit their reports electronically to the 
Department. If unions do not complete this interface, they will still 
be able to use the Form LM-2 software by the ``cut and paste'' method 
or by keying information directly into the electronic form. The Form 
LM-2 software will be available to download from the OLMS website at 
www.olms.dol.gov well before any labor organization will have to use it 
to file their reports, which will give the Department plenty of time to 
conduct compliance assistance and answer questions posed by the filing 
community.
    The Department's extensive compliance assistance will include some 
or all of the following actions:
    [sbull] Mass mailings to all reporting unions explaining the final 
rule and the effective date.
    [sbull] Briefings for national/international unions, including 
meetings with national/international secretary-treasurers and their 
staffs and follow-up training sessions.
    [sbull] Training OLMS staff on the new forms software and how to 
respond to inquiries from users.
    [sbull] Establishing and publicizing a toll-free telephone number 
for software trouble-shooting.
    [sbull] Maintaining a help desk with a toll-free telephone number 
and a dedicated email address for handling reporting inquiries.
    [sbull] Development of users' guides for the new forms software.
    [sbull] Development of Powerpoint briefings on the new forms 
software.
    [sbull] Presentation of Powerpoint briefings by OLMS field offices 
in compliance assistance sessions with filers.
    [sbull] Establishing a section on the OLMS website devoted to the 
revised Form LM-2 and making regular updates to it.
    [sbull] Developing a ``list serve'' system to send email messages 
to unions, accountants, union members, and other interested individuals 
to provide up-to-the-minute information to assist in meeting the 
reporting requirements for the revised Form LM-2.
    [sbull] Developing guidance to assist unions to configure off-the-
shelf software to best capture the information needed to provide the 
data required for submitting the LM-2 and T-1 reports.

I. Effective Date

    The Department proposed to make the use of the revised Form LM-2 
and the new Form T-1 mandatory for reports for fiscal years commencing 
after the publication of the final rule. The Department specifically 
invited comments concerning whether one year is an appropriate time 
period before labor organizations are required to use the new forms and 
whether labor organizations should be required to use the revised form 
to report information for a fiscal year that begins within 30 days of 
the date that a final rule is issued. One commenter said the effective 
date was appropriate observing that ``[t]he proposed electronic filing 
procedures and effective dates strike a reasonable balance between 
limiting reporting burdens and increasing members' access to important 
information.'' Two other comments from organizations proposed that the 
effective date should be even earlier. These commenters indicated that 
while the new rule would require additional reporting burdens, the 
essential information to be reported remained unchanged. These 
commenters also expressed concern that unions would file the new forms 
late as many unions do with the current forms.
    The majority of the comments specifically dealing with the rule's 
effective date opposed the proposed effective date saying that it was 
too soon. The commenters, most of whom were labor organizations, argued 
that the final rule should not be imposed until the software that will 
be provided by the Department is tested, implemented and fully 
operational. Several unions suggested that the effective date be 
delayed six months to two years. Some commenters said that given the 
Department's experience with e.LORS and the SEC's experience with its 
reporting system, a delay of two to four years before full 
implementation was more realistic. Other commenters suggested that the 
Department's

[[Page 58411]]

software be subject to a separate review and comment process after it 
is issued.
    The Department continues to believe that an earlier or immediate 
effective date would not be appropriate for a proposed rule of this 
magnitude. Some interim period will be needed for unions to adapt their 
recordkeeping practices to the new requirements. Similarly, there will 
be a later need for the Department and labor organizations to test and 
implement the reporting software that will be provided by the 
Department. The aim of the Department is to balance some reasonable 
amount of time that unions will need to adapt to the new reporting 
requirements and the members' immediate interest in knowing how their 
dues money is spent. This member interest is reflected in the numerous 
comments from members indicating general support for the proposed 
changes and emphasizing the members' right to have information 
concerning their union.
    In addressing unions' concerns, it is appropriate to sketch the 
tasks to be undertaken by unions to meet the requirements of the new 
reporting regime. The tasks involve two phases of preparation. First, 
filers will need to study and understand the new requirements, make 
adjustments to the union's recordkeeping system, and train staff. 
Second, filers that choose to take advantage of the electronic 
importation features of the Department's reporting software will need 
to create reports within their accounting systems that will be used to 
export their data to populate the reporting forms. As discussed in 
greater detail below, the first phase likely can be completed within a 
few weeks of the rule's publication and certainly by the effective date 
of the rule, whereas the second phase need not be completed until the 
form is filed, at the earliest, nearly 18 months after publication of 
this rule (and then only for unions that have fiscal years beginning on 
January 1, 2004).
    The grace period of about three months is relevant to the first 
phase discussed above, which begins immediately upon publication of the 
final rule. The preamble, instructions and forms will be the 
authoritative source of information regarding the new reporting 
requirements. Union officials will use these documents to understand 
what is required of them. Additionally, the Department will provide 
substantial compliance assistance that will include an overview of the 
requirements, a comparison to the old requirements, guidance to assist 
unions to configure off-the-shelf software to best capture the 
information needed to provide the data required for submitting the LM-2 
and T-1 reports, a tentative schedule of seminars for international, 
national, intermediate and local unions hosted throughout the country, 
an email list-serve to provide periodic updates to interested parties, 
web-based materials that include frequently asked questions, a 
description of the Form T-1 registration process, and other topics of 
interest to filers.
    Once union officials understand the new reporting requirements it 
will be necessary to make some adjustments to their recordkeeping 
systems. Most changes will be very minor. The most crucial change 
involves the tracking of disbursements to ensure that each disbursement 
is allocated to the proper disbursement category with a descriptive 
purpose. Each union will track new disbursements according to the 
account classifications created by that union and classify them 
according to the disbursement categories of the revised Form LM-2. Some 
commenters asserted that this is a dramatic policy shift tantamount to 
imposing a new recordkeeping system, which would cause a significant 
burden, but this ignores the fact that unions have always been required 
to allocate each disbursement to one or more disbursement categories on 
the Form LM-2. For example, unions have always been required to 
allocate credit card payments to multiple categories of the Form LM-2 
based upon the purposes of each charge. A single credit card charge to 
a travel agent may include expenses that must be allocated to three or 
more different places on the Form LM-2. The Department has changed the 
categories but not the underlying method of allocating these 
disbursements. In fact, there actually fewer disbursement categories on 
the new form and the five new categories are thoroughly defined in the 
instructions to the form. After allocating the disbursement, they will 
enter a brief purpose for each transaction in a memo field. These sorts 
of operations should be easy to perform since such changes to the 
classification of transactions and the creation or modification of 
accounts are made on a week-to-week or day-to-day basis in the normal 
course of business. It may require some retraining to understand the 
new categories and the use of the memo field, but this is guidance that 
bookkeepers are accustomed to receiving. Nothing during this phase is 
particularly time consuming, difficult, or outside the common routine 
of individuals engaged in bookkeeping and accounting. In sum, the 
Department believes that Form LM-2 filers will be able to make any 
needed adjustments to their bookkeeping and data processing practices 
to capture and allocate transactions in the categories prescribed by 
the Form LM-2 and to later transmit such data without incurring an 
undue burden.
    Addressing unions' additional concerns, it is the Department's 
position that neither the time spent by the SEC in the development of 
its Electronic Data Gathering, Analysis, and Retrieval (EDGAR) system 
nor the time required for the Department to implement its e.LORS system 
provide appropriate paradigms for determining the time necessary to 
implement mandatory electronic filing of the Form LM-2. First, the 
phase-in of the mandatory electronic filing on the SEC's EDGAR system 
was completed on May 6, 1996, over seven years ago. See 61 FR 13544; 
http://www.sec.gov/info/edgar/regoverview.htm. Since then, technology 
has continued to develop, building, in part, on experience gained from 
using systems like EDGAR, and computerized recordkeeping and 
communication have become more accessible and better understood. As the 
SEC itself commented, in implementing recent improvements:

    Recent technological advances, most notably the rapidly 
expanding use of the Internet, have led to unprecedented changes in 
the means available to corporations, government agencies, and the 
investing public to obtain and disseminate information. Today many 
companies, regardless of size, make information available to the 
public through Internet web sites. On those sites and through links 
from one web site to others, individuals may obtain a vast amount of 
information in a matter of seconds. Advanced data presentation 
methods using audio, video, and graphic and image material are now 
available through even the most inexpensive personal computers or 
laptops.

65 FR 24788-89.
    Moreover, the EDGAR system is far more complex and multi-faceted 
than the filing of the one or two forms contemplated by this rule. In 
fact, EDGAR accommodates the filing of over 75 separate forms by a 
variety of different types of entities. See http://www.sec.gov/info/edgar/forms.htm#common. The fact that such a massive system could be 
implemented with a three-year phase-in period over seven years ago 
lends support to the Department's assertion that the far simpler 
architecture required to permit similar organizations to file two 
forms, at most, can be implemented in much less time. In addition, the 
Department will be able to utilize both the architecture developed for 
e.LORS, as well as experience gained in developing

[[Page 58412]]

and implementing that system, to facilitate the establishment of a 
system of mandatory electronic filing for the current Form LM-2. 
Although some commenters also pointed to delays in publication of 
recordkeeping rules by the Occupational Safety and Health 
Administration, those delays are irrelevant inasmuch as they were 
related to policy changes, not technical difficulties. See 68 FR 38601.
    The Department continues to believe that labor organizations will 
have adequate time to conform to the revised forms and comply with the 
more detailed reporting requirements. As indicated above, unions will 
have a minimum of approximately 18 months before their first report on 
the new forms is due. During this time, they already will have made 
changes to their bookkeeping practices needed to capture the 
information that will be reported. Thus, the unions will be able to 
focus their efforts on training their staff in the new requirements of 
the actual reporting software. As the Department has acknowledged, 
there were some complications with the implementation of the previous 
e.LORS system. The Department has learned from this process. Building 
upon the existing infrastructure, the Department is employing more 
advanced technology in developing the reporting software than was the 
case in the initial e.LORS project. Similar software has proven 
efficient with other government agencies.
    As discussed above, the Department has decided to delay the 
effective date of the final rule by postponing its application until 
unions begin their next fiscal year after December 31, 2003, i.e., 
about three months after publication of this rule. Approximately two 
thirds (\2/3\) of the reporting unions begin their fiscal year on 
January 1. The first report containing the information required under 
the new rule for these unions would be due on March 31, 2005. Labor 
organizations that use a fiscal year beginning on a date other than 
January 1 will have even more time to comply.

IV. Summary of Changes to the Proposal to Require Form T-1 Reporting 
for Trusts

    The Department proposed to require all unions to report the assets, 
liabilities, receipts, and disbursements of all funds or organizations 
that are not wholly owned by the union, but that meet the statutory 
definition of a ``trust in which a labor organization is interested,'' 
that have annual receipts of $200,000 or more and to which the labor 
organization contributes at least $10,000 during the reporting year on 
a new Form T-1 (Trust Annual Report) in order to fulfill the purpose of 
the statutory reporting requirements.
    A ``trust in which a labor organization is interested'' is defined 
in Section 3(l) of the LMRDA (29 U.S.C. 402(l)) as follows:

    * * * 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.

    The Department sought comments on a number of issues relating to 
this new form, which are discussed below.

A. Who Should Be Required To File a Form T-1

1. Labor Organizations That File Forms LM-3 and LM-4
    The Department proposed that all labor organizations, including 
smaller labor organizations eligible to file their labor organization 
annual financial report on Forms LM-3 and LM-4, as well as larger labor 
organizations required to file Form LM-2, would be required to file 
Form T-1 for any trust in which a labor organization is interested if 
the total annual receipts of the trust were at least $200,000 and to 
which the labor organization contributed at least $10,000, or to which 
$10,000 was contributed on behalf of the labor organization, during the 
reported year. The proposed Form T-1 is designed to require unions to 
report financial information about union funds that have been invested 
in such trusts, information that has not been disclosed under the 
current reporting regimen for unions. The proposed reporting scheme was 
established to discourage circumvention or evasion of the reporting 
requirements for such trusts, while imposing minimal burdens on labor 
organizations. The Department invited comments on whether this aspect 
of the Department's proposal strikes an appropriate balance between the 
need for transparency and any burden on labor organizations.
    Numerous commenters expressed their views on the reporting burden 
that the proposal would entail. Some commenters discussed the likely 
impact on unions without substantial resources invested in covered 
trusts. A business/trade association asserted that the reporting burden 
on such unions would be significantly less than on unions with more 
substantial assets, given that the burden likely would be proportional 
to the size of a union's overall finances. The association also 
suggested that it might be appropriate to require smaller labor 
organizations, otherwise eligible to file their labor organization 
annual financial report on Forms LM-3 or LM-4, to file their annual 
reports on the more detailed Form LM-2 for any year in which such 
organizations meet the requirement for filing the Form T-1.
    Many unions submitted comments that would except some unions from 
the Department's proposal. These commenters stated that unions, 
regardless of the size of their membership or their financial resources 
would have virtually the same responsibility and tasks, even though 
only a small number of the unions would have the staff or other 
resources to obtain, prepare, and file timely and accurate information 
on Form T-1.
    Many commenters stressed the limited human resources available to 
some unions. These commenters observed that many unions have no 
clerical employees and must rely either on part-time officers or, in 
very many cases, unpaid members who volunteer their services after work 
hours. In the view of these commenters, very few of those officials and 
employees have the computer or accounting experience or training 
sufficient to readily process and submit the necessary financial 
information for the Form T-1 in electronic format.
    Commenters stated that many labor organizations conduct and record 
their financial and other union affairs by hand and seldom have ready 
access to current-generation computers, software, and other electronic 
equipment. These commenters expressed concern that these organizations, 
which already often find it necessary to hire professional assistance 
to meet current reporting requirements, in many cases would be 
constrained further to hire and rely on computer, accounting, legal, 
and other consulting assistance to comply with the Department's Form T-
1 proposal. Additionally, these commenters stated that such unions 
would find it necessary to expend significant amounts of their 
resources for training on how to meet their reporting obligations. The 
commenters further stated that, because there is a significant turnover 
of the organization's part-time and unpaid officials and employees, 
those costs may not only be a significant but also a recurring expense 
for small organizations. Commenters stated that many organizations 
would be faced with the dilemma of raising the dues of, or cutting 
services to, their members.
    The Department has been persuaded that the relative size of a 
union, as measured by its overall finances, will

[[Page 58413]]

affect its ability to comply with the proposed requirements relating to 
trusts in which the union has an interest. For this reason, the 
Department has decided to limit the requirement for filing Form T-1 to 
labor unions that have receipts of at least $250,000 per year, the same 
filing threshold that applies to organizations that must file their 
annual financial reports on Form LM-2. Accordingly, the Department's 
final rule excepts from the trust reporting requirement labor unions 
that are eligible to file Forms LM-3 and LM-4.
    Because the proposed requirement that Form LM-3 and -4 filers file 
a Form T-1 for trusts in which they are interested was the only 
significant change proposed with respect to Forms LM-3 and LM-4, 
neither these forms nor the Instructions for them will be included in 
the appendix to this rule. In addition, a change will be made to the 
Instructions for Form LM-2 to make them consistent with the unchanged 
Instructions for Forms LM-3 and -4, which provide that the term ``total 
annual receipts'' includes receipts of any subsidiary organization, 
defined as

* * * any separate organization of which the ownership is wholly 
vested in the reporting labor organization or its officers or its 
membership, which is governed or controlled by the officers, 
employees, or members of the reporting labor organization, and which 
is wholly financed by the reporting labor organization.

    While an entity that meets the definition of a subsidiary will also 
be a trust in which the union is interested, the assets of which would 
not normally be included in ``total annual receipts'' of the reporting 
union, an exception to the normal rule will be added to the 
Instructions to make clear that the assets of a trust should not be 
included unless the trust is also a subsidiary, as defined above. The 
NPRM pointed out that one alternative to the proposed criteria for 
filing a Form T-1 would be to require a report for any entity that is 
dominated or controlled to such a degree that assets, liabilities, 
receipts and disbursements of the entity effectively are those of the 
union itself. Commenters were specifically invited to comment on the 
fact that assets and receipts of such an entity ``would be reportable 
as assets and receipts of the union itself (rather than assets of an 
organization in which the union has an interest)'' and that the 
addition of such amounts might require a union to file a Form LM-2 
rather than a Form LM-3 or LM-4. See 67 FR 79285. Although, as 
explained in Section IV. A. 3, the Department has rejected reporting 
based on ``single entity'' status in favor of the statutory definition 
of a trust in which a labor organization is interested, it is 
appropriate to retain the existing inclusion of the receipts of a 
subsidiary (which is more clearly and more narrowly defined than a 
single entity) in the receipts of a reporting union for the sole 
purpose of deciding whether the union must file a Form LM-2. Otherwise, 
removing the requirement for unions with annual receipts of $250,000 or 
less to file a report regarding trusts in which they are interested 
would permit unions to allocate assets to a wholly owned, controlled 
and financed entity and avoid even the reporting requirements imposed 
with respect to such entities before these reforms.
2. Other Exemptions
    The Department originally proposed four express exemptions to the 
Form T-1 Trust Annual Report: (1) Where an organization makes freely 
available, and specifies the location of, an audit of the trust 
pursuant to 29 U.S.C. 186(c)(5)(B); (2) where an organization files 
publicly available reports about the trust as a Political Action 
Committee (PAC) with a state or federal agency; (3) where a report 
about the trust as a political organization is filed with the Internal 
Revenue Service pursuant to 26 U.S.C. 527; or (4) where the trust is 
required to file an annual report pursuant to ERISA (29 U.S.C. 1023). 
The Department invited comments concerning whether the proposed Form T-
1 procedures--including the enumerated exemptions to Form T-1 filing--
were appropriate given the facts and circumstances of current union 
reporting.
    Many labor organizations supported the proposed Form T-1 exemptions 
as a reasonable approach that provides valuable financial disclosure, 
while avoiding needless duplication of effort. Other unions, apparently 
either mistaken about, or unaware of, the parameters of the exemptions, 
criticized the Form T-1 on the ground that many trusts are heavily 
regulated by ERISA (and other federal laws) and are already required to 
file similar financial reports with government agencies. In the 
Department's view, these comments are best read to provide implicit 
support for the proposed exemptions. Several commenters suggested that 
the Department extend the Form T-1 exemption to any entity willing to 
be audited by an independent certified public accountant and willing to 
make that audit publicly available, irrespective of whether the trust 
currently files an audit or report with a government agency. Finally, 
several trade associations suggested that the Form T-1 permit no 
exemptions at all. These organizations stated that, at a minimum, 
unions be required to append to their Form LM-2 filings the pertinent 
audit or annual report filed with the other government agency.
    In response to these comments, the Department has continued to 
provide four exceptions to the Form T-1 requirements: (1) A PAC fund, 
if publicly available reports on the PAC's funds are filed with federal 
or state agencies; (2) any political organization for which reports are 
filed with the IRS under 26 U.S.C. 527; (3) employee benefit plans 
filing a complete and timely report under ERISA; and (4) any covered 
trust or fund for which an independent audit has been conducted in 
accordance with standards prescribed in the final rule. For the first 
three categories, the exception is complete. No Form T-1 is required. 
For the fourth category, a union must file the Form T-1, but can file 
the independent audit in lieu of providing the financial information 
otherwise required by Form T-1. The audit will be required to meet 
either the requirements of 29 CFR 2520.103-1 et seq. (relating to 
annual reports and financial statements required to be filed under 
ERISA) or the standards described in detail in the Instructions to Form 
T-1.
    The standards prescribed in the Form T-1 Instructions, generally, 
require that the audit be 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 accepted accounting principles. Notes to the financial 
statements included in the audit must disclose, for the preceding 
twelve month period: Losses, shortages, or other discrepancies in the 
trust's finances; the acquisition or disposition of assets, other than 
by purchase or sale; liabilities and loans liquidated, reduced, or 
written off without the disbursement of cash; and loans made to union 
officers or employees. The audit must be accompanied by schedules that 
disclose, for the preceding twelve month period: A statement of the 
assets and liabilities of the trust, valued at current value, and the 
same data displayed in comparative form for the end of the previous 
fiscal year of the trust; a statement of trust receipts and 
disbursements; and a list of all entities, including the name and 
description of the entity, with which the trust conducted $10,000 or 
more of commerce during the reporting period, as well as the aggregated 
total of all receipts/disbursements with each such entity during the 
reporting period.

