[Federal Register Volume 85, Number 27 (Monday, February 10, 2020)]
[Proposed Rules]
[Pages 7518-7520]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2020-02511]


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LEGAL SERVICES CORPORATION

45 CFR Parts 1610 and 1630


Use of Non-LSC Funds, Transfers of LSC Funds, Program Integrity; 
Cost Standards and Procedures

AGENCY: Legal Services Corporation.

ACTION: Further notice of proposed rulemaking.

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SUMMARY: This further notice of proposed rulemaking provides public 
notice for comment about one substantive change to the Legal Services 
Corporation's (LSC or Corporation) regulation regarding cost standards 
at 45 CFR part 1630 that would permit LSC to question and disallow 
costs in addition to other, already available remedial measures when a 
recipient uses non-LSC funds in violation of the LSC restrictions that 
apply to non-LSC funds. This notice is in addition to the notice of 
proposed rulemaking for 45 CFR part 1610 and 1630 published on August 
12, 2019.

DATES: Comments must be received by March 26, 2020.

ADDRESSES: You may submit comments by any of the following methods:
     Federal Rulemaking Portal: Follow the instructions for 
submitting comments.
     Email: [email protected]. Include ``Part 1630 
Rulemaking'' in the subject line of the message.
     Fax: (202) 337-6519.
     Mail: Mark Freedman, Senior Associate General Counsel, 
Legal Services Corporation, 3333 K Street NW, Washington, DC 20007, 
ATTN: Part 1630 Rulemaking.
     Hand Delivery/Courier: Mark Freedman, Senior Associate 
General Counsel, Legal Services Corporation, 3333 K Street NW, 
Washington, DC 20007, ATTN: Part 1630 Rulemaking.
    Instructions: LSC prefers electronic submissions via email with 
attachments in Acrobat PDF format. LSC will not consider written 
comments sent to any other address or received after the end of the 
comment period.

FOR FURTHER INFORMATION CONTACT: Mark Freedman, Senior Associate 
General Counsel, Legal Services Corporation, 3333 K Street NW, 
Washington, DC 20007; (202) 295-1623 (phone), (202) 337-6519 (fax), or 
[email protected].

SUPPLEMENTARY INFORMATION:

I. Introduction

    On August 12, 2019, the Legal Services Corporation (LSC or 
Corporation) published a Notice of Proposed Rulemaking (NPRM or 
Proposed Rule) at 84 FR 39787 proposing changes to 45 CFR part 1610--
Use of Non-LSC Funds and to a related provision of 45 CFR part 1630--
Cost Standards and Procedures. LSC stated that the Proposed Rule did 
not contain any substantive changes to either rule. Rather, LSC 
proposed updates to part 1610 to improve clarity and updates to Sec.  
1630.16 to better reference the substantive terms of part 1610. LSC 
received two comments during the 60-day comment period and one late 
comment. Generally, the comments supported the proposed rule. LSC will 
respond to the comments in the Final Rule. These notices and the 
comments are published on LSC's website at <www.lsc.gov/rulemaking>.
    Some of the comments stated that the proposed rule would make one 
substantive change in Sec.  1630.16. LSC agrees. LSC is publishing this 
Further Notice of Proposed Rulemaking to provide clear notice of that 
change and an opportunity for public comment. The proposed language for 
Sec.  1630.16 has not changed from the NPRM.
    Additionally, on January 10, 2020, the National Association of 
IOLTA Programs wrote to LSC noting the same substantive change in Sec.  
1630.16 and requesting that LSC repost the proposed substantive changes 
for comments.

