ESA Final Rule

Labor Organization Annual Financial Reports; Final Rule [Rules and Regulations] [10/09/2003]

Volume 68, Number 196

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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


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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., olms-public@dol.gov, (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,

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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 http://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

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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