[[Page 58414]]

These standards overlap partially with the standards required by the 
ERISA rule, with changes necessary to serve the particular needs of the 
Department in administering the ``interested trust'' provisions of the 
LMRDA, as discussed throughout this section of the preamble. See 
generally AICPA, Professional Standards, Special Reports, AU Sec. Sec.  
600 and 623; FASB, FAS 117, Final Statements for Not-for-Profit 
Organizations, ]] 45, 47, 63.
    The new audit alternative is aimed at promoting disclosure while 
avoiding duplication for trusts that are already subject to an 
independent audit. The audit option enables unions to avoid reporting 
the detailed financial information on a Form T-1 if they are already 
receiving an audit that meets the specifications set forth above, by 
simply filing a copy of such an audit along with the first page of a 
Form T-1, which provides identifying information. The criteria set 
forth above are in line with standard business practices (id.) and 
provide the kind of information in which union members who submitted 
comments on this issue demonstrated an interest. The information 
required in such an audit, however, is somewhat more general than that 
otherwise required on a Form T-1. For example, an audit need not 
specify the purpose for disbursements of $10,000 or more by the trust, 
but need only list the identities of those with whom the trust engaged 
in $10,000 transactions.
    As discussed earlier, no union is required to file an audit for a 
covered trust. Instead, the union may choose to meet the reporting 
requirement by submitting either: (1) A statement that a qualifying 
report (as identified above in the categories listed) has been filed 
with a separate government agency; (2) a copy of an independent audit 
meeting the standards prescribed above; or (3) a completed T-1 Form. 
These requirements should not be read as diminishing or affecting in 
any way a trust's disclosure obligations under other applicable law 
including, but not limited to, ERISA, state and federal reporting laws 
governing PAC funds, IRS regulations governing political organizations, 
and Section 302(c) of the Labor Management Relations Act (LMRA), 29 
U.S.C. 186(c).
    The audit process provides a valuable qualitative check on the 
entity's finances by an independent examiner. Among other regulatory 
schemes, the SEC, as noted above, recognizes the important, rigorous 
role independent audits serve in its regulation of public companies. 
The Department recognizes that the audit option may not provide the 
same detail as the Form T-1, but in this context the need for 
itemization is less significant than it is in reporting the union's 
non-trust assets because the Form T-1 does not apply to disbursements 
by labor organizations directly. The Form LM-2 already captures 
specific union disbursements and accounts payable to trusts. The Form 
T-1 is designed to provide information about an entity created by the 
labor organization, or trustees or members of the governing body of 
which are selected or appointed by the labor organization, a primary 
purpose of which is to provide benefits for the labor organization's 
members or their beneficiaries.
    Many union members recommended generally greater scrutiny of joint 
employer-union funds authorized under the LMRA. Moreover, while many 
union members were critical of the current state of joint funds 
disclosure and sought greater Department oversight of these funds, 
these comments can be read equally as supporting the requirements that 
unions specify where the audit is available. At least one union member 
stated that the critical problem was that requests for information 
about these funds were ignored--not that the substance of the 
information provided was insufficient. Similar reasoning supports 
extending the opportunity to reporting labor organizations to file a 
qualifying audit in place of a Form T-1 for any trust. The Department 
believes, however, that such audits should be filed with the 
Department, rather than maintained separately from the labor 
organization's other financial information. Their filing with the 
Department will promote transparency and accountability by allowing 
union members to access all trust information quickly and easily in one 
location.
3. Form T-1 Reporting Threshold
    The Department proposed a reporting threshold based on the trust's 
annual receipts and a union's annual contributions to the trust (or the 
contribution made on the labor organization's behalf, or as a result of 
a negotiated agreement to which the labor organization is a party). The 
Department proposed $200,000 in annual receipts as the trust threshold 
and $10,000 as the threshold for a union's contributions to the trust. 
Although most of the comments received focused on the size of a labor 
organization's contribution, rather than the size of a reportable 
trust, the Department has decided to raise the reporting threshold to 
require unions to report only trusts with annual receipts of $250,000 
or more, consistent with the increase in the reporting threshold for 
the Form LM-2.
    One comment suggested that in some circumstances the $10,000 
threshold for labor organization contributions to a trust was too high. 
That comment urged the Department to modify the proposal so that a 
union that contributes either $10,000 or 10% of its total annual 
receipts, whichever is less, would be required to file Form T-1. The 
comment reasoned that amounts of less than $10,000 may be significant, 
relative to the organizations overall finances, for some unions, and 
that members of such unions should have the benefit of knowing how 
their money is being spent. As noted above, the Department invited 
comments about the impact that the proposed trust reporting requirement 
would have on unions with relatively small assets. The commenters have 
persuaded the Department that some smaller unions could encounter 
significant and recurring difficulties in complying with the 
Department's proposal. The Department's decision to limit the 
requirement for filing Form T-1 to those unions with annual receipts of 
at least $250,000 has rendered moot the suggestion to adopt an 
alternative Form T-1 filing threshold for union contributions of the 
lesser of $10,000 or 10% of the union's total annual receipts.
    The Department recognizes that amounts less than $10,000 may be 
comparatively more significant to some unions. However, the Department 
believes that the value of such information to union members is 
outweighed by the burden such reporting could have on unions without a 
professional or even full-time staff. Such unions also may have 
comparatively more difficulty in obtaining the detailed information and 
preparing the detailed trust report on Form T-1, especially in 
electronic format.
    A number of commenters expressed the view that the $10,000 union 
contribution threshold for filing Form T-1 was too low and recommended 
various alternatives:
    [sbull] Two comments suggested that the $10,000 threshold served a 
limited purpose because a benefit program would readily meet that 
threshold; the comments cited as an example the fact that a union with 
as few as 49 members who work full-time and contribute $.10 per hour to 
a benefit program would meet the threshold. A third comment suggested 
that the union annual contribution threshold be raised to $25,000.
    [sbull] Two comments stated that the Department's proposal would 
require a union to file detailed reports on Form

[[Page 58415]]

T-1 regarding trusts in which a union may have only a 5% ownership 
interest. Those comments urged the Department to revise the proposal so 
that the threshold was based on ownership or control of at least 50% of 
the trust.
    [sbull] For similar reasons, three comments suggested that a 
threshold of 20% or 25% or some other percentage of the receipts of the 
trust would be a better measure of the union's relationship with the 
trust that would permit the union to obtain details of the trust's 
financial operations to be reported on the Form T-1.
    The Department has not been persuaded that these comments provide a 
sufficiently balanced and workable alternative to the Department's 
proposal. The $10,000 threshold for union contributions proposed by the 
Department represents, in the Department's view, the most appropriate 
compromise between an amount that is sufficiently high so that an undue 
reporting burden is not imposed on unions with limited finances and an 
amount that is sufficiently low so that trusts will be reported if they 
receive contributions equal to a significant proportion of the 
reporting union's other financial affairs. Thus, a threshold 
contribution of $25,000 seems excessively high, especially in relation 
to the other financial affairs of labor organizations. Setting the 
threshold at this level would deny members information about financial 
transactions involving a significant amount of money relative to the 
union's overall finances and other reportable financial transactions.
    Basing a union's obligation to file a trust report on the 
percentage of the union's ownership or control of the trust also does 
not appear to be a workable or appropriate approach. Union ownership 
and control in the context of a union's participation in a trust that 
provides benefits to the union membership are very difficult concepts 
to quantify. Even if percentages of ownership or control were 
susceptible to reasonably precise calculations, in view of the many 
variables present in these situations, there is no readily apparent 
figure that would ensure the cooperation of the various trusts.
    In any event, it seems unlikely that significant ownership or 
control need be vested in a single reporting labor organization in 
order to ensure trust cooperation so that the labor organization may 
obtain trust information sufficient for filing a Form T-1. A trust in 
which a labor organization is interested is defined in section 3(l) of 
the LMRDA to mean an organization that was created or established by a 
labor organization or one or more of the members of the governing body 
of which is selected or appointed by a labor organization. Thus, by 
definition one or more labor organizations probably will have 
significant involvement in the affairs of the trust. As a result, the 
Department anticipates that in most instances the reporting union, 
either by itself or in combination with other reporting unions, in 
practice will exercise sufficient influence to require or persuade the 
trust to provide the information necessary to file a Form T-1. It seems 
likely that in the great preponderance of circumstances it would not be 
necessary for a reporting union to have anything approaching 50% 
ownership or control of the trust in order to obtain the necessary 
information from the trust to prepare and file Form T-1.
    The Department disagrees with the suggestion that a union's 
reporting threshold be based on the union's share of a particular 
trust's annual receipts. Under this approach, for example, a union 
would have to file a Form T-1 only if the union's per annum 
contribution reflects 20% or 25% of the total contributions received by 
the trust during this period. This approach would operate to except 
from reporting information relating to substantial contributions by a 
union, even though such contributions could represent the primary 
investment of the union. Moreover, this approach would deny members 
information, given the purpose of the trust, that is uniquely important 
to them as union members, even though the contributions of their 
particular union represents only a relatively small fraction of the 
contributions received by the trust. A formula setting the threshold at 
20% or 25% of the annual receipts of the trust might exclude from the 
reporting requirement those large trusts that have numerous 
participating unions. Thus, even though the trust's entire 
contributions come from unions, no information would be disclosed by 
this trust unless a contributing union exceeds the suggested percentage 
of total contributions. For example, if a union need only file a Form 
T-1 for a trust if it contributes 20% of the trust's annual receipts, 
no disclosure will be required for even the smallest reportable trust, 
i.e., a trust with annual receipts of $250,000, unless a single union 
contributes at least $50,000 annually to the trust, even though the 
trust receives all or most of its funding from a group of six or more 
unions.
    The Department recognizes that where one or more labor 
organizations participate in a trust and fewer than all such labor 
organizations meet the annual contribution threshold that would trigger 
the obligations to file Form T-1 under the Department's proposal, all 
labor organizations that are required to file Form T-1 will submit 
virtually the same report. Members of the other participating labor 
organizations that do not meet the annual contribution threshold and 
that are not required to file Form T-1 would have access to those trust 
reports because the reports are public information under section 205 of 
the LMRDA, 29 U.S.C. 435. However, the Department believes that it is 
impractical to restrict the reporting to a single labor organization. 
Although it might be possible to impose the reporting obligation only 
on the labor organization that makes the largest contribution to the 
trust, this rule might be difficult to apply unless trusts were 
mandated to maintain an easily accessible and dynamic report of 
contributions by each participant in the trust, a condition that the 
Department is unable to impose. Allowing self-selection among unions 
also would be a possible option, but there is no guarantee that this 
would be workable. There is no mechanism by which this obligation could 
be enforced, and a particular union's failure to abide by any voluntary 
arrangement would deny members of several unions information to which 
they are entitled. Thus, in the Department's view, this alternative 
does not ensure that members would receive information about their 
union's trust holdings on a regular, predictable, and enforceable 
basis.
    The Department also sought comments on an alternative ``single 
entity'' test to identify those funds or other organizations for which 
a union should report assets, liabilities, receipts and disbursements. 
The NPRM defined a ``single entity'' as one that is ``dominated or 
controlled by the labor organization to such a degree that assets, 
liabilities, receipts and disbursements of the entity effectively are 
those of the union itself.'' Id. The test focuses on such factors as 
commonality of ownership, directors and/or officers, exercise of 
control, personnel policies, and operations. If a related organization 
and the union are effectively a ``single entity,'' then the union would 
be required to include the related organization's financial information 
as part of the union's own finances on the appropriate LM form. The 
Department invited comments on the following specific issues: (i) 
Whether requiring a union to report financial data for any organization 
qualifying as a ``single

[[Page 58416]]

entity'' would provide better information to interested union members 
than the current requirements for reporting trusts in which the union 
has an interest; (ii) whether a union could easily identify 
organizations that satisfy the ``single entity'' test; and (iii) 
whether the proposed ``single entity'' rule may affect some smaller 
unions if the combined assets and receipts of the union and the related 
organization exceed the $200,000 threshold for requiring use of the 
proposed Form LM-2.
    The Department received very few comments addressing the ``single 
entity'' test, all of which opposed the proposal. One comment 
criticized the proposed test because it would be more costly to enforce 
and less effective than the current ``bright-line'' standard (i.e., the 
$10,000 contribution threshold). The comment suggested that a union 
could simply deny that a related organization qualifies as a deemed 
``single entity'' and not disclose the financial information; 
interested union members would then have to litigate the issue. 
According to the commenter, the relationship between the union and the 
other organization might not be apparent to the union members and, as a 
consequence, members would have no reason to make inquiries about the 
relationship between the organizations. With respect to the impact on 
smaller unions, the comment noted that the proposal might encourage 
those unions to under-report assets to avoid the Form LM-2 threshold. 
The comment suggested lowering the Form LM-2 threshold or importing the 
proposed Form LM-2 changes into the Form LM-3 if the Department is 
concerned about under-reporting. Another comment rejected the 
Department's view that the related organization's finances must be 
combined with the union's finances for all purposes. The comment 
believed ``single entity'' reporting only requires the union to report 
the related organization's finances, but not to combine the two 
organizations' income to determine the applicable LM form. Determining 
the LM Form filing threshold on the combined receipts of both entities 
is ``absurd on its face,'' stated the comment, because a ``single 
entity'' finding recognizes two discrete legal entities and is thus 
unlike a finding that an organization is a ``subsidiary'' of a labor 
organization under the current Form LM-2. A third comment broadly 
rejected the ``single entity'' test because it would create 
``misleading'' information about local unions and generate ``useless'' 
financial data.
    After consideration of the comments received, the Department has 
decided against adopting the proposed ``single entity'' test. The 
Department agrees that the test is less effective than other criteria 
for determining whether a union is responsible for reporting financial 
information from related organizations. The criticisms underscore the 
difficulties faced by union members in obtaining financial information 
from a union: A union could conceal its relationship with the related 
organization, which would deny interested union members the information 
necessary for initiating inquiries; or a union could refuse to disclose 
information on the basis that the organization does not meet the 
standard for a ``single entity'' relationship. In either case, the 
Department would have to resort to litigation to obtain the withheld 
financial information. The ``single entity'' test does not reduce these 
obstacles. Moreover, the Department acknowledges that the test may be 
difficult to apply in some cases. The test requires close scrutiny of 
the related organization to determine whether a sufficient commonality 
of personnel, policies and operations exists to deem the union and the 
organization a ``single entity.'' Union members may encounter 
significant difficulties in obtaining the necessary information to make 
the comparison, which could reduce the incentive to conduct such 
inquiries. Even a fully informed investigation may not produce a 
conclusive answer because reasonable minds could differ about the 
relationship between the organizations. In contrast, a ``bright line'' 
standard based on a specified dollar threshold is unambiguous and easy 
to apply. The threshold determines whether the union's ``interest'' in 
another entity is sufficient to require its disclosure. This approach 
imposes no significant burden on interested union members.

B. Information Required for a Trust in Which a Labor Organization Is 
Interested

    The Department proposed requiring labor organizations to report, on 
a Form T-1, itemized receipts and disbursements of a covered trust. The 
comments on this proposal, in large part, mirrored those with respect 
to itemization on Form LM-2. Several commenters suggested that 
itemization was likely to significantly burden affected unions with 
little corresponding benefit. Labor organizations, they argued, do not 
currently have accounting systems for this type of itemization and the 
number of entries alone for large trusts would be overwhelming. Other 
commenters supported itemization of Form T-1 receipts and 
disbursements. One organization cited the recent Washington Teachers' 
Union embezzlement case as an example of financial corruption that 
might have been prevented by Form T-1 itemization. Commenters noted 
that the Form T-1 included a schedule to report officer and employee 
salaries but comments that argued generally that the form was too 
burdensome did not specifically address that schedule. After carefully 
considering the comments, the Department continues to believe that 
unions should provide their members with financial information about 
its significant financial investments with covered trusts. However, the 
final rule reduces the burden of reporting information about such 
trusts.
    As is the case with respect to itemization on Form LM-2, the 
Department believes the benefits of disclosure to union members will 
outweigh any corresponding burdens upon union officials. Union members 
have expressed through their comments serious concern over union dues 
that are deposited into trusts and joint ventures and unaccounted for 
thereafter. Large trusts will be required to itemize numerous entries. 
These trusts, however, will have available to them the same bookkeeping 
and accounting software available to unions. Thus, for the reasons 
discussed with respect to the Form LM-2, no undue burden is imposed 
upon covered trusts in compiling the information needed for the union 
to file the Form T-1. Moreover, there has been no suggestion that 
covered trusts are ill equipped to comply with the bookkeeping or 
reporting requirements established by the final rule. Moreover, the 
trust information will be readily accessible to any union member with 
access to the Internet. In sum, unions have not asserted that a trust 
in which a union is interested will encounter any significant burden in 
connection with the collection of information needed to complete a Form 
T-1, and none is apparent. The unions also have failed to demonstrate 
that they will encounter any significant burden in providing the 
information to the Department, a burden that, in any event, is less 
significant than the preparation of the Form LM-2. Unlike the Form T-1, 
the Form LM-2 imposes on the reporting union the direct responsibility 
to capture the information needed to prepare the required report with 
this Department.
    Many commenters opposed the specific threshold of $10,000 for

[[Page 58417]]

itemized receipts or disbursements on the Form T-1. Again, these 
comments were similar to those on thresholds in Form LM-2. Some 
commenters suggested a greater dollar figure such as $25,000 (possibly 
indexed to inflation) or a percentage of the total receipts or 
disbursements of the trust such as 20% or 25%. Commenters asserted that 
the use of a percentage threshold would be more consistent with the 
Department's current regulation of employee benefit plans. One 
organization recommended a disjunctive threshold for itemization of 
$10,000 or 10%, the latter to capture those instances where a union 
contributes less than $10,000 but still controls a significant portion 
of the trust. Finally, one union member recommended that every 
disbursement be itemized regardless of size.
    As discussed in greater detail above, the Department continues to 
believe that $10,000 is the appropriate threshold for itemization. This 
amount, in the Department's view, represents a substantial transaction 
that would be of interest to union members. For that same reason, a 
percentage threshold would be inappropriate, as it would deny 
information to members of unions with considerable assets about 
substantial transactions, denying them information about transactions 
that might have a significant impact on the union's finances. 
Conversely, the Department believes that the other proposals to 
eliminate any threshold, or to replace it with a lower dollar figure or 
a percentage of the assets of the union (or the trust) (which could 
operate to require itemization of transactions of less than $10,000) 
would impose an unwarranted burden on the unions without corresponding 
benefit to the members, given the unlikely impact on the overall 
financial health of most unions of transactions that are between 
$10,000 and a de minimis amount. 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 the finances of a trust are less likely to 
directly impact union members than the expenditures by the union 
itself.
    One commenter questioned the wisdom of setting a $250 reporting 
threshold under Schedule 4 for loans to officers, employees, or 
members. The commenter stated that such threshold would require the 
reporting of routine transactions, including relatively small credit 
card balances and most loans from a credit union trust. In response, 
the Department has decided to eliminate this Schedule from the Form T-
1, and, in its place, require the union to state whether the trust has 
loaned money to officers or employees of the union during the reporting 
period on terms that are substantially more favorable than terms 
available to others, or has forgiven loans to officers or employees of 
the union during the reporting period. If the union answers in the 
affirmative, information about the loan must be provided in Item 25 
(Additional Information). This information will be beneficial to union 
members without burdening every reporting union.
    Several labor organizations raised privacy challenges to the Form 
T-1 itemization requirement, specifically that disclosing the name and 
address of individuals receiving trust funds (as well as the date, 
purpose, and amount of the transfer) would be unwise and likely 
unlawful under federal privacy laws. Some commenters recommended 
aggregating all disbursement amounts. While aggregating all 
disbursements would substantially reduce the amount and quality of the 
information reported on a Form T-1, the Department is sympathetic to 
the concerns that the disclosure of information in a Form T-1, which 
will be available on the Internet, should not result in the disclosure 
of private information regarding individuals. Accordingly, the 
Department has concluded that labor organizations will be permitted to 
use a procedure similar to that used with respect to sensitive 
information reported on the Form LM-2 itself. If the labor organization 
concludes that disclosure of specific information about a trust's 
disbursements to, or receipts from, individuals will result in the 
inappropriate disclosure of private information regarding such 
individuals, the disbursement or receipt may be aggregated with, and 
reported only as a part of, the total amount of disbursements and 
receipts below the itemized reporting threshold. The labor organization 
that elects to use this procedure, however, must indicate on the Form 
T-1 that it has done so and the use of this procedure will constitute 
``just cause'' for union members to examine more specific information 
regarding these transactions, unless disclosure is prohibited by law or 
would endanger the health or safety of an individual.