II. General Background

A. LSC Restrictions on Non-LSC Funds

    The Legal Services Corporation Act (LSC Act or Act), 42 U.S.C. 
2996-2996l, and, since 1996, LSC's annual appropriation, impose 
restrictions and requirements on the use of LSC and non-LSC funds by 
recipients of grants from LSC for the delivery of civil legal aid. See, 
e.g., Public Law 116-93 (2019) (appropriating funds to LSC subject to 
restrictions set out in prior appropriations). LSC implemented the 
application of those restrictions and requirements to recipients' use 
of non-

[[Page 7519]]

LSC funds through part 1610 of title 45 of the Code of Federal 
Regulations.
    The current rule describes two categories of restrictions on the 
use of non-LSC funds: (1) Restrictions established in the LSC Act (LSC 
Act Restrictions) and (2) restrictions established in LSC's annual 
appropriation (Appropriations Restrictions). The rule then discusses 
how those restrictions apply to three different categories of non-LSC 
funds used by recipients: (a) Private funds (such as individual 
donations), (b) public funds (such as government grants), and (c) 
tribal funds (such as grants from Native American tribes).
    All uses of private funds by recipients are subject to both the LSC 
Act Restrictions and the Appropriations Restrictions. Additionally, all 
uses of public funds by recipients are subject to the Appropriations 
Restrictions.
    By contrast, the LSC Act Restrictions do not apply to the use of 
public funds so long as the recipient uses those funds consistent with 
``the purposes for which they are provided'' by the other funding 
source (authorized use). 42 U.S.C. 2996i(c). If, instead, the recipient 
uses public funds contrary to the purposes for which they were provided 
(unauthorized use), then those uses of public funds are subject to the 
LSC Act Restrictions. For example, the State of Michigan provides 
public funds to many LSC recipients for ``indigent civil legal 
assistance.'' MCL Sec.  600.151a. The LSC Act does not apply its 
restrictions to those public funds so long as they are used for 
purposes authorized by the State of Michigan and consistent with the 
terms of the grant awarding them. Michigan law prohibits using those 
funds ``to provide legal services in relation to any criminal case or 
proceeding . . . .'' MCL Sec.  600.1485(10). Thus, any use of those 
Michigan public funds by an LSC recipient for a criminal case would 
violate the purposes for which they were provided and therefore subject 
those unauthorized uses of the funds to the LSC Act restrictions.
    Lastly, both the LSC Act Restrictions and the Appropriations 
Restrictions do not normally apply to authorized uses of tribal funds. 
42 U.S.C. 2996i(c) and Public Law 104-134, 504(d)(2)(A) (1996) (as 
incorporated by reference in LSC's current appropriation).

