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ESA Final Rules

Labor Organization Annual Financial Reports   [10/13/2009]
[PDF]
FR Doc E9-24571
[Federal Register: October 13, 2009 (Volume 74, Number 196)]
[Rules and Regulations]               
[Page 52401-52413]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr13oc09-8]                         

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DEPARTMENT OF LABOR

Office of Labor-Management Standards

29 CFR Parts 403 and 408

RIN 1215-AB62

 
Labor Organization Annual Financial Reports

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

ACTION: Final Rule; Rescission of January 21, 2009 rule.

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SUMMARY: This final rule withdraws a rule published in the Federal 
Register on January 21, 2009, which revised the Form LM-2, an annual 
financial report required by the Labor-Management Reporting and 
Disclosure Act of 1959, as amended (LMRDA), and established standards 
and procedures by which the Department can revoke, when

[[Page 52402]]

warranted, the authorization for smaller labor organizations to file 
the Form LM-3, a less detailed annual financial report also required 
pursuant to the LMRDA. Upon consideration of the comments received 
following an April 21, 2009 notice of proposed rulemaking (NPRM), the 
Department withdraws the January 21 rule. The rule is withdrawn because 
the revisions it made to the Form LM-2 were issued without an adequate 
review of the Department's experience under the relatively recent 
revisions to Form LM-2 in 2003, and because the comments received 
indicate that the Department may have underestimated the increased 
burden that the rule would place on reporting labor organizations. 
Additionally, upon consideration of the comments received, the 
Department withdraws the provisions of the rule pertaining to the 
revocation of a small union's authorization to file a Form LM-3 report 
due to delinquency or deficiency in filing such report, because the 
revocation standards and procedures are not based upon realistic 
assessments of such a union's ability to file the more complex Form LM-
2 and thus are unlikely to achieve the intended goals of greater 
transparency and disclosure. Moreover, the revocation provisions did 
not adequately balance the need for transparency with the burden placed 
upon smaller labor organizations.

DATES: Effective October 13, 2009, the Final Rule published January 21, 
2009 amending 29 CFR parts 403 and 408 (74 FR 3678), for which the 
effective date was delayed on February 20, 2009 (74 FR 7814) and April 
21, 2009 (74 FR 18132), is withdrawn.

FOR FURTHER INFORMATION CONTACT: Denise M. Boucher, Director, Office of 
Policy, Reports and Disclosure, Office of Labor-Management Standards, 
Employment Standards Administration, U.S. Department of Labor, 200 
Constitution Avenue, NW., Room N-5609, Washington, DC 20210, (202) 693-
1185 (this is not a toll-free number), (800) 877-8339 (TTY/TDD).

SUPPLEMENTARY INFORMATION:

I. Statutory Authority

    This rescission of the January 21, 2009 rule (January 21 rule) is 
issued pursuant to section 208 of the LMRDA, 29 U.S.C. 438. Section 208 
authorizes the Secretary of Labor to issue, amend, and rescind rules 
and regulations to implement the LMRDA's reporting provisions. Section 
208 also provides that the Secretary shall ``establish simplified 
reports for labor organizations or employers for whom [s]he finds that 
by virtue of their size a detailed report would be unduly burdensome,'' 
and to revoke this authorization to file simplified reports for any 
labor organization or employer if the Secretary determines, after such 
investigation as she deems proper and due notice and opportunity for a 
hearing, that the purposes of section 208 would be served by 
revocation. Secretary's Order 01-2008, issued May 30, 2008, and 
published in the Federal Register on June 6, 2008 (73 FR 32424), 
contains the delegation of authority and assignment of responsibility 
for the Secretary's functions under the LMRDA to the Assistant 
Secretary for Employment Standards and permits re-delegation of such 
authority.