C. Deadline for Filing a Form T-1

    Comments from two unions stated that requiring the Form T-1 to be 
filed within ninety days after a trust's fiscal year would not provide 
sufficient time for labor organizations to take all necessary steps for 
filing Form T-1, including: determining whether the filing threshold is 
met; communicating with the trust; communicating with other 
participating labor organizations; obtaining the necessary information; 
and preparing and filing the Form T-1. A comment from a third union 
stated that the governing rules of its national union require its books 
and LM report to be audited and filed with the national union before 
the deadline for filing the local union's LM form and that requiring 
Form T-1 to be filed at the same time would make it even more difficult 
for locals of that national to meet their reporting deadline for their 
annual reports.
    The Department's intention in permitting a union to file its Form 
T-1 within ninety days after the trust's fiscal year was to ease the 
burden for both the trust and the union. The Department anticipates 
that a trust more readily will be able to provide necessary information 
to the reporting labor organization at the conclusion of the trust's 
fiscal year and that a labor organization will have correspondingly 
less difficulty in obtaining information at that time.
    The Department recognizes that reporting labor organizations must 
obtain this information from their trusts, but most of the steps 
outlined by the commenters above should take little time. A labor 
organization should readily be able to determine from its own records 
whether the labor organization's own contributions to the trust equaled 
or exceeded $10,000 annually. A labor organization is likely to know 
from past audits or other information provided by the trust whether the 
trust's annual receipts approximate $250,000 or more, and, whether or 
not the labor organization has that information, the labor 
organization's request to the trust for information necessary for 
filing Form T-1 could simply be conditioned on the trust having that 
level of annual receipts. It should not be necessary to seek any 
information or assistance from other unions that participate in the 
trust. Even the assembly of information by the trust and the subsequent 
preparation of Form T-1 by union officials should not require 
substantial expenditures of time, inasmuch as the Form T-1 requires 
only relatively basic information regarding receipts, disbursements and 
payments to officers and employees of the trust. The time and 
difficulty a labor organization may experience in obtaining and filing 
information on Form T-1 is thus minimized.
    Two commenters, a union and an accountant, observed that reporting 
unions may not control a trust for which

[[Page 58418]]

information must be filed on Form T-1 and that it may be difficult for 
some unions to obtain the necessary information from trusts. Though the 
trusts may have legal identities separate from reporting unions, the 
Department anticipates that in many and probably most instances the 
reporting union either by itself or in combination with other reporting 
unions will in practice exercise sufficient influence to require or 
persuade the trust to provide the necessary information. In this 
connection, if the union's members request further information about a 
particular trust or further details about a reported transaction, the 
union must disclose to the member any relevant information within its 
possession at the time of the inquiry and make a good faith effort to 
obtain additional information from the trust.
    The Department recognizes that there may be some instances in which 
a trust will not fully cooperate in providing timely information to the 
reporting union. However, the Department expects that, in those 
infrequent instances, the reporting union officials will be able to 
demonstrate that they made a good-faith effort to obtain timely 
information from the trust. In such situations, the Department is 
prepared to exercise any available investigative and other authority to 
assist the reporting union to obtain the necessary information. One 
commenter, an accountant, suggested that some of the information 
required to be reported on Form T-1 may be reported by the trusts under 
other federal reporting requirements with later reporting deadlines and 
that unions that file reports regarding those trusts should be 
permitted to use those later deadlines. The Department concludes that a 
rule with such uncertain deadlines would be difficult to administer and 
would not be easily ascertained and applied by all parties, including 
labor organizations, their members, the trusts, the Department, and the 
public.
    One commenter, a union business representative, urged the 
Department to include a procedure for granting extensions of time to 
labor organizations for filing their financial reports. The commenter 
argued that some labor organizations already find it difficult to file 
current LM forms in a timely manner. Section 207 of the LMRDA expressly 
states that each labor organization annual financial report must be 
filed within ninety days after the organization's fiscal year. This 
requirement is consistent with the evident intention of Congress that 
union members and others have access to regular and timely annual 
reports as a means to effectuate union self-government. The statute 
provides no authority to waive this deadline, even when a union has 
made a good faith effort to comply with the deadline. The Department 
has concluded that neither the current nor the revised reporting forms 
for labor organizations are likely to pose unreasonable difficulties 
for union officials who are reasonably diligent in their efforts to 
timely file the union's Form LM-2 and any Form T-1.
    Another commenter, also an accountant, suggested that a reporting 
labor organization be permitted to file information from the ``latest 
available'' report by the trust and that it would be simpler to require 
Form T-1 to be filed at the same time that the labor organization must 
file its annual report, namely within ninety days after the end of the 
labor organization's fiscal year, rather than ninety days after the end 
of the trust's fiscal year. As discussed above, only certain reports 
will be acceptable as substitutes for the Form T-1. Nonetheless, this 
comment suggests a reasonable approach that will ensure that union 
members are able to obtain relevant information about a trust in which 
his or her union has an interest, while reducing any burden for the 
reporting union. Thus, the Department has decided to require a 
reporting labor organization to file its Form T-1(s), or qualifying 
audits in substitution for Form T-1(s), at the same time as it files 
its own Form LM-2. The Form T-1, or qualifying audit, however, need not 
cover the same reporting year as the Form LM-2. Rather, the reporting 
labor organization must provide, at the time it files its Form LM-2, a 
Form T-1 or qualifying audit for the trust's most recent fiscal year 
that ended during the labor organization's reporting year--essentially 
the ``latest available'' report. If the trust's fiscal year coincides 
with the reporting labor organization, the labor organization will have 
90 days in which to obtain the necessary information to complete a Form 
T-1, or the audit. If a trust's fiscal year ends on a different date 
than the labor organization's, the reporting union will have, in 
addition, any time between the end of the trust's most recent fiscal 
year and the end of the union's own fiscal year to obtain the 
information. Moreover, this requirement, like all other changes made by 
this rule, will be effective for fiscal years beginning on or after 
January 1, 2004. Accordingly, a union will be required to file a Form 
T-1 only for fiscal years beginning on or after January 1, 2004, of 
trusts in which it has an interest. Because a union need only file the 
``latest available'' report for its trusts, it is unlikely that many 
Form T-1 reports, if any, will be required in the first year. For 
example, if a union's fiscal year begins on January 1, 2004, its Form 
LM-2 will be due at the end of March of 2005. If that union has an 
interest in a trust that begins its fiscal year on October 1, the first 
fiscal year for which a Form T-1 will be required for such a trust is 
the fiscal year that ends on September 30, 2005. Obviously, no Form T-1 
will be available to file with the union's first revised Form LM-2 
filed in March. If, however, a union that begins its fiscal year on 
January 1, 2004, has an interest in a trust that also begins its fiscal 
year on January 1, 2004, the union should file a Form T-1 covering the 
trust's 2004 fiscal year when the union files its Form LM-2 in March of 
2005.

V. Regulatory Procedures

A. 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; or (3) materially 
alter the budgetary impact of entitlements, grants, user fees, or loan 
programs or the rights and obligations of recipients thereof. The 
Department estimates the total cost of the final rule to be $79.9 
million in the first year, $44.1 million in the second year, and $43.2 
million in the third year (see the following Paperwork Reduction Act 
section for a description of how these costs were estimated). The 
three-year average cost of the rule is $55.7 million per year. The 
Department also estimates a benefit of $2.6 million per year in savings 
for 501 smaller unions because they can file the less burdensome Form 
LM-3 as a result of increasing the new Form LM-2 reporting threshold to 
$250,000. Further, there are substantial unquantifiable benefits that 
result from the greater transparency of labor organizations' financial 
information to its members and other benefits of deterring fraud or 
discovering it earlier. As a result, the Department has

[[Page 58419]]

concluded that a full economic impact and cost/benefit analysis is not 
required for the rule under section 6(a)(3) of the Order. However, 
because of its importance to the public, the rule was treated as an 
otherwise significant regulatory action and was reviewed by the Office 
of Management and Budget (OMB).
    One commenter stated that the Department failed to meet certain 
requirements of Executive Order 12866. Specifically, the comment 
asserted that the Department failed in several respects to adhere to 
the ``Principles of Regulation'' set forth in Section 1(b) of the 
Order:
    a. The Notice of Proposed Rulemaking did not demonstrate that the 
Department engaged in any investigation and assessment of the problems 
addressed by the proposed rule.
    b. The Notice of Proposed Rulemaking did not demonstrate that the 
Department considered any non-regulatory alternatives for accomplishing 
the objectives of the proposed rule.
    c. The Notice of Proposed Rulemaking provided no evidence that the 
proposed rule would reduce financial mismanagement of labor 
organizations or was the most cost effective means to address the 
objectives of the rule.
    d. There is no documentation that the Department's proposed rule is 
based on the best reasonably obtainable information.
    e. The proposed rule ignores the preference expressed in Section 
1(b)(8) of Executive Order 12866 for performance objectives rather than 
design standards.
    The comment also asserted that the requirements for significant 
regulatory action set forth in Executive Order 12866 were not properly 
observed in that:
    a. The Department did not engage in any cost-benefit analysis of 
the proposed rule.
    b. The Department did not seek the involvement of those intended to 
benefit from and expected to be burdened by the proposed rule.
    c. The Office of Information and Regulatory Affairs (OIRA) of the 
Office of Management and Budget (OMB) did not take sufficient time to 
review the Department's proposed rule for purposes of Executive Order 
12866.
    As an initial matter, the Department firmly believes it has 
complied fully with E.O. 12866 in all relevant respects. The comment 
appears to have a fundamental misapprehension of the purpose and 
function of Executive Order 12866 and of the Department's efforts to 
comply with the requirements of the Order. As explained below, the 
purpose of Executive Order 12866 is to facilitate the effective 
internal management of the Federal Government with respect to the 
development of regulatory actions. Indeed, Sections 6(a)(3)(E) and 
6(b)(4)(D) in fact provide that an agency and OIRA will make available 
to the public various information and documents regarding the 
development of agency rules only ``[a]fter the regulatory action has 
been published in the Federal Register or otherwise issued to the 
public.''
    Inasmuch as Executive Order 12866 is intended solely for the 
internal management of federal regulatory actions, the Order does not 
provide for judicial review or other public review of the procedures 
and substantive requirements of the Order during the developmental 
stages of a rule. That is underscored in several provisions of the 
Order. For example, Section 10 of the Order states: ``This Executive 
Order is intended only to improve the internal management of the 
Federal Government and does not create any right or benefit, 
substantive or procedural, enforceable at law or equity by a party 
against the United States, its agencies or instrumentalities, its 
officers or employees, or any other person.''
    The nature of Executive Order 12866 as a tool for the development 
and internal review of federal rules also is evident throughout the 
text of the Order. For example, ``The Principles of Regulation,'' which 
the comment appears to have treated as setting forth substantive legal 
requirements, is introduced by the statement that agencies ``should'' 
adhere to those principles ``where applicable.'' Section 1(b)(8), as 
the comment suggests, expresses a preference for rules that establish 
performance objectives rather than rules that mandate specific behavior 
or the specific manner of compliance, but states that this should be 
sought ``to the extent feasible.'' Section 1(b)(6), as suggested by the 
comment, provides for an assessment of the costs and benefits of a 
proposed rule but adds, ``recognizing that some costs and benefits are 
difficult to quantify.'' In the instant rulemaking, the Department has 
assessed fully the costs and benefits associated with the final rule.
    The commenter's demand that the efforts of the Department and OIRA 
to comply with the procedural and substantive principles, objectives, 
and requirements of Executive Order 12866 be documented in detail, be 
described exhaustively for the review of the public at this time, and 
be evidenced in the Notice of Proposed Rulemaking is misplaced, as is 
the objection that its view of the most cost effective alternative was 
not proposed. The principles, objectives, and requirements of Executive 
Order 12866 are designed to guide and assist the agency and OIRA during 
the development of the agency rule and are not addressed to the public. 
The remedy for any agency failure to comply with some requirement of 
the Executive Order, as the excerpt from Section 10 referred to above 
makes clear, is not judicial review at the behest of the regulated or 
benefited community under the proposed rule; rather, the remedy is the 
President's directive in Section 8 of the Order that the agency's rule 
may not be published in the Federal Register or otherwise issued to the 
public until OIRA either waives or completes its review.
    Some of the procedural and substantive requirements of Executive 
Order 12866, as expressly indicated in Section 1(b)(6) (``recognizing 
that some costs and benefits are difficult to quantify''), are not 
susceptible to precise definition and measurement. The insistence of 
the comment that the Department did not choose ``the most cost 
effective means to address the alleged problem'' is itself not a 
statement that can be assessed with objective precision. Any calculus 
of the costs and benefits of the proposed rule is based in significant 
part on the value of transparency and accountability in union financial 
affairs as well as on very difficult projections regarding the impact 
of the accessibility of financial information on sound union financial 
management and union democracy generally. That increased transparency 
in union financial affairs will deter some mismanagement and 
malfeasance, promote democratic values in unions, and prevent the loss 
of trust by members and the loss of confidence by the public generally 
in unions and their officials cannot be seriously doubted. But the 
Department recognizes that it is very difficult to quantify and balance 
the associated costs and benefits of those matters with any precision.
    The Department has concluded, therefore, that to the extent 
feasible, appropriate, and necessary, the Department has disclosed in 
the Notice of Proposed Rulemaking and, more extensively, in this 
preamble to the final rule the pertinent aspects of the Department's 
assessment of the problem, the information relied on, the costs and 
benefits involved, the alternatives considered, and the most 
appropriate remedy. For the various reasons outlined above and contrary 
to the apparent assumption of the comment, Executive Order 12866 did

[[Page 58420]]

not require the Department to set forth in the Notice of Proposed 
Rulemaking or in this preamble other evidence of the Department's 
efforts to comply with the Order in developing and submitting this 
proposal to OIRA for review.

B. Small Business Regulatory Enforcement Fairness Act

    The Department has concluded that this rule is not a ``major'' rule 
under the Small Business Regulatory Enforcement Fairness Act of 1996 (5 
U.S.C. 801 et seq.). In reaching this conclusion, the Department has 
determined that the rule will not likely result in (1) An annual effect 
on the economy of $100 million or more; (2) a major increase in costs 
or prices for consumers, individual industries, Federal, State or local 
government agencies, or geographic regions; or (3) significant adverse 
effects on competition, employment, investment, productivity, 
innovation, or on the ability of United States-based enterprises to 
compete with foreign-based enterprises in domestic or export markets.

C. 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. The basis for the Department's estimate of the likely cost of 
compliance with this rule is set forth above.

D. Executive Order 13132 (Federalism)

    The Department has reviewed this rule in accordance with Executive 
Order 13132 regarding federalism and has determined that the 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.''

E. Regulatory Flexibility Analysis

    The Regulatory Flexibility Act of 1980, 5 U.S.C. 601, et seq., 
requires agencies to prepare regulatory flexibility analyses, and to 
develop alternatives wherever possible, in drafting regulations that 
will have a significant impact on a substantial number of small 
entities. The Small Business Administration (SBA) determined, in a 
regulation that became effective on October 1, 2000, that the maximum 
annual receipts allowed for a labor union or similar labor organization 
and its affiliates to be considered a small organization or entity 
under section 601(4), (6) of the Regulatory Flexibility Act was $5.0 
million. 13 CFR 121.201 [Code Listing 813930]. This amount was adjusted 
for inflation to $6.0 million by a regulation that became effective on 
February 22, 2002. Accordingly, the following analysis assesses the 
impact of these regulations on small entities as defined by the 
applicable SBA size standards.
1. Statement of the Need for, and Objectives of, the Rule
    The following is a summary of the need for, and the objectives of, 
the final rule. A more complete discussion is contained in the preamble 
above.
    The Department is revising the forms labor organizations use to 
file the annual financial reports required by the Labor-Management 
Reporting and Disclosure Act of 1959, as amended (LMRDA or Act). This 
final rule modifies Form LM-2, which is the report required to be filed 
by the largest labor organizations and creates a new Form T-1 for these 
unions to report the assets, liabilities, receipts, and disbursements 
of trusts in which a labor organization has an interest. To reduce the 
burden on smaller labor organizations, the final rule also raises the 
threshold for filing Form LM-3 to annual receipts of between $10,000 
and $249,999 to correspond with the higher Form LM-2 threshold 
($250,000). These forms are prescribed by the Secretary of Labor to 
implement the Act and incorporated by reference in the applicable 
regulations.
    Over the past forty years, the functions and operations of unions 
have evolved while the forms used by unions to file annual financial 
reports required by the LMRDA have remained substantially unchanged. 
The forms no longer serve their underlying purpose because they fail to 
provide union members with sufficient information to reasonably 
disclose to them ``the financial condition and operation[s]'' of labor 
organizations as required by the LMRDA. As noted previously, it is 
impossible for union members to evaluate in any meaningful way the 
operations or management of their unions when the financial disclosure 
reports filed with OLMS simply report large expenditures (e.g., $62 
million) for broad, general categories like ``Grants to Joint Projects 
with State and Local Affiliates.'' The large dollar amount and vague 
description of such entries make it essentially impossible for anyone 
to determine with any degree of specificity what union operations their 
dues are spent on, without which the purposes of the LMRDA are not met.
    Today's union members need relevant information provided in a 
usable format in order to make the decisions necessary to exercise 
their rights as members of democratic institutions. The information 
provided members on the current forms lags well behind the financial 
information available to them in other contexts of their lives as 
consumers, citizens, and investors. The Department is committed to 
maintaining accountability and promoting transparency with full and 
fair disclosure by labor organizations. Providing additional detail on 
Form LM-2 and requiring similar disclosure on the new Form T-1 of 
information about trusts in which the labor organization has an 
interest is necessary to give union members an accurate picture of 
their labor organization's financial condition and operations and to 
prevent the circumvention or evasion of the statutory reporting 
requirements.
    The revision of Form LM-2 is also necessary to improve its 
usefulness as a deterrent to financial fraud and mismanagement. OLMS 
case files repeatedly demonstrate that this goal of the Act is not 
being met. Over the past five years, OLMS investigations resulted in 
over 640 criminal convictions. As a remedy, the courts ordered the 
responsible officials to pay $15,446,896 in restitution, in addition to 
debarring them from union service for a combined total of almost ten 
thousand years. In many cases the broad aggregated categories on the 
existing forms enabled union officers to hide embezzlements and 
financial mismanagement. More detailed reporting of all financial 
transactions is likely to discourage and reduce corruption because it 
would be more difficult to hide financial mismanagement from members 
and strengthen the effective and efficient enforcement of the Act by 
the Department.
    The objective of this rule is to increase the transparency of union 
financial reporting by revising the LMRDA disclosure forms and to take 
advantage of modern technology to reduce the reporting burden. This 
will enable workers to be responsible, informed, and effective 
participants in the governance of their unions; discourage embezzlement 
and financial mismanagement; prevent the circumvention or evasion of 
the statutory reporting requirements; and strengthen the effective and 
efficient enforcement of the Act by OLMS.