B. Disallowed Costs for Restricted Uses of Non-LSC Funds

    When a recipient violates an LSC restriction, LSC has a range of 
available remedial options to both correct the violation and prevent 
future recurrences of that violation. Generally, LSC works closely with 
the recipient on identifying the problem, including misunderstandings 
or recordkeeping and documentation defects, and developing workable 
long-term solutions. LSC may also prevent the recipient from charging 
to the LSC grant any expenses associated with the violation through 
questioned and disallowed costs. 45 CFR part 1630 (rules and procedures 
for questioning and disallowing costs). Ordinarily, that combination of 
solutions and disallowed costs is sufficient. Nonetheless, in cases 
involving persistent or intentional violations, or a failure to take 
remedial actions, LSC may also suspend funding, impose sanctions, or 
terminate a grant. 45 CFR 1618.5 (referencing suspensions in part 1623 
and sanctions or terminations in part 1606).
    The LSC cost standards rule appears at 45 CFR part 1630 and sets 
rules for when ``[e]xpenditures are allowable under an LSC grant . . . 
.'' 45 CFR 1630.5(a). If a recipient engages in an LSC-restricted 
activity with LSC funds, then LSC can question and disallow those costs 
as not ``in compliance with the Act, applicable appropriations law, LSC 
rules, regulations, guidelines, and instructions, the Accounting Guide 
for LSC Recipients, the terms and conditions of the grant or contract, 
and other applicable law . . . .'' Id. at Sec.  1630.5(a)(4). LSC must 
provide the recipient with a written notice of the questioned costs, 
identifying both ``the amount of the cost and the factual and legal 
basis for disallowing it.'' Id. at Sec.  1630.11(b). The recipient has 
an opportunity to respond with evidence and arguments ``to show that 
the cost was allowable, or [with] equitable, practical, or other 
reasons'' why LSC should allow the cost. Id. at Sec.  1630.11(d). If 
LSC proceeds to disallow a cost over $2,500, the recipient can appeal 
the decision to the LSC President who may adopt, modify, or reverse the 
decision. Id. at Sec.  1630.12.
    Part 1630 generally focuses on the costs charged to LSC funds 
provided in an LSC grant, including standards for allowability of such 
costs and a process for LSC to question impermissible costs incurred by 
a grantee. By contrast, Sec.  1630.16(c) provides a mechanism to 
respond to the use of non-LSC funds in violation of the LSC 
restrictions by authorizing LSC to ``recover from a recipient's LSC 
funds an amount not to exceed the amount improperly charged to non-LSC 
funds.'' Part 1630 has contained a version of this provision since 
1986, when LSC first adopted the rule. 51 FR 29076 (Sec.  1630.12 in 
the first rule), 62 FR 68219 (Sec.  1630.11 in the revised rule with 
updates), 82 FR 37327 (Sec.  1630.16 in the revised rule without 
changes).
    As discussed above, part 1610 provides the rules for determining 
when the LSC restrictions prohibit a recipient from engaging in 
restricted activities using certain categories of non-LSC funds. 
Generally, when part 1610 and Sec.  1630.16(c) are read together, they 
provide the authority for LSC to invoke Sec.  1630.16(c) any time a 
recipient uses non-LSC funds in violation of the LSC restrictions. 
Regardless of disallowing costs, LSC has authority to address any 
violation of the restrictions or part 1610 with non-LSC funds through 
all other remedial options, including suspensions, sanctions, or 
terminations pursuant to parts 1606, 1618, and 1623.
    Section 1630.16 creates a conflict with part 1610 by providing an 
incomplete summary of the statutory restrictions on non-LSC funds. 
Section 1630.16(a) summarizes the application of the LSC Act 
Restrictions to public and tribal funds, but it omits the LSC Act 
Restrictions on unauthorized uses of public funds. The history of part 
1630 provides no explanation for this omission. By contrast, the Sec.  
1630.16(b) summary of the Appropriations Restrictions does not omit any 
categories of non-LSC funds and includes public, private, and tribal 
funds. The Proposed Rule would eliminate this unexplained gap.
    The National Legal Aid and Defender Association stated in its 
comment on the Proposed Rule that the current omission in Sec.  
1630.16(a) means that the authority to question and disallow costs in 
Sec.  1630.16(c) does not apply when a recipient uses non-LSC public 
funds for an activity prohibited by an LSC Act restriction and contrary 
to the authorized purposes set by the public funder providing those 
funds. Thus, in that situation, the recipient will have violated the 
LSC Act and Sec.  1610 with non-LSC public funds, but LSC cannot 
question or disallow an equivalent amount of LSC funds under Sec.  
1630.16(c). By contrast, Sec.  1630.16(c) provides LSC with that 
authority for all other uses of public funds, or of other non-LSC 
funds, in violation of the restrictions on non-LSC funds set out in the 
LSC Act, Appropriations Restrictions, and part 1610.

C. Proposed Revisions to Sec.  1630.16

    The revision to Sec.  1630.16 in the Proposed Rule eliminates this 
problem by referring directly to part 1610 to define the scope of the 
restriction on the use of non-LSC funds. This approach is consistent 
with the relationship between part 1630 and the other LSC restrictions. 
Part 1630 provides the rules

[[Page 7520]]

and procedures for questioning and disallowing costs charged to LSC 
funds based on violations of substantive restrictions appearing in the 
LSC statutes, regulations, and other requirements. Furthermore, the 
proposed approach ensures that LSC has one standard, set out in Part 
1610, for determining whether a recipient has used non-LSC funds in 
violation of the restrictions.
    In this rulemaking, the commenters asked LSC to retain the omission 
so that Sec.  1630.16 would not permit LSC to disallow costs for the 
unauthorized use of public, non-LSC funds in violation of the LSC Act 
Restrictions. They provided no rationale, however, as to why such an 
exception should exist for public funds but not for private or tribal 
funds. They also did not address why such an exception should exist 
when public funds are used in violation of the LSC Act Restrictions but 
not when public funds are used in violation of the Appropriations 
Restrictions.