[[Page 58421]]

2. Summary and Assessment of the Significant Issues Raised by Comments 
and Changes Made to the Proposed Rule as a Result of Such Comments
    Many comments, although not directed specifically at the initial 
regulatory flexibility analysis, raised issues related to the effect of 
the proposed rule on small entities, and in response, the Department 
made many significant changes to its proposal. These issues and changes 
are discussed in detail above. The following addresses comments that 
are specifically related to the Department's initial regulatory 
flexibility analysis.
    The AFL-CIO argues that the Department did not meet the standards 
of the Regulatory Flexibility Act and its requirements that agencies 
consider the impact of rules on small entities. Although the AFL-CIO 
acknowledges that the Department included a Regulatory Flexibility 
Analysis describing the impact of the proposed rule on small entities, 
the AFL-CIO claims that a purported lack of analysis indicates that the 
Department's inquiry was not conducted in good faith. For example, the 
AFL-CIO argues that the Department never seriously considered the 
alternatives listed in the initial Regulatory Flexibility Act analysis. 
The AFL-CIO contends that these alternatives were just ``straw men'' 
that the Department considered only briefly, knowing that they would be 
discarded. Among the alternatives that the Department should have 
considered and proposed for small unions, according to the AFL-CIO, 
were: (1) The ``phasing in'' of the effective date for the rule; (2) a 
permanent waiver of the electronic filing requirement; and (3) an 
exemption from functional reporting. These alternatives are addressed 
in the preamble and the discussion below.
    The Department noted in the NPRM that the SBA's definition of 
``small entity'' may not be appropriate in the context of labor unions 
and their regulation under the LMRDA. Nonetheless, the Department 
performed an Initial Regulatory Flexibility Analysis for the NPRM and 
addressed each of the categories, applying the SBA's definition as 
required by 5 U.S.C. 603. The Department has also submitted a Final 
Regulatory Flexibility Analysis with this final rule as required by 5 
U.S.C. 604. Thus, the Department has met the procedural requirements of 
the Act.
    The Department specifically considered and discussed in some detail 
five options in its Initial Regulatory Flexibility Analysis. Despite 
the AFL-CIO's disagreement with the Department's choice of options 
discussed or the Department's ultimate decisions concerning these 
options, the AFL-CIO has not shown and cannot show that the Department 
did not consider the options or acted in bad faith by not proposing 
them. In order to reduce the burden on smaller unions, the Department, 
among other revisions for the same purpose, adopted the alternative, 
identified in the NPRM, to raise the reporting threshold for the Form 
LM-2 from $200,000 to $250,000. As discussed in detail in the preamble, 
other revisions, adopted in response to comments, should make 
compliance by smaller unions easier than if the Department's proposal 
was left unchanged.
    The AFL-CIO contended that the Department failed to satisfy its 
obligation under the Regulatory Flexibility Act to actively solicit the 
participation of small entities as part of its planning for this 
rulemakings. The Department disagrees with this view and notes that it 
engaged in a substantial outreach effort, even before publication of 
the NPRM, in order to solicit ideas for improving the effectiveness of 
the annual financial report to achieve the disclosure intended by 
Congress in establishing the LMRDA's reporting requirements. To this 
end, Department officials conducted numerous consultations with union 
representatives, including face-to-face meetings with 39 unions. After 
publication of the proposal, Department officials continued to meet 
with unions that requested meetings and added notes of meetings with 
six unions during the public comment period to the rulemaking record.
    An alternative suggested by commenters that directly affects the 
smallest unions to whom the new rule applies was to adjust upward for 
inflation the Form LM-2 filing threshold from $200,000, the adjusted 
amount set in 1994. The Department has adopted this alternative and 
increased the Form LM-2 threshold to $250,000 in the final rule. As a 
result, 501 unions that currently file a Form LM-2 will now be able to 
satisfy the requirements of the LMRDA by filing the simpler Form LM-3. 
It should also be noted that the final $250,000 threshold is 
significantly higher than the earlier thresholds for filing the Form 
LM-2 when they are adjusted for inflation--1959 ($20,000), 1962 
($30,000), and 1981 ($100,000). The Department will continue to monitor 
this threshold, as well as all other thresholds established by this 
rule, and may make future adjustments if economic conditions warrant 
such a change.
    Another alternative considered by the Department was to phase-in 
the effective date for the Form LM-2 changes in order to provide 
smaller Form LM-2 filers additional lead time to modify their 
recordkeeping systems to comply with the new reporting requirements. 
This alternative also was supported by a number of commenters. After 
reviewing the comments, the Department has changed its proposal, which 
would have required unions to use the new Form LM-2 to file the report 
for any fiscal year beginning immediately after the publication of the 
final rule, and instead is requiring labor organizations to use the 
revised Form LM-2 to file the report for the fiscal years that begin on 
or after January 1, 2004, about three months after publication of this 
rule. This change provides approximately two-thirds of reporting unions 
with sufficient lead time within which to adjust their procedures to 
keep track of the information they will need to prepare a Form LM-2 and 
to submit, 15 months after the start of their next fiscal year 
(beginning on January 1, 2004), or nearly 18 months after the 
publication of this rule, the report to the Department, and even more 
time to the remaining third of reporting unions that use different 
dates for their fiscal years. Thus, no union will have less than about 
three months to change its bookkeeping and accounting systems to 
capture data that later will be needed to submit the Form LM-2.
    With this change, unions will have adequate time to conform to the 
revised forms and comply with the more detailed reporting requirements. 
The public comments and OLMS auditing and accounting experience confirm 
that many local (and therefore generally smaller) unions already 
collect and maintain some (and in some cases most) of the information 
required by the new form. Moreover, unions must already track and 
maintain records for all disbursements in order to report total 
disbursements for the variety of functional categories on the current 
Form LM-2. The survey data submitted by the AFL-CIO suggests that 16 to 
22% of local unions already have the capability to itemize and track 
receipts and disbursements (including credit card transactions), as 
required by the final Form LM-2. Further, after the research and review 
of different types of commercial-off-the-shelf accounting software, the 
Department believes that updating and modifying accounting systems to 
track all of the information required by the revised forms should be 
accomplished easily, given the lead time

[[Page 58422]]

built into the final rule. The steps required of unions to adjust their 
bookkeeping and accounting procedures are discussed in the preamble. 
OLMS also plans to provide compliance assistance to any labor 
organization that requests it. In addition, a review of the proposed 
revisions was undertaken to reduce paperwork burden for all Form LM-2 
filers and an effort was made during the review to identify ways to 
reduce the impact on small entities. The Department believes it has 
minimized the economic impact of the form revision on small unions to 
the extent possible while recognizing workers' and the Department's 
need for information to protect the rights of union members under the 
LMRDA.
    To reduce the burden on small labor organizations, several 
commenters suggested that unions be required to file annual independent 
audits as an alternative to filing the Form LM-2. Although some 
commenters argued that requiring unions to obtain annual audits is 
within the Department's statutory authority, no provision of the LMRDA 
vests the Secretary of Labor with any express authority to require 
unions to obtain audits and the Department has chosen not to attempt to 
impose such a requirement. Moreover, an annual audit requirement would 
require a reporting union to incur the expense of obtaining the 
services of an independent auditor and thus impose an additional burden 
on small unions, many of which, in the Department's experience, are not 
currently obtaining private audits. Finally, this alternative was 
rejected because audits typically do not reveal the detail on the 
financial operations of unions that is required by the statute (29 
U.S.C. 431) and requiring such detail with the appropriate audit 
standards would be no less burdensome than the final forms.
    A union, however, could meet its trust reporting obligation under 
the final rule by utilizing any exceptions provided for in the rule, 
including the submission of an independent audit of the trust that 
meets the minimum standards prescribed by the rule. In permitting this 
last exception, the Department recognizes that although most audits do 
not provide an adequate substitute for the full disclosure of 
information generally required under the LMRDA, this statutory purpose 
can be achieved in the trust reporting context so long as the 
information is verified by an independent examiner and meets the 
standards prescribed by the rule. By permitting a labor organization to 
submit an audit in place of a Form T-1, smaller labor organizations 
that file a Form LM-2 are relieved of the burden of compiling a 
separate form and need only insist that entities with annual receipts 
of $250,000 or more, to which they contribute $10,000 or more, or to 
which that amount is contributed on their behalf, provide only very 
basic information regarding their fiscal operations.
    Another commenter suggested that a reporting labor organization be 
permitted to file information from the ``latest available'' report by 
the trust. This commenter observed that it would be simpler to require 
Form T-1 to be filed at the same time that the labor organization must 
file its annual report, namely within ninety days after the end of the 
labor organization's fiscal year, rather than ninety days after the end 
of the trust's fiscal year. Although the ``latest available'' report of 
the trust may not be a sufficient substitute for a Form T-1 (depending 
on whether it meets the prescribed audit criteria as discussed in the 
preamble), this suggestion presents a reasonable alternative that 
should both alleviate burden for the reporting labor organization and 
minimize confusion for those interested in this information. Thus, the 
Department has decided to require a reporting labor organization to 
file all Form T-1s, or qualifying audits in substitution for Form T-1s, 
if it so chooses, at the same time that it files its own Form LM-2.
    To reduce the burden on smaller labor organizations, a few 
commenters, including the AFL-CIO, suggested that the Department 
establish a permanent waiver for electronic filing and/or pilot testing 
of electronic filing as alternatives to the Department's proposal. As 
discussed in the preamble, the Department has rejected the permanent 
waiver alternative because for several years Congress has urged the 
Department to implement the electronic filing of annual reports 
required by the LMRDA, along with an indexed and easily searchable 
computer database of the information submitted, accessible by the 
public over the Internet. See H.R. Conf. Rep. 105-390, 1997 
U.S.C.C.A.N. 2061; H.R. Conf. Rep. 105-825; H.R. Conf. Rep. 106-419; 
H.R. Conf. Rep. 106-479; H.R. Conf. Rep. 106-1033; H.R. Conf. Rep. 107-
342, 2002 U.S.C.C.A.N. 1690; H.R. Conf. Rep. 108-10, 2003 U.S.C.C.A.N. 
4. Moreover, as the public comments suggest, the relevant inquiry with 
respect to electronic filing is not whether it should be required, but 
rather how and when it should be accomplished. After significant 
research and analysis (as discussed above), the Department has decided 
that the best method to address any legitimate excessive burden 
associated with electronic filing is not through a permanent waiver, 
but through a hardship exemption (a term borrowed from the SEC's 
electronic filing procedures), and that, for the majority of filers, 
electronic filing is the least burdensome option.
    The Department gave serious consideration to the comments 
suggesting a pilot program or a delayed phase-in of the reporting 
requirements, but has concluded that such alternatives are unnecessary. 
After reviewing the recordkeeping and reporting requirements of the 
current Form LM-2, the public comments that were received, and the 
modifications that unions may have to make to their accounting and 
recordkeeping systems to comply with the final rule, the Department 
believes that Form LM-2 filers will be able to make the adjustments 
before the start of their first reporting period under the final rule--
a minimum of about three months from the date of the rule's 
publication--without incurring an undue burden. The most important 
change involves the tracking of receipts reported in Schedule 14 and 
disbursements to ensure that each disbursement is allocated to the 
proper disbursement category on the revised Form LM-2 with a 
descriptive purpose and that all of the required information (name, 
address, purpose, date, and amount) is captured for each ``other'' 
receipt and disbursement.
    Some commenters stated that this is a dramatic change in the Form 
LM-2 and would impose a significant burden on unions in order to change 
their recordkeeping systems before the effective date of the final 
rule. However, this position fails to recognize that unions have always 
been required to allocate each disbursement to one or more disbursement 
categories on the current Form LM-2 (and to maintain those records). 
For example, unions have always been required to allocate credit card 
payments to multiple categories of the LM-2 based upon the purposes of 
each charge. A single credit card charge to a travel agent may include 
expenses that must be allocated to three or more different places on 
the current LM-2. Although the Department has changed the functional 
categories on the final form, the underlying method of allocating these 
disbursements and maintaining the records remains the same.
    Changing accounting and recordkeeping systems to capture all of the 
required information (name, address, purpose, date, and amount) for 
each other receipt and disbursement can be accomplished before January 
1, 2004.

[[Page 58423]]

Filers will need to study and understand the new requirements and may 
have to work with their staff or vendors to make adjustments to the 
union's accounting and recordkeeping systems, and then train the staff. 
However, these sorts of operations--changing the way disbursements are 
classified and the types of information recorded--are routine in the 
normal course of business and relatively easy to perform within 
accounting systems. Moreover, as discussed in the preamble, the public 
comments suggest that 60% of the national and international unions 
already maintain written records for the information required by the 
new ``other receipts'' schedule and that many unions already maintain 
records as part of their normal business practice that reflect the 
required detail for disbursements for the revised form (even though 
between 10 and 40% of unions could not provide all of the required 
detail). Finally, because each labor organization's filing date is 
dependent on its chosen fiscal year, many unions will have more than 
three months to complete any changes they may have to make to their 
accounting and recordkeeping systems.
    Additionally, the Department will provide substantial compliance 
assistance to unions to assist them in understanding the new 
requirements and making adjustments to their recordkeeping and 
reporting practices. This initiative will include guidance that 
provides an overview of the requirements, a comparison of the old and 
new requirements, the types of account changes unions may have to make, 
guidance to assist unions to configure off-the-shelf software to best 
capture the information needed to provide the data required for 
submitting the LM-2 and T-1 reports, a schedule of seminars for unions 
hosted throughout the country, an email list-serve to provide periodic 
updates to interested parties, web-based materials that include 
frequently asked questions, a description of the Form T-1 registration 
process, and other topics of interest to filers.
    Filers that choose to take advantage of the electronic importation 
features of the Department's reporting software will need to create 
reports within their accounting systems that will be used to complete 
the revised Form LM-2 and new Form T-1. However, this work need not be 
completed until the form is ready to be filed, no earlier than 15 
months after the effective date of the final rule and nearly 18 months 
after publication. Further, in the event that any labor organization 
encounters severe difficulties concerning electronic filing, a hardship 
exemption will be available.
    A few commenters suggested that unions only be required to report 
the debts they have written off as a less burdensome alternative to 
reporting all debts above the proposed $1,000 threshold that are 90 
days or more past due. This alternative was rejected because: (1) The 
Department believes that raising the itemization threshold to $5,000 
for reporting debts will alleviate much of the burden suggested by 
commenters as a multitude of relatively small accounts will no longer 
have to be listed, particularly for smaller unions; (2) as discussed 
above, itemized disclosure is important because it provides a vital 
early warning signal of financial distress and possible fraud as in the 
Washington Teachers' Union case; and (3) the itemization requirement is 
tailored to a union member's legitimate interest in knowing, for 
example, whether the union continues to do business with an entity that 
fails to pay its debts or whether the union continually falls behind in 
payments to a certain vendor. Moreover, the public comments suggest 
that the majority of unions already collect most, if not all, of the 
information required by the accounts receivable and accounts payable 
schedules on the final form, which is not surprising considering the 
current Form LM-2 requires aggregate reporting of accounts receivable 
and accounts payable.
    Finally, a few commenters, together with the AFL-CIO, suggested an 
exemption from functional reporting to reduce the burden on smaller 
labor organizations. The Department has rejected this alternative 
because it would: (1) Eliminate the availability of meaningful 
information to over 12.3 million union members in unions with less than 
$6.0 million in annual receipts (the current SBA small entity standard 
for unions) and significantly reduce the transparency and 
accountability in the reporting of union financial condition and 
operations, which may have far greater impact on, and relevance to, 
union members, particularly since such lower levels of union 
organizations generally set and collect dues and provide 
representational and other services for their members; and (2) not 
provide any additional deterrence to fraud and embezzlement by 
officials in smaller labor organizations.
    Moreover, functional accounting is not a new concept to labor 
organizations, large or small. The current Form LM-2, through its use 
of categories, requires labor organizations to report certain 
expenditures by function. Moreover, functional accounting is required 
of not-for-profit organizations under the standards established by the 
FASB and some of the labor organizations that submitted comments 
acknowledged that they use functional reporting as a management tool. 
Furthermore, many commenters overlooked the fact that the IRS requires 
not-for-profit organizations, including unions, to report their 
expenditures by certain categories and that the IRS uses several 
functional categories that parallel, in many respects, the categories 
in the proposed Form LM-2. For example, both the IRS Form 990 and the 
new Form LM-2 require disclosure of disbursements related to political 
activity and lobbying (even though, unions typically report no 
information under these categories to the IRS). Finally, as explained 
above, the Department has made significant changes to the functional 
categories and associated schedules in the new Form LM-2 to minimize 
the burden, particularly on small unions.
3. Number of Small Entities Covered Under the Rule
    The primary impact of this final rule will be on the largest labor 
organizations, defined as those that have $250,000 or more in annual 
receipts. There are approximately 4,778 labor organizations of this 
size that are required to file Form LM-2 reports under the LMRDA (just 
19.0% of all labor organizations covered by the LMRDA). The Department 
estimates that 4,463 of these unions, or 93.4%, are considered small 
under the current SBA standard (annual receipts less than $6.0 
million). These unions have average annual receipts of approximately 
$1.1 million and an average of 14 officers and 4 employees. The rule 
will also reduce the burden on 501 small unions that will be able to 
file Form LM-3 instead of Form LM-2 because of raising the LM-2 
threshold to $250,000. These estimates are based on 2001 and 2002 data 
from the Office of Labor-Management Standards e.LORS system. This 
system contains annual receipt data on all Form LM-2, LM-3, and LM-4 
filers. Although these estimates may not be predictive of the exact 
number of small unions that will be impacted by this final rule in the 
future, the Department believes these estimates to be sound and are 
derived from the best available information.
4. Reporting, Recordkeeping and Other Compliance Requirements of the 
Rule
    This final rule is not expected to have a significant economic 
impact on a substantial number of small entities.

[[Page 58424]]

The LMRDA is primarily a reporting and disclosure statute. It 
establishes various reporting requirements for labor organizations, 
labor organization officers and employees, employers, surety companies, 
and employer consultants pursuant to Title II of the Act. Accordingly, 
the primary economic impact of the final rule will be the cost to 
reporting unions of compiling, recording, and reporting required 
information. The final rule establishes a new set of reporting 
requirements for those labor organizations with receipts of $250,000 or 
more. See the following Paperwork Reduction Act section (Overview of 
Changes to Form LM-2, and Overview of the New Form T-1) for greater 
detail on the reporting, recordkeeping, and other compliance 
requirements of the rule. In order to comply with these requirements, 
reporting unions may need to make adjustments in their recordkeeping 
and bookkeeping procedures and, in some instances, to make changes in 
computing hardware or software to file the reports electronically. None 
of these expenses is expected to have a substantial impact on the 4,463 
unions considered to be small by SBA standards (because they amount to 
only 1.7% of these unions' average annual receipts over three years), 
in large part because the public comments and OLMS's auditing 
experience confirm that labor organizations, like most small entities 
following standard business practices, already maintain at least some 
of the receipt and disbursement records required by the final rule.
    The average annual reporting and recordkeeping burden for the 
current Form LM-2 is $8,381 or 0.3% of average annual receipts for all 
Form LM-2 filers. The average additional first year cost (including 
first year non-recurring implementation costs) of the final rule for 
the 4,463 unions considered to be small by SBA standards for filing 
both the revised Form LM-2 and new Form T-1 is less than $17,876, or 
1.6% of average annual receipts (see Table 1). The average total first 
year cost of the revised Form LM-2 and new Form T-1 on small unions is 
$26,257, or 2.3% of total annual receipts. Further, the average total 
cost for small unions falls to $18,322 or 1.6% of total annual receipts 
in the second year.

BILLING CODE 4510-CP-P

[[Page 58425]]

[GRAPHIC] [TIFF OMITTED] TR09OC03.000

    The Department believes that it is very unlikely that small unions 
with about $250,000 in annual receipts would incur many of the costs 
incurred by the typical Form LM-2 filer. (For example, unions near this 
amount of receipts are likely to have far less complicated accounts 
covering far fewer transactions than the typical Form LM-

[[Page 58426]]

2 filer (with receipts between $500,000 and $49.9 million).) However, 
to assess the ``maximum'' or ``worst-case'' impact on small unions, the 
Department considered the unlikely event that a small union with 
$250,000 in annual receipts could incur the average compliance burden 
for unions with annual receipts of $500,000 to $49.9 million for the 
revised Form LM-2 and the new Form T-1. Under this unlikely scenario, 
the total additional cost of the final rule would be $20,596 in the 
first year, or 8.2% of annual receipts, and $11,206 in the second year, 
or 4.5% of annual receipts (see Table 1). For a small union with 
$500,000 in annual receipts, the maximum additional cost of the final 
rule would be 4.1% of receipts in the first year and 2.2% in the second 
year.
    As noted in section 3 above, the final rule will apply to 4,463 
unions that meet the SBA standard for small entities, or just 18.0% of 
all unions with annual receipts of less than $6 million that must file 
an annual financial report under the LMRDA (the other, even smaller, 
unions can file the less burdensome Form LM-3 or Form LM-4). Further, 
just 1,574 unions with annual receipts from $250,000 to $499,999, or 
6.3% of all unions covered by the LMRDA, would be affected by the final 
rule. Even less (than 6.3% of the total) would incur the maximum 
additional costs of the final rule described above. Therefore, the 
Department has decided that the final rule does not have a significant 
impact on a substantial number of small entities. Moreover, raising the 
Form LM-2 filing threshold from $200,000 to $250,000 will enable 501 of 
the smallest LM-2 filers to use the less burdensome Form LM-3 and save 
them an average of $5,104 per year compared to filing the current Form 
LM-2. Smaller unions that file Form LM-3 or LM-4 also will not have to 
file any Form T-1.
5. Steps Taken To Minimize the Impact on Small Entities
    The Department has raised the reporting threshold for the final 
Form LM-2 and new Form T-1 to $250,000 from the $200,000 threshold in 
the proposed rule. The Department has also determined that the 
itemization threshold for disbursements should be set at the high end 
of the range proposed ($2,000 to $5,000) and that specific information 
be required only if the amount of an ``other receipt'' or disbursement 
is $5,000 or more or, if such receipts from or disbursements to a 
single entity, aggregate to $5,000 or more during the reporting year. 
This change will reduce the number of disbursements that will have to 
be individually itemized and reported by smaller labor organizations. 
(OLMS experience in reviewing union records over the years in the 
course of audits and investigations suggests that smaller unions 
typically have fewer large disbursements). As noted above, the 
Department will continue to monitor all of the reporting thresholds in 
the Form LM-2 to attempt to ensure that both the level of reporting and 
the information reported remain relevant and meaningful in light of 
changes in the economy.
    Raising the threshold for filing a Form LM-2 from $200,00 to 
$250,000 will enable 501 of the smallest unions that previously were 
required to file a Form LM-2 to now use the Form LM-3. The latter form 
requires significantly less recordkeeping and reporting requirements 
than Form LM-2, thus reducing the burden on unions with annual receipts 
between $200,000 and $249,999. The 501 unions affected will save an 
average of $5,104 from the cost of filing the current Form LM-2, 
because they can file the less burdensome Form LM-3 rather than the 
current Form LM-2. In addition, each of these unions also will avoid an 
average $19,640 per year in costs that they would incur if they had to 
file the new Form LM-2 and an average $1,253 per year because they will 
not have to file a Form T-1. Thus, each of the 501 unions affected by 
raising the Form LM-2 threshold from $200,000 to $250,000 will avoid 
$17,616 in potential costs increases (i.e., $19,640 + $1,253--$3,277) 
by virtue of this change.
    Burden hour differences between the smaller labor organizations 
that are large enough to be required to file Form LM-2 and the largest 
labor organizations are more likely to result from differences in the 
financial operations of the unions themselves. Only the largest filers, 
those that have annual receipts in the millions, are likely to have 
extensive financial transactions. Unions with receipts of between 
$250,000 and $1.0 million, which account for over 2,833 of the 4,778, 
or 59.3% of Form LM-2 filers, are likely to have less difficulty using 
the revised form. A survey of affiliated unions submitted by the AFL-
CIO during the public comment process suggests that the median cost of 
the final rule will be just $5,724 per year for unions with less than 
$1.0 million in receipts compared to more than $820,000 for unions with 
$100.0 million to $250.0 million in annual receipts. As explained more 
fully below, the predictive value of the AFL-CIO survey is open to 
question in some respects. The Department's own experience, based on 
years of reviewing union records in audits and investigations, suggests 
that the AFL-CIO estimates of costs are more likely to be too high than 
too low.
    Unions with total annual receipts of less than $250,000 (81.0% of 
all LMRDA covered unions) can still elect to file a simplified report. 
Over 47.3% of all labor organizations may file a Form LM-3 that entails 
a lesser burden than the Form LM-2. The final rule makes no change to 
the Form LM-3 and the only changes to its instructions clarify the 
reporting obligation of intermediate bodies that have no private 
employee members, but are subordinate to national or international 
labor organizations that are covered by the LMRDA. The instructions 
state that such intermediate bodies must file an annual financial 
report. The very smallest unions, with total annual receipts of less 
than $10,000 (33.7% of all LMRDA covered unions), can elect to file an 
abbreviated report, Form LM-4, which further reduces their 
recordkeeping and reporting burden.
    The Department also has made several other changes to the proposed 
rule that will reduce the burden on small unions. Raising the reporting 
threshold for itemizing accounts receivable and accounts payable to 
$5,000 will reduce the number of items that must be reported, 
particularly for small unions that have few accounts receivable and 
accounts payable. Removing the itemization requirement for the benefits 
schedule will reduce the reporting burden for all unions and protect 
the privacy of individual benefit recipients, including those receiving 
payments for medical procedures, insurance or pension claims, or burial 
benefits. Changing the reporting requirements on the membership 
schedule will enable union members to easily obtain useful information 
without requiring unions to manufacture or report information for 
membership categories it does not keep. Finally, the new audit 
alternative for Form T-1 is aimed at promoting disclosure while 
reducing the recordkeeping and reporting burdens for unions with trusts 
that are already subject to an independent audit.
    Small entities will also benefit from OLMS's electronic labor 
organization reporting system (e.LORS), which utilizes technology to 
collect, maintain, and disclose the information it collects. The 
objectives of e.LORS are: (1) The electronic filing of Forms LM-2, LM-
3, and LM-4 via the Internet; (2) LMRDA program enhancements to improve 
accuracy, completeness, and timeliness of Forms LM-2, LM-3, and LM-4; 
and (3) the public disclosure of reports with

[[Page 58427]]

a searchable database via the Internet. Labor organizations are 
directed to use an electronic reporting format and OLMS will make 
software available for downloading over the Internet that enables labor 
organizations to report financial information that can be 
electronically compiled in the proper format for electronic filing.
    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 by manually typing in the data, by 
electronically importing data by schedule, or by electronically 
importing data for the entire form; automatically performs calculations 
and checks for typographical and mathematical errors and other 
discrepancies, which reduces the likelihood of having to file an 
amended report; and allows the submission of the form electronically 
via the Internet. 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.
    OLMS also has revised the instructions for the final Form LM-2 and 
Form T-1 to provide examples and guidance on how to complete the report 
and maintain records, and will provide compliance assistance for any 
questions or difficulties that may arise from using the software. A 
help desk is staffed during normal business hours and can be reached by 
calling a toll-free telephone number: 1-866-4-USA-DOL (1-800-487-2365).

F. Paperwork Reduction Act

    This statement is prepared in accordance with the Paperwork 
Reduction Act of 1995, 44 U.S.C. 3501 (PRA). See 5 CFR 1320.9. As 
discussed in the preamble to this final rule and the analysis that 
follows, the rule implements an information collection that meets the 
requirement of the Act 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 unions that must provide the 
information, including small unions; (4) the forms, instructions, and 
explanatory information in the preamble are written in plain language 
that will be understandable by reporting unions; (5) the disclosure 
requirements are implemented in ways consistent and compatible, to the 
maximum extent practicable, with the existing reporting and 
recordkeeping practices of unions that must comply with them; (6) this 
preamble informs unions 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, which 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.'' See 5 CFR 1320.9; 44 U.S.C. 3506(c). The Department's PRA 
analysis contains a summary, background on the current Form LM-2, an 
overview of changes to each form, and the burden associated with the 
current forms and final rule. The Department also discusses various 
comments, specific to the PRA, that are not fully addressed elsewhere 
in the preamble. As discussed, the Department has revised its burden 
estimates for the final rule, based upon its review of the comments and 
adjustments to its baseline estimate of the costs associated with the 
requirements of the Department's current rule relating to the 
submission of annual financial reports by labor organizations.
    In this rulemaking, the Department has sought to improve the 
usefulness and accessibility of information to members of labor 
organizations subject to the LMRDA. The LMRDA reporting provisions were 
devised to protect the basic rights of union members and to guarantee 
the democratic procedures and financial integrity of labor 
organizations. The 1959 Senate report on the version of the bill later 
enacted as the LMRDA stated clearly, ``the members who are the real 
owners of the money and property of the organization are entitled to a 
full accounting of all transactions involving their property.'' A full 
accounting was described as ``full reporting and public disclosure of 
union internal processes and financial operations.''
    As labor organizations have become more multifaceted and have 
created hybrid structures for their various activities, the form used 
to report financial information with respect to these activities has 
remained relatively unchanged and has become a barrier to the complete 
and transparent reporting of labor organization's financial information 
intended by the LMRDA. Moreover, just as in the corporate sector, there 
have been a number of financial failures and irregularities involving 
pension funds and other member accounts maintained by labor 
organizations. These failures and irregularities result in direct 
financial harm to union members. If union members had more complete, 
understandable information about their unions' financial transactions, 
investments, and solvency, they would be in a much better position than 
they are today to protect their personal financial interests and to 
exercise their rights of self-governance. The purpose of the final rule 
is to provide them with such information. The information collection 
achieved by this rule is integral to this purpose. The paperwork 
requirements associated with the rule are necessary to enable workers 
to be responsible, informed, and effective participants in the 
governance of their unions; discourage embezzlement and financial 
mismanagement; prevent the circumvention or evasion of the statutory 
reporting requirements; and strengthen the effective and efficient 
enforcement of the Act by the Department.
    Pursuant to the PRA, the information collection requirements 
contained in this final rule have been submitted to OMB for approval. 
Within 30 days from the date of publication of this final rule, you may 
direct comments by fax (202-395-6974) to: Desk Officer for the 
Department of Labor/ESA, Office of Management and Budget.
1. Summary
    This final rule modifies the annual reports required to be filed by 
the largest labor organizations, prescribed by the Secretary of Labor 
to implement the Act and incorporated by reference in the applicable 
regulations. As discussed above and throughout the preamble to the 
final rule, the revised paperwork requirements are necessary to 
effectuate the purposes of the LMRDA by providing union members with 
information about their unions that will enable them to be responsible, 
informed, and effective participants in the governance of their unions;

[[Page 58428]]

discourage embezzlement and financial mismanagement; prevent the 
circumvention or evasion of the statutory reporting requirements; and 
strengthen the effective and efficient enforcement of the Act by the 
Department. The manner in which the collected information will serve 
these purposes is discussed throughout the preamble to the final rule.
    Two forms that will implement the new reporting requirements and 
their instructions are published in the appendix to this final rule: 
the revised Form LM-2, a form now filed by the largest unions to report 
their annual financial information, and the new Form T-1, a form also 
to be filed by the largest unions to report the assets, liabilities, 
receipts, and disbursements of trusts in which they have an interest. 
The forms are 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. Union members thus will be able to obtain 
a more accurate and complete picture of their union's financial 
condition and operations without imposing an unwarranted burden on 
reporting unions. The rule also includes a clarification of the 
Department's interpretation of Section 3(j)(5) (29 U.S.C. 402(j)(5)) of 
the LMRDA, in agreement with the recent decision of the U.S. Court of 
Appeals for the Ninth Circuit in Chao v. Bremerton Metal Trades 
Council, AFL-CIO, 294 F. 3d 1114 (2002). The Department adopts that 
court's view that any ``conference, general committee, joint, or system 
board, or joint council'' that is subordinate to a national or 
international labor organization is itself a labor organization under 
the LMRDA and will be required to file an annual financial report if 
the national or international labor organization is a labor 
organization engaged in an industry affecting commerce within the 
meaning of section 3(j) of the LMRDA. This clarification applies to all 
financial reports required to be filed under the LMRDA. The final rule 
also increases the filing threshold for the Form LM-3, a form filed by 
unions with less annual receipts than Form LM-2 filers and requiring a 
less detailed accounting than Form LM-2, a change that will reduce the 
recordkeeping and reporting burden for smaller unions. The final rule 
did not raise the filing threshold for Form LM-4 and did not otherwise 
revise the Form LM-4, although the instructions for Form LM-4 have been 
altered to reflect the Department's decision to adopt the holding of 
Bremerton Metal Trades Council, AFL-CIO. 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 union 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, and approved by, OMB. Based upon 
careful consideration of the comments and the changes made to the 
Department's proposal in this final rule, the Department has made 
significant adjustments to its burdens estimates. The costs to the 
Department for administering the annual financial report requirements 
of the LMRDA also were adjusted. These federal annualized costs, 
undifferentiated by form, are separately discussed after the burdens on 
the reporting unions are considered.
    Based upon the analysis presented below, the Department estimates 
that the total first year burden to comply with the revised Forms LM-2 
and LM-3 and the new Form T-1 to be 3.4 million hours, 1.4 million 
hours and 0.2 million hours, respectively. The total first year 
compliance costs associated with this burden, including the cost for 
computer hardware and software, are estimated to be $116.0 million for 
the Form LM-2, $39.0 million for the Form LM-3 and $5.5 million for the 
new Form T-1. The actual cost of the final rule, however, is not $160.5 
million in the first year. It is the difference between cost of the 
current forms and the revised Form LM-2 and new Form T-1, or $79.9 
million the first year ($160.5 million--$80.6 million). The average 
three-year cost of the final rule is $55.7 million. Therefore, this 
final rule is not a major economic rule.
    Both the burden hours and the compliance costs associated with the 
revised Form LM-2 and the new Form T-1 decline in subsequent years. The 
Department estimates that the total burden averaged over the first 
three years to comply with the revised Form LM-2 and the new Form T-1 
to be 2.8 million hours and 0.1 million hours, respectively. The total 
compliance costs associated with this burden averaged over the first 
three years are estimated to be $93.8 million for the Form LM-2 and 
$3.5 million for the new Form T-1.
2. Background on Current Form LM-2
    Every labor organization whose total annual receipts are $200,000 
or more and those organizations that are in trusteeship must currently 
file an annual financial report on the current Form LM-2, Labor 
Organization Annual Report, within 90 days after the end of the union's 
fiscal year, to disclose its financial condition and operations for the 
preceding fiscal year. The current Form LM-2 is also used by covered 
labor organizations with total annual receipts of $200,000 or more to 
file a terminal report upon losing their identity by merger, 
consolidation or other reason.
    The current Form LM-2 consists of 24 questions that identify the 
labor organization and provide basic information (in primarily a yes/no 
format); a statement of 11 financial items on different assets and 
liabilities; a statement of receipts and disbursements; and 15 
supporting schedules. The information that is reported includes: 
whether the union has any subsidiary organizations and trusts; whether 
the union has a political action committee; whether the union 
discovered any loss or shortage of funds; the number of members; rates 
of dues and fees; the dollar amount for seven asset categories, such as 
accounts receivable, cash, and investments; the dollar amount for four 
liability categories, such as accounts payable and mortgages payable; 
the dollar amount for 16 categories of receipts such as dues and 
interest; and the dollar amount for 18 categories of disbursements such 
as payments to officers and repayment of loans obtained. Five of the 
supporting schedules include a detailed itemization of loans receivable 
and payable, the sale and purchase of investments and fixed assets, and 
payments to officers. There are also 10 supporting schedules for 
receipts and disbursements that provide union members with more 
detailed information by general groupings or bookkeeping categories to 
identify their purpose. Unions are required to track their receipts and 
disbursements in order to correctly group them into the categories on 
the current form.
    The Department also has developed an electronic reporting system 
for labor organizations, e.LORS, which uses information technology to 
perform some of the administrative functions for the current forms. The 
objectives of the e.LORS system include the electronic filing of 
current Forms LM-2, LM-3, and LM-4, as well as other LMRDA disclosure 
documents; disclosure of reports via a searchable Internet database; 
improving the accuracy, completeness and timeliness of reports; and 
creating efficiency gains in the reporting system. Effective use of the 
system reduces the burden on reporting organizations, provides 
increased information to union members, and

[[Page 58429]]

enhances LMRDA enforcement by OLMS. The OLMS Internet Disclosure site 
is available for public use. The site contains a copy of each labor 
organization's annual financial report for reporting year 2000 and 
thereafter as well as an indexed computer database on the information 
for each report that is searchable through the Internet. The Department 
is developing an enhanced e.LORS system for the revised Form LM-2 and 
new Form T-1.
    To ease the transition to electronic disclosure, OLMS includes 
e.LORS information in its outreach program, including compliance 
assistance information on the OLMS website, individual guidance 
provided through responses to e-mail, written, or telephone inquiries, 
and formal group sessions conducted for union officials regarding 
compliance. The current forms are provided on CD-ROM discs at no cost 
to labor organizations, can be downloaded from the OLMS website, and 
are available from OLMS field offices and from the OLMS National 
Office. OLMS has also implemented a system to permit union officers to 
submit forms electronically with digital signatures. Unions are 
currently required, however, to pay a minimal fee to obtain electronic 
signature capability for the two officers who sign the form. 
Information about this system can be obtained on the OLMS Web site at 
www.olms.dol.gov. Digital signatures ensure the authenticity of Form 
LM-2 reports without compromising efficiency. As discussed in the 
Regulatory Flexibility Analysis and the preamble, additional compliance 
assistance will be provided in connection with the new reporting and 
filing requirements.
    Filing labor organizations have several advantages with the current 
electronic filing system. With e.LORS, information from previously 
filed reports and officer or employee information can be directly 
imported to Form LM-2. Not only is entry of the information eased, the 
software also makes mathematical calculations and checks for errors or 
discrepancies. Ready acceptance of the benefits of electronic reporting 
is predictable based on experience with software that OLMS has 
developed and distributed to labor organizations for completing the 
current Forms LM-2, LM-3, and LM-4. Approximately 76% of unions that 
currently file Form LM-2, LM-3, and LM-4 take advantage of the ability 
to enter data electronically on a computerized form.
3. Overview of Changes to Form LM-2
    The Department, among other revisions for the purpose of reducing 
the burden on small unions, adopted the alternative, identified in the 
NPRM, to raise the reporting threshold for the Form LM-2 from $200,000 
to $250,000. The new rule adjusts upward the Form LM-2 filing threshold 
of $200,000 set in 1994 to account for inflation. As a result of 
raising the Form LM-2 threshold to $250,000 in the final rule, 501 
unions that currently file a Form LM-2 will now be able to satisfy the 
requirements of the LMRDA by filing the simpler Form LM-3. It should 
also be noted that the final $250,000 threshold is significantly higher 
than the earlier thresholds for filing the Form LM-2--1959 ($20,000), 
1962 ($30,000), and 1981 ($100,000).
    In comparison to the current Form LM-2, the revised Form LM-2 
includes: three fewer questions (21 instead of 24) that identify the 
labor organization and provide basic information (in the same general 
yes/no format); the same 11 financial items on assets and liabilities 
in Statement A; an updated Statement B that asks for information on 
fewer categories of receipts (13 instead of 16) and disbursements (17 
instead of 19); and five additional supporting schedules (20 instead of 
15). The updated Statement B (Receipts and Disbursements) also drops 
six old categories of disbursements and adds five new categories that 
will provide more useful information to union members on the amount of 
union funds spent on representational activities, strike benefits, 
union administration, general overhead, and political activities and 
lobbying.
    Over half (8) of the 15 current supporting schedules are not 
changing. These include loans receivable, loans payable, other assets, 
other liabilities, fixed assets, sale of investments and fixed assets, 
purchase of investments and fixed assets, and benefits. The schedule 
for itemizing investments has only a minor modification involving 
information that is maintained in the normal course of business--the 
reporting threshold has changed from over $1,000 and 20% of the total 
book value of the union's investments to over $5,000 and 5% of the 
total. Two other supporting schedules (Office and Administrative 
Expense, and Other Disbursements) on the current form have been dropped 
from the revised form and the disbursements that were reported on those 
schedules will now be reported elsewhere on the revised Form LM-2 (such 
as the schedules for union administration or general overhead).
    One change to Form LM-2 is the requirement that unions provide an 
estimate of the time expended by their officers and employees on each 
of the several categories prescribed generally for union receipts and 
disbursements including: representational activities; union 
administration; general overhead; political activities and lobbying; 
and contributions, gifts, and grants. However, the Department is not 
requiring unions to keep detailed time records, and it is left up to 
the labor organization to determine the least burdensome way to provide 
the information.
    Another change to the Form LM-2 is the addition of two new 
schedules for accounts receivable and accounts payable. The new 
schedules require the reporting of (1) The name of any entity or 
individual with which the labor organization had an account payable 
valued at $5,000 or more that was more than 90 days past due at the end 
of the reporting period or that was liquidated, reduced or written off 
during the reporting period, and (2) the name of any entity or 
individual with which the labor organization had an account receivable 
valued at $5,000 or more that was more than 90 days past due at the end 
of the reporting period or that was liquidated, reduced or written off 
during the reporting period. However, as noted above, the Department is 
not requiring Form LM-2 filers to use accrual accounting. Although the 
LMRDA and the current Form LM-2 already require some accrual basis 
accounting information, under the final rule unions may choose the 
method by which to track their finances `` on a cash basis, accrual 
basis, a hybrid of the two, or some other method of accounting `` so 
long as they can accurately report the information required by the Form 
LM-2.
    The revised Form LM-2 also includes a new schedule for reporting 
their number of members by membership category. Each labor 
organization, however, is permitted to name and report on its own 
membership categories (in the same manner as it keeps its membership 
records). It appears from the public comments received on the 
Department's proposal that each union maintains membership information 
in some manner; however, a union will not be required to manufacture or 
report information for membership categories it does not keep.
    The Form LM-2 also has been revised to require unions to 
individually identify receipts and disbursements for two of the current 
supporting schedules (Other Receipts and Contributions, Gifts, and 
Grants) and four of the new