III. Elimination of the Conflict Between Parts 1610 and 1630

    LSC proposes to harmonize parts 1610 and 1630 with new text in 
Sec.  1630.16(a) that will replace the existing Sec.  1630.16(a) and 
(b) and that will reference the substantive rules on non-LSC funds set 
out in part 1610. Doing so will eliminate the conflict between the 
rules. It will also incorporate into Sec.  1630.16 the more detailed 
information about the application of these restrictions to non-LSC 
funds set out in the proposed part 1610. These revisions capture the 
statutory requirements more accurately than the current text of either 
Sec.  1630.16 or part 1610.
    The Proposed Rule would provide at Sec.  1630.16(a) that:
    No cost may be charged to non-LSC funds in violation of Sec. Sec.  
1610.3 or 1610.4 of this chapter.
    The referenced sections of part 1610 are as set out in the Proposed 
Rule at 84 FR 39787. That proposed text would replace the existing text 
at Sec.  1630.16(a) and (b) that provides (emphasis added):
    (a) No costs attributable to a purpose prohibited by the LSC Act, 
as defined by 45 CFR 1610.2(a), may be charged to private funds, except 
for tribal funds used for the specific purposes for which they were 
provided.
    (b) No cost attributable to an activity prohibited by or 
inconsistent with Public Law 103-134, title V, sec. 504, as defined by 
45 CFR 1610.2(b), may be charged to non-LSC funds, except for tribal 
funds used for the specific purposes for which they were provided.
    Part 1600 defines ``non-LSC funds'' as ``any funds that are not 
Corporation funds or LSC funds,'' which includes private funds, public 
funds, and tribal funds. Part 1610 defines ``private funds,'' ``public 
funds,'' and ``tribal funds.''

IV. Request for Comments

    LSC requests public comments on this proposal. Comments that 
propose keeping the gap between part 1610 and Sec.  1630.16 must:
    1. Identify a valid purpose for the gap consistent with the 
statutory restrictions;
    2. Explain why, for the LSC Act Restrictions, Sec.  1630.16 should 
not apply to unauthorized uses of public funds that violate the LSC Act 
while continuing to apply to unauthorized uses of tribal funds that 
violate the LSC Act;
    3. Explain why Sec.  1630.16 should not apply to unauthorized uses 
of public funds that violate the LSC Act while continuing to apply to 
any uses of public funds that violate the restrictions in the LSC 
appropriation.
    Comments that otherwise oppose the proposed cross reference to part 
1610 in Sec.  1630.16(a) must provide a justification for any 
distinction between the rules for the use on non-LSC funds in part 1610 
and in Sec.  1630.16, including justifying the distinction consistent 
with the statutory restrictions and justifying any distinctions in 
Sec.  1630.16 among the different types of restrictions on non-LSC 
funds set out in part 1610.

List of Subjects in 45 CFR Part 1630

    Accounting, Government contracts, Grant programs--law, Hearing and 
appeal procedures, Legal services, Questioned costs.

    For the reasons set forth in the preamble, the Legal Services 
Corporation proposes to amend 45 CFR chapter XVI as follows:

PART 1630--COST STANDARDS AND PROCEDURES

0
1. The authority citation for part 1630 continues to read as follows:

    Authority: 42 U.S.C. 2996g(e).

0
2. Revise Sec.  1630.16 to read as follows:


Sec.  1630.16  Applicability to non-LSC funds.

    (a) No cost may be charged to non-LSC funds in violation of 
Sec. Sec.  1610.3 or 1610.4 of this chapter.
    (b) LSC may recover from a recipient's LSC funds an amount not to 
exceed the amount improperly charged to non-LSC funds. The review and 
appeal procedures of Sec. Sec.  1630.11 and 1630.12 govern any decision 
by LSC to recover funds under this paragraph.

    Dated: February 4, 2020.
Mark Freedman,
Senior Associate General Counsel.
[FR Doc. 2020-02511 Filed 2-7-20; 8:45 am]
BILLING CODE 7050-01-P