[[Page 58430]]

supporting schedules (Representational Activities, Union 
Administration, General Overhead, and Political and Lobbying 
Activities). Currently, two of these schedules provide some detail 
about various receipts and disbursements by general groupings or 
bookkeeping categories to identify their purpose. However, the revised 
Form LM-2 will require labor organizations to individually identify 
receipts or disbursements, reported in six supporting schedules, of 
$5,000 or more, or total receipts or total disbursements, reported in 
each of those schedules, from an entity or individual that aggregate to 
$5,000 or more during the reporting period. For individually identified 
receipts and disbursements, unions will have to report the name, 
address, purpose, date, and amount associated with the transaction.
    Under the final rule, labor organizations that file the Form LM-2 
are required to report the major receipts and disbursements of trusts 
in which the labor organization has an interest. Currently, a union 
only has to report information about subsidiary organizations, defined 
as ``wholly owned, wholly controlled, and wholly financed by the 
reporting union.'' Under the final rule, if a union's financial 
contribution to a trust, or a contribution made on the union's behalf, 
is less than $10,000 or the union has an interest in a trust that has 
annual receipts of less than $250,000, the union only has to report on 
Form LM-2 the existence of the trust and the amount of the union's 
contribution or the contribution made on the union's behalf. If the 
contribution is $10,000 or more and the annual receipts of the trust 
are $250,000 or more, the labor organization will be required to report 
the receipts and disbursements of the trust on the new Form T-1. Unions 
will be required to separately identify each entity or individual from 
which the trust received $10,000 or more during the reporting period. 
Unions will also be required to separately identify any entity or 
individual to which the trust made disbursements of $10,000 or more, or 
that aggregated to $10,000 or more, during the reporting period. For 
individually identified receipts and disbursements, unions will have to 
report the name, address, purpose, date, and amount associated with the 
transaction.
    Unions will not have to file a Form T-1 for organizations that meet 
the statutory definition of a trust if the trust files a report 
pursuant to 26 U.S.C. 527, or pursuant to the requirements of ERISA, or 
if the organization is a Political Action Committee (PAC) and files 
publicly available reports with a Federal or state agency. For such 
trusts, the union is required only to state on the Form LM-2 that such 
a report has been filed and where union members can obtain the report. 
In addition, a labor organization may substitute an independent audit 
for most of the information that otherwise would be required on a Form 
T-1, provided the audit meets certain criteria described in the 
preamble above.
    As discussed above, the instructions to Form LM-2 also adopt the 
recent holding in Chao v. Bremerton Metal Trades Council, AFL-CIO, 
clarifying that any ``conference, general committee, joint, or system 
board, or joint council,'' which is subordinate to a national or 
international labor organization is itself a labor organization under 
the LMRDA and will be required to file an annual financial report if 
the national or international labor organization is a labor 
organization engaged in an industry affecting commerce within the 
meaning of section 3(j) of the LMRDA. See 29 U.S.C. 402(j)(5). The 
Department estimates that this will add 100 new Form LM-2 filers.
    Finally, under the rule, each labor organization that has annual 
receipts of $250,000 or more is required to file a Form LM-2 
electronically with the Department. Based on reports filed with OLMS 
and the experience of its investigators, the Department recognizes that 
a majority of current Form LM-2 filers currently use computerized 
recordkeeping systems and now possess, or can easily acquire, the 
technology necessary to submit reports in electronic form. Several OLMS 
field offices report that even smaller unions that file Form LM-3 
reports now maintain their accounts electronically. The availability of 
electronic software that will permit unions that keep their records 
electronically to export data from their programs to the Form LM-2 
software should reduce the burden of reporting financial information 
with the specificity required by the final rule. Under the final rule, 
unions have the choice to complete the reports for submission by either 
utilizing the Department's software to automatically transmit the 
information or by ``cutting and pasting'' the information into the 
Department's on-line form. If, however, a labor organization is unable 
to file electronically without undue burden or expense, it can request 
a hardship exemption from the Department. If the Department determines 
that the grant of the exemption is appropriate and consistent with the 
public interest and the protection of union members, the union will be 
excused from filing electronically for the period of the exemption.
4. Overview of Changes to Form LM-3
    The only revision in the final rule to Form LM-3 is the change that 
increases the size of labor organizations that are permitted to file 
the form from $199,999.99 to $249,999.99 in total annual receipts. This 
is required because the Form LM-2 reporting threshold is increasing to 
$250,000.
    The instructions to Form LM-3 also adopt the holding in Chao v. 
Bremerton Metal Trades Council, AFL-CIO, as the Department's 
interpretation of section 3(j)(5) of the LMRDA. The Department 
estimates that this will add 50 new Form LM-3 filers.
5. Overview of the Form LM-4
    After carefully reviewing the comments, the Department has decided 
not to change the Form-LM-4 in the final rule.
6. Overview of the New Form T-1
    A labor organization will be required to file Form T-1 if it has an 
interest in a trust, as defined in the LMRDA; if the union and the 
trust each have annual receipts of $250,000 or more; and the union 
makes a financial contribution to the trust, or a contribution is made 
on the labor organization's behalf, of $10,000 or more. If a union's 
financial contribution to a trust, or a contribution made on the 
union's behalf, is less than $10,000 or the union has an interest in a 
trust that has annual receipts of less than $250,000, the union only 
has to report the existence of the trust and the amount of the union's 
contribution or the contribution made on the union's behalf.
    Also to minimize the burden, unions will not have to file a Form T-
1 for organizations that meet the statutory definition of a trust if 
the trust files a report pursuant to 26 U.S.C. 527, or pursuant to the 
requirements of ERISA, or if the organization is a Political Action 
Committee (PAC) and files publicly available reports with a Federal or 
state agency. For such trusts, the union need only state on the Form 
LM-2 that such a report has been filed and where union members can 
obtain the report. In addition, a labor organization may choose to 
substitute an independent audit for most of the information that 
otherwise would be required on a Form T-1, provided the audit meets the 
criteria prescribed by the final rule. In such instances, the union is 
not required to provide the financial details for the trust otherwise 
required of filers.

[[Page 58431]]

    The new Form T-1 follows the format of the revised Form LM-2. The 
Form T-1, however, is similar to Form LM-4 in that it is much shorter 
and requires less information than the Form LM-2. The Form T-1 
includes: 20 questions that identify the trust, provide basic 
information (in a yes/no format), and the total amount of assets, 
liabilities, receipts and disbursements of the trust; a schedule that 
separately identifies any individual or entity from which the trust 
receives $10,000 or more during the reporting period; a schedule that 
separately identifies any entity or individual that received 
disbursements that aggregate to $10,000 or more from the trust during 
the reporting period and the purpose of disbursement; and a schedule of 
disbursements to officers and employees of the trust.
7. Recordkeeping and Reporting Burden Hour Estimates for the Current, 
Revised, and New Forms
    The Department received several comments on the recordkeeping and 
reporting burdens associated with the current Form LM-2, and the 
proposed Form LM-2 and Form T-1, and the Department's initial PRA 
analysis. Many union members and a number of nonprofit organizations 
commented on the usefulness of the information provided on the proposed 
forms and expressed the view that the benefits of the additional 
information outweighed the marginal increase in recordkeeping and 
reporting costs. Other commenters expressed strong contrary views. Many 
of these comments already have been addressed in the preamble.
    Although the Department received only a few comments that were 
specific to the Department's compliance with the requirements of the 
PRA, it did receive many comments on the NPRM PRA analysis and burden 
hour estimates. The AFL-CIO and the Mercatus Center, the latter an 
economic policy group based at George Mason University in Virginia, 
submitted detailed comments and data. A third commenter, the Center for 
Progressive Regulation (CPR), self-described in its comments as a newly 
formed, Washington, D.C.-based, organization of academics specializing 
in legal, economic and scientific issues surrounding federal 
regulation, expressed views critical of the Department's initial burden 
analysis. The latter organization, however, did not include in its 
submission any alternative data for the Department to consider. Some 
unions also submitted comments critical of the Department's analysis 
and provided some alternatives for the Department to consider.
    The Department has carefully considered these various comments as 
well as the rest of the record and has relied on many of the 
commenters' observations in refining its burden analysis. In many 
instances, as identified below, the Department has used the data 
supplied by the commenters to better estimate how much time filers take 
to complete the current Form LM-2 and could take to complete the 
revised Form LM-2. By taking this information into account, the 
Department has increased the baseline burden assumptions for the 
current Form LM-2 that underlie most of the Department's estimates. At 
the same time, the Department could not use all of the data submitted 
by the commenters in refining burden estimates. Some of the data, for 
example, was no longer relevant to the analysis because a proposed 
requirement was revised or eliminated altogether in the final rule 
necessitating the revision or elimination of the burden associated with 
the proposed requirement. In other instances, the information, while 
illustrative of problems that had been identified by a particular union 
or unions, could not be used to arrive at an average burden hour 
estimate for unions generally or within one of the defined tiers. For 
example, ALPA explained that it uses a particularly sophisticated 
accounting program in maintaining its financial information and would 
incur significant burden in converting their program to comply with the 
proposed rule, but this information could not be used to accurately 
estimate how many other unions have similarly sophisticated accounting 
programs and could incur similar burdens. Other information was not 
used because it was based on a misunderstanding of the NPRM. For 
example, some commenters stated that local unions would incur 
significant costs associated with converting to an accrual accounting 
method when the NPRM proposed no such requirement.
    In most cases, the Department has reported data regarding its 
burden hour estimates to the nearest hundredth, as it did in the NPRM. 
Contrary to the perception of a few commenters, the Department's 
practice is not intended to suggest greater precision than the 
underlying data would reflect. Instead, the figures used by the 
Department are derived from the Department's computations based on 
assumptions, rounded to the nearest hundredth by an Excel spreadsheet.
a. General Comments
    The AFL-CIO argued that the proposed information gathering is not 
necessary for the proper functioning of the Department. The AFL-CIO 
contends that the Department's paperwork analysis in the NPRM was 
fundamentally flawed and dramatically underestimated the paperwork 
burdens and costs to unions in complying with the proposed reporting 
requirements. The AFL-CIO also argued that the proposed rule is not the 
least burdensome approach that the Department could have taken to 
achieve the goal of the LMRDA and the rulemaking to make union 
financial reports and underlying data more useful and accessible to 
their members. And, as a final observation, the AFL-CIO stated that the 
proposed rule might shift the cost of developing and implementing 
electronic filing upon the reporting unions.
    The AFL-CIO's contention that the changes in the reporting 
requirements are not necessary for the proper functioning of the 
Department lacks merit. The Secretary is charged under section 208 of 
the LMRDA, 29 U.S.C. 438, with the authority and responsibility for 
determining ``the form and publication of reports required to be filed 
under this title.'' Unions, in turn, are required to file annual 
reports containing certain listed minimum information ``in such detail 
as may be necessary accurately to disclose its financial condition and 
operations for its preceding fiscal year.'' 29 U.S.C. 431(b). These 
reports are statutorily required, not primarily for the proper 
functioning of the Department, but for disclosing to the members of the 
organization how their dues money has been used in the past year. As 
stated in its proposal and supported by many of the public comments 
received on the proposal, the Department believes that the minimal 
information reported on the current Form LM-2 forms is inadequate to 
ensure that unions are reporting and using funds in ways their members 
would approve. As discussed in the preamble, comments by union members 
explained their difficulties in obtaining information about their 
union's finances and expressed frustration in their inability to find 
out where their dues money was going. The more detailed reporting 
requirements in the final rule will increase members' awareness of how 
their dues money is being spent by their unions. This is consistent 
with the intent of the LMRDA and highlights the purpose served by the 
rule's information collection provisions.
    The suggestion that the Department's initial burden analysis was 
fundamentally flawed is unpersuasive. The AFL-CIO has failed to 
identify any analytical shortcomings in the

[[Page 58432]]

Department's approach. Instead, the AFL-CIO's contention rests, in 
large part, on its view that the Department has underestimated the 
baseline burden hour data used by the Department for the current Form 
LM-2 and that, therefore, the Department has underestimated the burden 
for the revised form. As discussed below, this baseline was based on 
what the Department believed was the accepted burden associated with 
the current Form LM-2, as reflected in the Department's numerous, 
unchallenged submissions to OMB in obtaining OMB's approval to continue 
using the form. Based on the information submitted by the AFL-CIO and 
other commenters in response to the Department's proposal, and the 
Departments own analysis, however, the Department has adjusted its 
burden hour estimates upward for the current form. These adjustments 
are discussed in detail below.
    Contrary to the AFL-CIO's view, the Department's paperwork analysis 
in the NPRM was well reasoned, especially in the absence of any earlier 
challenge to the Department's prior assessment of the time required to 
prepare the current Form LM-2. As discussed below, the Department has 
revised its estimates in preparing the PRA analysis for the final rule 
and presents a more refined assessment by the Department of any burden 
imposed on reporting unions under the new Form LM-2.
    The Department used the AFL-CIO and other commenters' estimates 
when they provided information that the Department did not have and 
that increased the accuracy of its estimates by adding to the 
Department's own data and auditing experience. The Department used the 
following AFL-CIO data estimating the average burden for completing the 
current Form LM-2: 1,500 hours each for 141 national and international 
unions and 200 hours each for 5,038 local unions. The latter number 
reflects the number of unions in the 2002 OLMS e.LORS data. These 
figures yield a weighted average of 239 hours, which the Department 
rounded up to 240 hours for use in making additional burden 
assessments. The Department had to make some assumptions about the 
local unions due to the scarcity of data. The AFL-CIO only surveyed 23 
local unions on their actual experience with the current form. Since 
the AFL-CIO did not include estimates for consulting, accounting, 
legal, or similar costs, the Department had to assume additional hours 
for these activities in order to arrive at a weighted average for 
computing a total burden estimate for filers for completing the current 
Form LM-2.
    The AFL-CIO provided some information that appears to contradict 
the burden hour estimates discussed above. The AFL-CIO's report 
included an estimate of burden for the current Form LM-2, based on an 
average of 52 hours for each individual employed by a union (but 
without specifying the average number of individuals it used as a 
divisor). This figure is not consistent with its 1,500 and 200 burden 
hour estimate, when applied to the Department's 2001 or 2002 e.LORS 
data that contains the reported number of employees and officers for 
all Form LM-2 filers. Thus, in the Department's view, the AFL-CIO's per 
employee estimate may not accurately reflect a true average. For this 
reason, the Department chose, instead, to rely on the AFL-CIO's 
alternative, per union, estimate of the number of hours required to 
complete the current Form LM-2.
    Some of the AFL-CIO data involved broad subjective or qualitative 
categories that could not be used to estimate burden hours. For 
example, the estimate that 45% of local unions said that it would be 
quite difficult to extremely difficult to compile the name, address, 
date, amount, and purpose for all charges by functional category, is 
illustrative of the effort associated with the itemization requirement 
in the final rule but can not be used to develop actual burden hour 
estimates. Moreover, this estimate also demonstrates that 55%, or a 
majority, of local unions find the change less difficult. Of course, 
the Department did not use the AFL-CIO's data in computing the burden 
of complying with the revised Form LM-2 to the extent that the data 
pertained to requirements that were addressed in the Department's 
proposal, but not embodied in the final rule.
    The Department also used the AFL-CIO data on the number of unions 
using functional reporting to refine its recordkeeping burden 
estimates. Specifically, the AFL-CIO data relating to the unions' 
ability to itemize disbursements were used to corroborate the 
Department's data and auditing experience. The Department notes, 
however, that the data either understate the unions' capacity to report 
information by functional categories or by implication shows that a 
substantial number of unions are not in compliance with the current 
reporting requirements (the current report requires the tracking of all 
receipts and disbursements in order to place them in the appropriate 
schedule and category on the current form). However, the Department did 
not use the AFL-CIO data relating to problems that unions might 
encounter in classifying information by the categories included in the 
Department's proposals in developing burden hour estimates because of 
the subjective/qualitative nature of the information. The Department 
used almost all of the AFL-CIO information concerning the computer 
software and hardware capabilities of unions. This information added 
accuracy to the Department's own data and estimates.
    The argument that the Department's proposal shifted the cost of 
developing and implementing electronic filing to unions by making 
unions responsible, in part, for some of the software development 
ignores the fact that the Department will provide, at no cost to 
unions, the software that allows unions to file electronically with the 
Department. Reporting unions, however, may be required to make changes 
to the way that they record the information in order to prepare the 
revised Form LM-2 and submit it electronically, and the Department has 
included the costs of such changes in the estimates discussed below. 
The AFL-CIO's disagreement with the Department's burden estimate in the 
NPRM was based, in part, on its view that unions currently experience 
considerable difficulty in timely reporting annual financial 
information, and that the Department's proposals, by adding new 
requirements, are overly burdensome. In support of this position, the 
AFL-CIO included information about the unions' current record on 
timeliness. While, as discussed above, the Department has used the 
burden hour estimates provided by the AFL-CIO to reassess the 
Department's estimate of the time required for completing the current 
forms, qualitative assessments of difficulty or timely-submission data 
could not be used to develop burden hour estimates. The Department also 
did not utilize the information used by the AFL-CIO to support its 
assertion that the Department had failed to consider whether, and the 
extent to which, unions might need additional resources to comply with 
the proposal. Although this information illustrates the need to use 
external support staff or the need to hire additional in-house staff to 
address the higher burden hours associated with the revised Form LM-2, 
the information is not helpful for estimating average or total burden 
hours, but simply illustrates the choices unions have to comply with 
the current and final rule.
    The AFL-CIO's contention that the Department could have chosen less 
burdensome alternatives to achieve the same objectives is unpersuasive. 
As demonstrated by the final rule, the

[[Page 58433]]

Department has made numerous changes to its proposal that reduce the 
paperwork burden associated with the rule. Throughout the preamble, the 
Department has explained its position on adopting, or not, alternative 
proposals suggested by the commenters. The Department, in crafting the 
final rule, has sought to reduce the paperwork burden on unions, 
without compromising the Department's statutory obligation to ensure 
that union members are provided annual reports on their unions' 
finances. Both the NPRM and the final rule, in the Department's view, 
fully comply with its responsibilities under the LMRDA and the PRA. The 
final rule establishes the least burdensome approach practicable to 
provide union members and the Department with the information required 
by the LMRDA.
    The comments submitted by the Mercatus Center were largely 
supportive of the Department's proposal, including the Department's 
effort to specifically estimate the burden hours associated with the 
unions' compliance with the proposal. The organization, however, 
suggested that the burden estimates could be improved if the Department 
capitalized its estimates of costs and provided additional 
documentation of the Department's own costs associated with the rule. 
Although capitalization would be a reasonable alternative to the direct 
cost approach used in this rulemaking, the Department believes that 
averaging the costs over the first three years, as the Department has 
done here, yields approximately the same result in estimating burden. 
Moreover, in this rulemaking, there was relatively little to be 
capitalized. Only the computer equipment and software and the one-time 
labor costs could be considered for capitalization. In its analysis, 
the Department has assumed that most of the computer equipment and 
software would be purchased for normal business operations. The minimal 
additional costs associated with the final rule have been allocated in 
the first year. This same procedure was used for the one-time labor 
costs. While the procedure used by DOL does not include any 
``opportunity costs'' for capital (e.g., interest charges), DOL 
believes that its estimates, by using, in effect, a three year life 
cycle for all such costs has reasonably estimated the burden.
    Mercatus estimated that the average burden associated with the 
Department's proposal, per union, at about 180 hours. It broke down its 
estimates as follows: install new software, 4 hours; design/adjust 
report forms and format structures, 72 hours; modify existing 
accounting systems, 32 hours; incorporate electric signatures, 16 
hours, systems testing, 24 hours, and employee training, 32 hours (8 
hours x 4 employees). To compute the compensation costs associated with 
these tasks, it used $27.80 as ``fully loaded wage rate of union 
employees.''
    Mercatus also noted that the Department's analysis did not 
appropriately recognize that the Department's proposal would have an 
impact beyond the union's bookkeeping and accounting staff. Mercatus 
noted that the rule likely would affect the manner by which union staff 
document or record their activities, and that such costs, though 
minimal on a transaction basis, will have a measurable cost in the 
aggregate. The Department has considered such costs in its analysis of 
the final rule.
b. Methodology for the Burden Estimates
    In reaching its estimates, the Department considered both the one-
time and recurring costs associated with the final rule. Separate 
estimates are included for the initial year of implementation as well 
as the second and third years. For filers, the Department included 
separate estimates, based on the relative size of unions as measured by 
the amount of their annual receipts. The size of a union, as measured 
by the amount of its annual receipts, will affect the burden on 
reporting unions. For example, larger unions have more receipts and 
disbursements to itemize and more employees who have to estimate their 
time allocation.
    The primary impact of this final rule will be on the largest labor 
organizations, defined as those that have $250,000 or more in annual 
receipts. There are approximately 4,778 labor organizations of this 
size that are required to file Form LM-2 reports under the LMRDA (just 
19.0 percent of all labor organizations covered by the LMRDA). The rule 
will also reduce the burden on 501 small unions that will be able to 
file Form LM-3 instead of Form LM-2 because of raising the LM-2 
threshold to $250,000. These estimates are based on 2001 and 2002 data 
from the OLMS e.LORS system. This system contains annual receipt data 
on all Form LM-2, LM-3, and LM-4 filers. Although these estimates may 
not be predictive of the exact number of small unions that will be 
impacted by this final rule in the future, the Department believes 
these estimates to be sound and are derived from the best available 
information.
    The Department's estimates include costs for both labor and 
equipment that will be incurred by filers. The labor costs reflect the 
Department's assumption that the unions will rely upon the services of 
some or all of the following positions (either internal or external 
staff, including union president, union secretary-treasurer, 
accountant, bookkeeper, computer programmer, lawyer, consultant) and 
the compensation costs for these positions, as measured by wage rates 
and employer costs published by the Bureau of Labor Statistics or 
derived from data reported in e.LORS. The Department also made 
assumptions relating to the time that particular tasks or activities 
would take. The activities generally involve only one of the three 
distinct ``operational'' phases of the rule: first, tasks associated 
with modifying bookkeeping and accounting practices, including the 
modification or purchase of software, to capture data needed to prepare 
the required reports; and second, tasks associated with recordkeeping; 
and third, tasks associated with sending or exporting the data in an 
electronic format that can be processed by the Department's import 
software. Since the analysis is designed to provide estimates for a 
``representative'' union the Department's estimates largely reflect 
weighted averages. Where an estimate depends upon the number of unions 
subject to the LMRDA or included in one of the tier groups, the 
Department has relied upon data in the e.LORS system (for the years 
stated for each example in the text or tables).
    The following methodology and assumptions underlie the Department's 
burden estimates:
    [sbull] The size of a union, as measured by the amount of its 
annual receipts, will affect the burden on reporting unions. Larger 
unions have more receipts and disbursements to itemize and more 
employees who have to estimate their time allocation. Three tiers, 
based on annual receipts, have been constructed to differentiate the 
burdens among Form LM-2 filers.
    [sbull] A union's use of computer technology, or not, to maintain 
its financial accounts and prepare annual financial reports under the 
current rule, will affect the burden on reporting unions. Although few 
LM-2 filers do not have computers, the larger the union the greater 
likelihood that it will be using a specialized accounting program 
instead of commercial-off-the-shelf accounting software.
    [sbull] Relative burden associated with the final rule will 
correspond to the following predictable stages: review of the rule, 
instructions, and forms; adjustments to or acquisition of

[[Page 58434]]

accounting software and computer hardware; installation, testing, and 
review of the Department's reporting software; changing accounting 
structures and developing, testing, reviewing, and documenting 
accounting software queries as well as designing query reports; 
training union officers and employees involved in bookkeeping and 
accounting functions; training union officers and employees to maintain 
information relating to transactions and estimating the amount of time 
they expend in prescribed categories; the actual recordkeeping of data 
under the revised procedures associated with itemizing receipts and 
disbursements and allocating them by functional categories; aging 
accounts receivable and accounts payable; allocating time for officers 
and employees by functional categories; preparing a download 
methodology to either submit electronic reports using ``cut and paste'' 
methods or the import/export technology allowing for a more automated 
transfer of data to the Department; the development, testing, and 
review of any translator software that may be required between a 
union's accounting software and Department's reporting software; 
obtaining digital signatures for the union officers; additional review 
by the president and secretary-treasurer; and completing a continuing 
hardship exemption request if necessary.
    [sbull] Burden can be categorized as recurring or non-recurring, 
with the latter primarily associated with the initial implementation 
stages. Recordkeeping burden, as distinct from reporting burden, will 
predominate during the first months of implementation.
    [sbull] Burden can be reasonably estimated to vary over time with 
the greatest burden in the initial year, decreasing in later years as 
users gain experience. Estimates for each of the first three years and 
a three-year average will provide useful information to assess the 
burden. A weighted average provides a ``snapshot'' of the burden 
associated with the form for an individual reporting union.
    [sbull] Burden can be usefully reported as an overall total for all 
filers in terms of hours and cost. This burden, for most purposes, can 
be differentiated for each individual form. The Federal burden cannot 
be reasonably estimated by form.
    [sbull] The estimated burden associated with the current LM-forms 
is the appropriate baseline for estimating the burden and cost 
associated with the final rule.
c. Baseline Adjustments: Current Forms
    After reviewing the public comments, the Department assumes that 
5,038 local unions now take 200 hours and 141 national and 
international unions take 1,500 hours to collect and report their 
information on the current Form LM-2 for a weighted average of 
approximately 240.0 hours for each of the 5,179 respondents. In 
addition, the Department assumes that Form LM-2 filers take an average 
24.0 hours for accounting, 16.0 hours for programming, 8.0 hours for 
legal review, and 4.0 hours for consulting assistance to complete the 
current form for an average total burden of 292.0 hours per respondent 
(see Table 2). Further, the Department estimates that 160.0 hours of 
the total is for recordkeeping burden and 132.0 hours is for reporting 
burden. The difference in the number of responses in Table 2 reflects 
that fewer unions filed LM-2's and LM-3's in 2002 than in 2001 
according to OLMS e.LORS data.
    The Department also estimates that 11,356 local unions will take an 
average 104.0 hours to collect and report their information on the 
current Form LM-3. In addition, the Department assumes that all Form 
LM-3 filers will take an average 8.0 hours for accounting and 4.0 hours 
for legal review to complete the current form for an average total 
burden of 116.0 hours per respondent (see Table 2). Further, the 
Department estimates that 64.0 hours of the total is for recordkeeping 
burden and 52.0 hours is for reporting burden. These estimates and 
assumptions are based on the similarity of the Form LM-3 and Form LM-2 
recordkeeping and reporting requirements, as well as the relative 
differences in the size of the unions that complete the two forms.
    The Department has also updated the average annual cost of 
complying with the current Form LM-2 and LM-3 recordkeeping and 
reporting requirements as follows: The average total cost per 
respondent is $8,381 for the current Form LM-2 and $3,277 for Form LM-
3. These figures include estimates for consulting, accounting, legal, 
and programming costs and are weighted averages across all respondents 
and are based on total compensation rates not hourly wage rates. The 
total annual cost for all respondents is estimated to be $43.4 million 
for Form LM-2 and $37.2 million for Form LM-3 (see Table 2). It should 
be noted that although it may appear that the Department has applied 
inconsistent dollar costs per hour to the burden hour estimates, the 
dollar costs per hour naturally differ between forms because of the 
varying amounts of accountant time, bookkeeping time, and the time of 
the union secretary-treasurer and president associated with each form, 
which yield different weighted average costs per hour.

[[Page 58435]]

[GRAPHIC] [TIFF OMITTED] TR09OC03.001


[[Page 58436]]


d. New Form LM-2
    To estimate the burden hours and costs for the revised Form LM-2 
and the new Form T-1 the Department divided Form LM-2 filers into three 
groups or tiers, based on the amount of unions' annual receipts. In 
Tier 1, there are 1,574 unions with annual receipts from $250,000 to 
$499,999.99. The Department assumes that unions within this tier 
probably use some type of commercial off-the-shelf accounting software 
program and will most likely use the ``cut and paste'' feature of the 
new reporting software (see Table 3). In Tier 2, there are 3,158 unions 
with annual receipts from $500,000 to $49.9 million. The Department 
assumes that unions within this tier most likely use some type of 
commercial off-the-shelf accounting software program and will use all 
of the electronic filing features of the new reporting software. 
Finally, in Tier 3, there are the 46 unions with annual receipts of 
$50.0 million or more. The Department assumes that unions within this 
tier most likely use some type of specialized accounting software 
program and also will use all of the electronic filing features of the 
new reporting software. Table 3 summarizes the Characteristics of Form 
LM-2 filers by annual receipts.
[GRAPHIC] [TIFF OMITTED] TR09OC03.002

    For each of the three tiers, the Department estimated burden hours 
for the additional nonrecurring (first year) recordkeeping and 
reporting requirements, the additional recurring recordkeeping and 
reporting burden hours, and a three-year annual average for the 
additional nonrecurring and recurring burden hours.
    The Department estimates that LM-2 filers will spend an average of 
nearly $1,000 for computer hardware, hardware upgrades, accounting 
software, and software upgrades, and 14.6 hours to install and set up, 
or reconfigure the computer hardware and accounting software (these are 
weighted averages of $1,500 for computer hardware and $250 for 
accounting software across all LM-2 filers). Although many unions 
currently have the hardware and software that is necessary for the 
recordkeeping and reporting requirements of the final rule, data 
submitted by the AFL-CIO suggests that 21% of national and 
international unions and 33% of local unions would need to purchase and 
install new computer hardware; 11% of national and international unions 
and 40% of local unions would need new software; and 51% of national 
and international unions and 35% of local unions would need to upgrade 
their software. An additional 12.5% of local unions do not use 
computers; however, the Department assumes that 86.4% (501) of these 
unions will no longer have to file the Form LM-2 because of the higher 
reporting threshold ($250,000) for the form. For those unions without 
computers, the Department also

[[Page 58437]]

estimated that it would take an average of 14.6 (nonrecurring) hours to 
install and/or upgrade the computer hardware and software. In addition, 
for all unions the Department estimated that it would take an average 
of 8.9 (nonrecurring) hours to install, test, and review the OLMS 
reporting software.
    The Department estimates that it will take unions an average of 
76.8 (nonrecurring) hours to change their accounting structures; 
develop, test, review, and document accounting software queries; design 
query reports; and train accounting personnel. Unions that use a fiscal 
year beginning on January 1 will need to spend less than half of these 
hours (32.5) making changes before January 1, 2004, in order to be 
ready to begin the recordkeeping necessary to be able to file the 
revised Form LM-2. Unions will have until 90 days following the end of 
their fiscal year to spend the remainder of these hours (44.3) making 
changes that will be necessary to actually populate the Form LM-2, 
which will be due, at the earliest, at the end of March 2005. These 
estimates are based on the Department's review of a variety of 
accounting software packages, its evaluation of the recordkeeping 
requirements of the current Form LM-2, and its review of the public 
comments. The Department relied upon the expertise of investigators 
with first-hand knowledge of union financial reporting, including the 
use of software, to determine which four commercial off-the-shelf 
software packages were most commonly used by unions to maintain their 
finances and prepare financial reports. Using these four common off-
the-shelf software packages, Department investigators determined that 
it was possible to set up categories or accounts tailored to capture 
the information necessary to comply with the requirements of the rule. 
The software packages tested utilize a common processing format.
    Many unions with commercial-off-the-shelf accounting software will 
take less time and other, typically larger, unions with specialized 
accounting systems may take more time. Further, the public comments 
suggest that many unions already have accounting systems that maintain 
at least some, if not all, of the required information for 
disbursements and other receipts. Therefore, as discussed above, the 
Department continues to believe that unions will have adequate time to 
conform their accounting systems to the revised forms before the start 
of the first reporting period for which they will be required to report 
on the new Form LM-2 (no earlier than January 1, 2004).
    The Department estimates an average 30-minute reduction in burden 
for the changes to pages one and two and Statement B of the Form LM-2 
(for all three tiers) for reporting three fewer yes/no questions and 5 
fewer minutes for reporting three fewer receipt categories and two less 
disbursement category on Statement B. The burden reduction is less for 
Statement B because the information that is currently reported on four 
lines must be still be gathered for the revised form, but are added 
together and reported on just one line of the revised form.
    The Department estimates no reduction or increase in burden for 
Tier 1 filers associated with the eight unchanged schedules on the 
revised Form LM-2. It is assumed that Tier 1 respondents will use the 
same features in the new software that are in the existing OLMS 
software to complete these schedules. However, for Tier 2 and Tier 3 
filers the Department estimates a 50% decrease (12.5 hours or 1.6 hours 
per unchanged schedule) in reporting burden that results from moving 
from the current manual or ``cut and paste'' method on the existing 
form to an electronic data export capability for the unchanged 
schedules on the revised form.
    The Department estimated the burden associated with the three Form 
LM-2 schedules that are being revised: investments, all officers and 
disbursements to officers, and disbursements to employees. Each has a 
nonrecurring burden for respondents to adapt to the revisions (e.g., 
new schedule reporting thresholds and additional detail) of 4.7, 15.6 
and 7.8 hours, respectively. For the revised officer and employee 
schedules, the Department estimates an average of 60 minutes of 
training for each officer and employee and from 30 to 60 minutes per 
month and an additional 60 minutes per year for each officer and 
employee to estimate the amount of time spent on each of the functional 
categories on the schedule each month and then sum them for the entire 
year (as described in the preamble, the Department is only requiring 
officers and employees, as a general rule, to estimate their time to 
the nearest 10%). In calculating the average time union officers and 
employees will spend estimating their time, the Department assumed that 
the task will be more time consuming for officers and employees of 
larger unions. For example, while the Department assumed that officers 
and employees of the smallest Form LM-2 filers (Tier 1, with annual 
receipts of less than $500,000) would spend 30 minutes a month during 
the year (approximately seven minutes a week) and an hour at the end of 
the year, the Department assumed that officers of the largest Form LM-2 
files (Tier 3, with annual receipts of $50 million or more) will spend 
60 minutes a month during the year (approximately 14 minutes a week) 
and an hour at the end of the year.
    It is also assumed that Tier 1 respondents will use the same 
features in the new software that are in the existing OLMS software to 
complete the officer and employee schedules, and that it will take them 
an average of 2.0 additional hours to complete each schedule in 
addition to the average of 6.0 hours to complete the officer schedule 
and 10.0 hours to complete the existing schedules. However, for Tier 2 
and Tier 3 filers, the Department estimates an additional 6 hours to 
export and transmit data for the officer and employee schedules (3 
hours for each schedule) and a 25% decrease in reporting burden that 
results from moving from the current manual or ``cut and paste'' method 
on the existing form to an electronic data export capability on the 
revised form. No additional recordkeeping burden is estimated for the 
officer and employee disbursement schedules because the Department is 
not requiring unions to maintain detailed time records.
    For the two new schedules for accounts receivable and accounts 
payable, the Department estimates that on average unions will take 4.9 
additional hours (of nonrecurring burden) to develop, test, review, and 
document accounting software queries; design query reports; prepare a 
download methodology; and train personnel.
    The Department also estimates that on average unions will take an 
additional (recurring) 0.8 hours of recordkeeping burden to age their 
accounts receivable and accounts payable, and an additional 1.4 
(recurring) hours to prepare the new schedules. OLMS e.LORS data and 
the public comments suggest that many Form LM-2 filers with receipts of 
less than $50 million (99% of all filers) have few or no accounts 
receivable or accounts payable that meet the threshold for the relevant 
schedule and that 50% of the national and international unions already 
maintain accounts receivable and accounts payable in the format 
required by the final rule. Therefore, the Department has included a 
relatively small amount of additional recordkeeping and reporting 
burden hours associated with these schedules.
    For the new ``other receipts'' schedule, the Department estimates 
that on average unions will take 10.3

[[Page 58438]]

additional hours (of nonrecurring recordkeeping and reporting burden) 
to change accounting structures; develop, test, review, and document 
accounting software queries; design query reports; prepare a download 
methodology; and train personnel. Further, the Department also 
estimates that on average unions will take an additional (recurring) 
0.6 hours to prepare the new schedule. The additional reporting burden 
is a net estimate that includes a 50% decrease in reporting burden that 
results from moving from the current manual or ``cut and paste'' method 
for the existing schedule to an electronic data export capability on 
the revised form for the Tier 2 and Tier 3 filers. Moreover, OLMS 
e.LORS data indicates that ``other receipts'' represent only 8.8% of 
total receipts and that the average amount that would have to be 
itemized on the schedule is $309,999. Therefore, Form LM-2 filers would 
have to electronically report at most an average of just 62 other 
receipts per year (and probably far less since some receipts will be 
more than $5,000). The Department also estimates that on average unions 
will take an additional (recurring) 2.7 hours of recordkeeping burden. 
Currently, this supporting schedule requires some detail (description 
and amount) for other receipts but does not require the date or name 
and address. The public comments also suggest that 60% of the national 
and international unions already maintain written records for the 
information required by the new ``other receipts'' schedule.
    For the five new disbursement schedules (representational 
activities; union administration; general overhead; contributions, 
gifts and grants; and political activities and lobbying), the 
Department estimates that on average unions will take 10.3 additional 
hours (of nonrecurring recordkeeping and reporting burden) to change 
accounting structures; develop, test, review, and document accounting 
software queries; design query reports; prepare a download methodology; 
and train personnel. Further, the Department also estimates that on 
average unions will take an additional (recurring) 6.0 hours time to 
prepare the new schedules. This additional reporting burden is a net 
estimate that includes a 50% decrease in reporting burden that results 
from moving from the current manual or ``cut and paste'' method for the 
existing ``other disbursements,'' ``office and administrative 
expense,'' and ``contributions, gifts, and grants'' schedules to an 
electronic data export capability on the revised form for the Tier 2 
and Tier 3 filers. Moreover, OLMS e.LORS data indicates that 
disbursements on these five schedules account for just 23.2% of total 
disbursements and that the average amount that would have to be 
itemized on the schedules is $822,953, or $164,591 per schedule. 
Therefore, Form LM-2 filers would have to electronically report at most 
an average of just 33 disbursements per schedule per year (and probably 
less since some disbursements will be more than $5,000).
    The Department also estimates that on average unions will take an 
additional (recurring) 22.0 hours of recordkeeping burden to record the 
name, address, and date of disbursements. Currently, three disbursement 
supporting schedules require some detail (description and amount) but 
do not require the date or name and address. The public comments also 
suggest that many unions maintain records as part of their normal 
business practice that reflect the required detail for disbursements, 
but that 10 to 40% of unions could not provide all of the detail 
required by the Department's proposal.
    For the new membership schedule, the Department estimates that on 
average unions will take 4.9 additional hours (of nonrecurring burden) 
to develop, test, review, and document accounting software queries; 
design query reports; prepare a download methodology; and train 
personnel.
    The Department also estimates that on average unions will take an 
additional 2.1 (recurring) hours to prepare the new schedules. Since 
the final rule does not require unions to manufacture or report 
information for membership categories they do not keep, the Department 
has not estimated any additional recordkeeping burden for this 
schedule.
    For the revised Form LM-2, the Department estimates that unions 
will take an average of two hours to obtain each electronic signature 
(two signatures are needed). There is also a charge of $45 to obtain 
each electronic signature and a $5 processing fee. The Department also 
estimates that the union president and secretary-treasurer will take an 
average of 4 additional hours (two hours each) to review and sign the 
form on top of the 2.4 hours they already spend reviewing the current 
form. The additional time for the president and secretary-treasurer to 
review and sign the form declines to two hours the second year and one 
hour the third year as they become more familiar with the revised form.
    Finally, the Department estimates that 5% of Form LM-2 filers will 
submit a Continuing Hardship Exemption Request in the first year and 
that it will take 1.0 hour to prepare this request. The Department 
further estimates that 3% of Form LM-2 filers will submit a hardship 
request in the second year and that 1% will submit a request in the 
third year. The Department assumes that most, if not all, of the 
hardship exemptions that will be requested will come from the smaller 
tier 1 Form LM-2 filers. Therefore, the Department estimates that there 
will not be a reduction or increase in reporting burden hours aside 
from the additional 1.0 hour to make the request since the amount of 
time to ``cut and paste'' and print the reports is not much different 
on average than the time to ``cut and paste'' and electronically 
submit.

[[Page 58439]]

[GRAPHIC] [TIFF OMITTED] TR09OC03.003

    The Department estimates the average reporting and recordkeeping 
burden for the revised Form LM-2 to be 710.1 hours per respondent in 
the first year (including non-recurring implementation costs), 539.4 
hours per respondent in the second year, and 536.0 hours per respondent 
in the third year. The Department estimates the total

[[Page 58440]]

annual burden hours for respondents for the revised Form LM-2 to be 3.4 
million hours in the first year, 2.6 million hours in the second and 
third years.
    The Department estimates the average annual cost for the revised 
Form LM-2 to be $24,271 per respondent in the first year (including 
non-recurring implementation costs), $17,387 per respondent in the 
second year, and $17,262 per respondent in the third year. The 
Department also estimates the total annual cost to respondents for the 
revised Form LM-2 to be $116.0 million in the first year, $83.1 million 
in the second year, and $82.5 million in the third year (see Table 5). 
These amounts include the total cost of the revised Form LM-2; the cost 
of the changes implemented in this final rule, as noted above, is $79.9 
million the first year (the difference between the combined costs of 
the revised Form LM-2 plus the new Form T-1 and the cost of the current 
Form LM-2). The average three-year cost of the final rule is $55.7 
million. Moreover, as explained above, the Department believes that it 
is very unlikely that small unions with $250,000 in annual receipts 
would incur many of the costs incurred by the typical Form LM-2 filer. 
Even the AFL-CIO, in commenting on the more burdensome proposed Form 
LM-2 estimated that unions with annual receipts of less than $500,000 
would incur an average cost of just $3,750 for the proposed changes.

[[Page 58441]]

[GRAPHIC] [TIFF OMITTED] TR09OC03.004


[[Page 58442]]


e. Form LM-3
    The Department also estimates that 11,356 local unions take an 
average 104.0 hours to collect and report their information on the 
current Form LM-3. In addition, the Department assumes that all Form 
LM-3 filers will take an average 8.0 hours for accounting and 4.0 hours 
for legal review to complete the current form for an average total 
burden of 116.0 hours per respondent (see Table 2). Further, the 
Department estimates that 64.0 hours of the total is for recordkeeping 
burden and 52.0 hours is for reporting burden. These estimates and 
assumptions are based on the similarity of the Form LM-3 and Form LM-2 
recordkeeping and reporting requirements, the fewer number of schedules 
that need to be reported on the Form LM-3, as well as the relative 
differences in the size of the unions that complete the two forms.
    The Department has also updated the average annual cost of 
complying with the current Form LM-3 recordkeeping and reporting 
requirements to $3,277. Again, this figure includes estimates for 
consulting, accounting, legal, and programming costs and is a weighted 
average across all respondents. The dollar cost estimate is also based 
on total compensation costs and not hourly wage rates. The total annual 
cost for all respondents is estimated to be $39.0 million for Form LM-3 
(see Table 6). It should be noted that although it may appear that the 
Department has applied inconsistent dollar costs per hour to the burden 
hour estimates, the dollar costs per hour naturally differ between 
forms because of the varying amounts of accountant time, bookkeeping 
time, and the time of the union secretary-treasurer and president 
associated with each form, that yield different weighted average costs 
per hour.

[[Page 58443]]

[GRAPHIC] [TIFF OMITTED] TR09OC03.005

    It should also be noted that by increasing the filing threshold for 
Form LM-2, 501 small unions who currently file Form LM-2 would only 
have to file the less burdensome Form LM-3. Each of these unions will 
save an average of 176 hours per year (116 hours for Form LM-3 compared 
to the 292 hours that they are expending to file the current

[[Page 58444]]

Form LM-2) and altogether save 88,176 hours. In monetary savings, the 
increased threshold amounts to an average savings of $5,104 per year, 
or a total $2.6 million per year. These savings accrue because unions 
with annual receipts above $200,000 but less than $250,000 will be able 
to file the less burdensome and less costly Form LM-3. Additionally, 
these unions will not be required to file Form T-1 if they have a trust 
nor will they incur the increased costs related to the revised Form LM-
2.
f. New Form T-1
    To estimate the burden hours and costs for the new Form T-1 three 
important assumptions were made to estimate the number of responses. 
First, it was assumed that 15% of the 1,574 tier 1 LM-2 filers with 
annual revenues of from $250,000 to $499,999.99 would file one Form T-
1. Second, it was assumed that 35% of the 3,158 tier 2 Form LM-2 filers 
with annual revenues of from $500,000 to $49.9 million would file an 
average of 2.6 Form T-1s. Third, it was assumed that 100% of the 46 
tier 3 Form LM-2 filers with annual revenues of $50 million or more 
would file an average of five T-1 reports each. Although 939 Form LM-2 
filers report having a subsidiary, it is difficult to estimate how many 
more entities fall within the broader definition of trusts or funds to 
be reported under the final rule.
    For each of the three tiers, the Department estimated burden hours 
for the additional nonrecurring (first year) recordkeeping and 
reporting requirements, the recurring recordkeeping and reporting 
burden hours, and a three year annual average for the nonrecurring and 
recurring burden hours similar to the way it estimated the burden hours 
for Form LM-2 filers (see previous discussion).
    The Department estimates the burden required for preparing to 
complete the Form T-1 for all three tiers to be 2.4 non-recurring hours 
to provide the new Form T-1 requirements to the trust, 4.3 hours for 
reviewing the new form and instructions, and 8.0 non-recurring (first 
year) hours for installing, testing, and reviewing the OLMS provided 
software. The time to read and review the form and instructions is 
estimated to decline to 2.0 hours the second year and 1.0 hour the 
third year as unions and trusts become more familiar with the revised 
form. (see Table 7)
    The Department estimates the average reporting burden required to 
complete pages one and two of the Form T-1 for each of the three tiers 
to be 6.1 hours and the average recordkeeping burden associated with 
the items on pages one and two to be 1.6 hours. These estimates are 
proportionally based on the recordkeeping and reporting burden estimate 
for the first two pages of the current Form LM-4, which are very 
similar to the first two pages of the new Form T-1. The first two pages 
of Form LM-4 have 21 items (8 questions that identify the union, four 
yes/no questions, seven summary numbers for: Maximum amount of bonding, 
number of members, total assets, liabilities, receipts, and 
disbursements, total disbursements to officers, and a space for 
additional information). The first two pages of Form T-1 have 25 items 
(14 questions that identify the union and trust, six yes/no questions, 
just four summary numbers for total assets, liabilities, receipts, and 
disbursements, and a space for additional information). For comparison, 
the first part of Form LM-3 (before the schedules) has 56 items with 
two statements on assets, liabilities, receipts, and disbursements.
    For the new receipt and disbursement schedules the Department 
estimates that on average T-1 respondents will take 9.8 hours (of 
nonrecurring burden) to develop, test, review, and document accounting 
software queries; design query reports; prepare a download methodology; 
and train personnel for each of the schedules. Further, the Department 
also estimates that on average Form T-1 respondents will take 1.2 
(recurring) hours to prepare, transmit/report, and report the new 
receipts schedule and 1.4 hours to report the new disbursements 
schedule. The Department also estimates that on average Form T-1 
respondents will take 8.3 hours (recurring) of recordkeeping burden for 
each schedule to maintain the additional information required by the 
final rule.
    For the new Form T-1 disbursements to officers and employees of the 
trust schedule the Department estimates that it will take respondents 
an average 2.8 hours (of nonrecurring burden) to develop, test, review, 
and document accounting software queries; design query reports; prepare 
a download methodology; and train personnel. Further, the Department 
estimates it will take on average 0.8 hours to prepare, export and 
transmit or report the new schedule. No additional recordkeeping burden 
is estimated for the officer and employee disbursement schedule because 
the Department is not requiring trusts to maintain detailed time 
records over what is kept as normal business practice.
    The Department also estimates that it will take 2.0 hours for the 
Trust to review the Form T-1 and 1.0 hours for this information to be 
sent to Form LM-2 filer. In addition, the Department estimates that the 
union president and secretary-treasurer will take 4.0 hours to review 
and sign the form. The time for the president and secretary-treasurer 
to review and sign the form declines to 2.0 hours the second year and 
1.0 hour the third year as they become more familiar with the revised 
form.

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    The Department estimates the average reporting and recordkeeping 
burden for the new Form T-1 to be 71.7 hours per respondent in the 
first year (including non-recurring implementation costs), 33.9 hours 
per respondent in the second year, and 30.4 hours per respondent in the 
third year (see Table 8). The Department estimates the total annual 
burden hours for respondents for the new Form T-1 to be 199,000 hours 
in the first year, 94,000 hours in the second year, and 84,000 hours in 
the third year. The Department estimates the average annual cost for 
the new Form T-1 to be $1,986 per respondent in the first year 
(including non-recurring implementation costs), $934 per respondent in 
the second year, and $838 per respondent in the third year.
    The Department also estimates the total annual cost to respondents 
for the new Form T-1 to be $5.5 million in the first year, $2.6 million 
in the second year, and $2.3 million in the third year.
    The cost estimates are based on wage-rate data obtained from the 
Department's Bureau of Labor Statistics (BLS) for personnel employed in 
service industries (i.e., accountant, bookkeeper, etc.) and adjusted to 
be total compensation estimates based on the BLS Employer Cost data. 
The estimates used for salaries of labor organization officers and 
employees are obtained from the annual financial reports filed with 
OLMS and are also adjusted to be total compensation estimates.

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h. Federal Costs Associated With Final Rule
    The annualized federal cost associated with revised Form LM-2 and 
the new Form T-1 is estimated to be $7.9 million. This includes 
operational expenses such as equipment, overhead, and printing as well 
as salaries and benefits for the OLMS staff in the National Office and 
field offices that are involved with reporting and disclosure 
activities. The estimate also includes the annualized cost for 
redesigning the forms, developing and implementing the electronic 
software, and implementing digital signature capability.

G. Executive Order 13045 (Protection of Children From Environmental 
Health Risks and Safety Risks)

    In accordance with Executive Order 13045, the Department has 
evaluated the environmental safety and health effects of the final rule 
on children. The Department has determined that the final rule will 
have no effect on children.

H. Executive Order 13175 (Consultation and Coordination With Indian 
Tribal Governments)

    The Department has reviewed this final rule in accordance with 
Executive Order 13175, and has determined that it does not have 
``tribal implications.'' The final rule does not ``have substantial 
direct effects on one or more Indian tribes, on the relationship 
between the Federal government and Indian tribes, or on the 
distribution of power and responsibilities between the Federal 
government and Indian tribes.''

I. Executive Order 12630 (Governmental Actions and Interference With 
Constitutionally Protected Property Rights)

    This final rule is not subject to Executive Order 12630, 
Governmental Actions and Interference with Constitutionally Protected 
Property Rights, because it does not involve implementation of a policy 
with takings implications.

J. Executive Order 12988 (Civil Justice Reform)

    This final rule has been drafted and reviewed in accordance with 
Executive Order 12988, Civil Justice Reform, and will not unduly burden 
the Federal court system. The final rule has been written so as to 
minimize litigation and provide a clear legal standard for affected 
conduct, and has been reviewed carefully to eliminate drafting errors 
and ambiguities.

K. Environmental Impact Assessment

    The Department has reviewed the final rule in accordance with the 
requirements of the National Environmental Policy Act (NEPA) of 1969 
(42 U.S.C. 4321 et seq.), the regulations of the Council on 
Environmental Quality (40 U.S.C. part 1500), and the Department's NEPA 
procedures (29 CFR part 11). The final rule will not have a significant 
impact on the quality of the human environment, and, thus, the 
Department has not conducted an environmental assessment or an 
environmental impact statement.

L. Executive Order 13211 (Actions Concerning Regulations That 
Significantly Affect Energy Supply, Distribution, or Use)

    This final rule is not subject to Executive Order 13211, because it 
will not have a significant adverse effect on the supply, distribution, 
or use of energy.

List of Subjects in 29 CFR Parts 403 and 408

    Labor unions, Reporting and recordkeeping requirements.

Text of Final Rule

0
In consideration of the foregoing, the Department of Labor, Office of 
Labor-Management Standards, hereby amends parts 403 and 408 of title 29 
of the Code of Federal Regulations 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: Secs. 202, 207, 208, 73 Stat. 525, 529 (29 U.S.C. 
432, 437, 438); Secretary's Order No. 4-2001, 66 FR 29656, May 31, 
2001.


Sec.  403.2  [Amended]

0
2. Section 403.2 is amended by:
    a. Removing the words ``together with a true copy thereof'' at the 
end of paragraph (a) and removing the comma preceding those words.
0
b. Adding paragraph (d) to read as follows:


Sec.  403.2  Annual financial report.

* * * * *
    (d) Every labor organization with annual receipts of $250,000 or 
more shall, except as otherwise provided, file a report on Form T-1 for 
every trust in which the labor organization is interested, as defined 
in section 3(l) of the Act, 29 U.S.C. 402(l), that has gross annual 
receipts of $250,000 or more, and to which $10,000 or more was 
contributed during the reporting period by the labor organization or on 
the labor organization's behalf or as a result of a negotiated 
agreement to which the labor organization is a party. 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. No Form T-1 need be 
filed for a trust if an annual financial report providing the same 
information and a similar level of detail is filed with another agency 
pursuant to federal or state law, as specified in the instructions 
accompanying Form T-1. In addition, an audit that meets the criteria 
specified in the Instructions for Form T-1 may be substituted for all 
but page 1 of the Form T-1. If, on the date for filing the annual 
financial report of such trust, such labor organization is in 
trusteeship, 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. Section 403.5 is amended by:
0
a. In paragraph (a), removing the words ``and one copy'' and removing 
the commas preceding and following those words.
0
b. In paragraph (b), removing the words `` and one copy'' and removing 
the commas preceding and following those words.
0
c. Adding a new paragraph (d) to read as follows:


Sec.  403.5  Terminal financial report.

* * * * *
    (d) If a trust in which a labor organization with $250,000 or more 
in annual receipts is interested loses its identity 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. Section 403.8 is amended to:
0
a. Designate the existing text as paragraph (a).
0
b. Add new paragraphs (b) and (c) to read as follows:

[[Page 58448]]

Sec.  403.8  Dissemination and verification of reports.

* * * * *
    (b)(1) If a labor organization is required to file a report under 
this part using the Form LM-2 and indicates that it has failed or 
refused to disclose information required by the Form concerning any 
disbursement, or receipt not otherwise reported on Statement B, to an 
individual or entity in the amount of $5,000 or more, or any two or 
more disbursements, or receipts not otherwise reported on Statement B, 
to an individual or entity that, in the aggregate, amount to $5,000 or 
more, because disclosure of such information may be adverse to the 
organization's legitimate interests, then the failure or refusal to 
disclose the information shall be deemed ``just cause'' for purposes of 
paragraph (a) of this section.
    (2) Disclosure may be adverse to a labor organization's legitimate 
interests under this paragraph if disclosure would reveal confidential 
information concerning the organization's organizing or negotiating 
strategy or individuals paid by the labor organization to work in a 
non-union facility in order to assist the labor organization in 
organizing employees, provided that such individuals are not employees 
of the labor organization who receive more than $10,000 in the 
aggregate in the reporting year from the union.
    (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.
    (c) In all other cases, a union member has the burden of 
establishing ``just cause'' for purposes of paragraph (a) of this 
section.

PART 408--LABOR ORGANIZATION TRUSTEESHIP REPORTS

0
5. The authority citation for part 408 is revised to read as follows:

    Authority: Secs. 202, 207, 208, 73 Stat. 525, 529 (29 U.S.C. 
432, 437, 438); Secretary's Order No. 4-2001, 66 FR 29656, May 31, 
2001.


Sec.  408.5  [Amended]

0
6. Section 408.5 is amended by:
0
a. Adding the words ``and any Form T-1 reports'' after the words ``on 
behalf of the subordinate labor organization the annual financial 
report'' and before the words ``required by part 403 of this chapter''.

0
b. Removing the words ``together with a true copy thereof'' at the end 
of the section and removing the comma preceding those words.

    Signed in Washington, DC this 2 day of October, 2003.
Victoria A. Lipnic,
Assistant Secretary for Employment Standards.

Appendix

    Note: This appendix, which will not appear in the Code of 
Federal Regulations, contains the revised Form LM-2 and the new Form 
T-1 and the instructions for these forms.


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[FR Doc. 03-25487 Filed 10-8-03; 8:45 am]
BILLING CODE 4510-CP-C