II. Background

A. Introduction

    The rescission of the January 21 rule is part of the Department's 
continuing effort to fairly effectuate the reporting requirements of 
the LMRDA. The LMRDA's various reporting provisions are designed to 
empower labor organizations and their members by providing the means 
and information to ensure a proper accounting of labor organization 
funds. The Department believes that a fair and transparent government 
regulatory regime must consider and balance the interests of labor 
organizations, their members, and the public. Any change to a union's 
recordkeeping, accounting, and reporting practices must be based on a 
demonstrated and significant need for additional information, 
consideration of the burden associated with such reporting and any 
increased costs associated with reporting additional information.
    On January 21, 2009, OLMS published in the Federal Register (74 FR 
3678) a rule revising the Form LM-2 (used by the largest labor 
organizations to file their annual financial reports). The rule would 
require labor unions to report additional information on Schedules 3 
(Sale of Investments and Fixed Assets), 4 (Purchase of Investments and 
Fixed Assets), 11 (All Officers and Disbursements to Officers), and 12 
(Disbursement to Employees). The rule also would add itemization 
schedules corresponding to categories of receipts, and establish a 
procedure and standards by which the Secretary of Labor may revoke a 
particular labor organization's authorization to file the simplified 
annual report, Form LM-3, where appropriate, after investigation, due 
notice, and opportunity for a hearing. The rule was scheduled to take 
effect on February 20, 2009, and apply to labor unions whose fiscal 
years began on or after July 1, 2009.
    Consistent with the memorandum of January 20, 2009, from the 
Assistant to the President and Chief of Staff, entitled ``Regulatory 
Review'' and the memorandum of January 21, 2009, from the Director of 
the Office of Management and Budget (OMB), entitled ``Implementation of 
Memorandum Concerning Regulatory Review,'' on February 3, 2009, the 
Department's Office of Labor-Management Standards (OLMS) published a 
request for comments (74 FR 5899) on a proposed 60-day extension of the 
effective date of the January 21 rule and invited comment on legal and 
policy questions relating to the rule, including the merits of 
rescinding or retaining the rule.
    On February 20, 2009 (74 FR 7814), OLMS extended the effective date 
of the January 21 rule until April 21, 2009, to allow additional time 
for the Department to review questions of law and policy concerning the 
rule, for the public to comment on the merits of it, and, meanwhile, to 
permit unions to delay costly development and implementation of any 
necessary new accounting and recordkeeping systems and procedures 
pending this further consideration. On March 19, 2009 (74 FR 11700), 
OLMS published a proposed rule to further extend the effective date 
until October 19, 2009 and to extend the applicability date until 
January 1, 2010. The Department published, on April 21, 2009 (74 FR 
18132), a final rule delaying the effective date until October 19, 
2009, and the applicability date until January 1, 2010.
    Upon consideration of the comments received on questions of law and 
policy raised by the January 21 rule, the Department proposed the 
rule's withdrawal on April 21, 2009 (74 FR 18172), because we were 
concerned that it may not have been informed by an adequate review of 
the Department's experience under the relatively recent revisions to 
Form LM-2 in 2003, and because the comments indicated that the 
Department may have underestimated the increased burden that would be 
placed on reporting labor organizations by the January 21 rule. 
Finally, the Department concluded, based on the comments received, that 
the provisions related to the revocation of a small union's 
authorization to file a simpler form because it has been delinquent or 
deficient in filing that form are not based upon realistic assessments 
of such a union's ability to file the more complex form and are 
unlikely to achieve the intended goals of greater transparency and 
disclosure.

[[Page 52403]]

    The Department initially published the NPRM with a 30-day comment 
period to expire on May 21, 2009. However, in response to comments 
requesting extension of the comment period, the Department extended the 
comment period to June 22, 2009. 74 FR 23811.
    This final rule addresses the comments received on the NPRM, and 
withdraws the January 21 rule. This rule takes effect upon publication, 
thereby relieving labor organizations from complying with the 
requirements of the January 21 rule and incurring the attendant burden 
of that rule. By withdrawing the January 21 rule, today's rule operates 
to continue the Form LM-2 reporting requirements that have been in 
place since 2003. Delaying the effective date of today's rule would not 
alter reporting obligations (given that no report would be due under 
the January 21 rule until the close of a fiscal year beginning on or 
after January 1, 2010), but could confuse labor organizations about 
their reporting obligations, add unnecessary planning and recordkeeping 
burden on these organizations, and potentially delay the submission of 
Form LM-2 reports.

B. The LMRDA's Reporting Requirements

    In enacting the LMRDA in 1959, a bipartisan Congress sought to 
protect the rights and interests of employees, labor organizations and 
the public generally as they relate to the activities of labor 
organizations, employers, labor relations consultants, and their 
officers, employees, and representatives. The LMRDA was the direct 
outgrowth of a Congressional investigation conducted by the Select 
Committee on Improper Activities in the Labor or Management Field, 
commonly known as the McClellan Committee. The LMRDA addressed various 
ills through a set of integrated provisions aimed at labor-management 
relations governance and management. These provisions include financial 
reporting and disclosure requirements for labor organizations, their 
officers and employees, employers, labor relations consultants, and 
surety companies. See 29 U.S.C. 431-36, 441.
    The Department has developed several forms for implementing the 
LMRDA's union financial reporting requirements. The annual reports 
required by section 201(b) of the Act, 29 U.S.C. 431(b) (Form LM-2, 
Form LM-3, and Form LM-4), contain information about a labor 
organization's assets, liabilities, receipts, disbursements, loans to 
officers and employees and business enterprises, payments to each 
officer, and payments to each employee of the labor organization paid 
more than $10,000 during the fiscal year. The reporting detail required 
of labor organizations, as the Secretary has established by rule, 
varies depending on the amount of the labor organization's annual 
receipts. 29 CFR 403.4.
    Forms LM-3 and LM-4 were developed by the Secretary to meet the 
LMRDA's charge that she develop ``simplified reports for labor 
organizations and employers for whom [s]he finds by virtue of their 
size a detailed report would be unduly burdensome,'' 29 U.S.C. 438. A 
labor organization not in trusteeship that has total annual receipts of 
less than $250,000 for its fiscal year may elect to file Form LM-3 
instead of Form LM-2. See 29 CFR 403.4(a)(1). The Form LM-3 is a five-
page document requiring labor organizations to provide particularized 
information by certain categories, but in less detail than Form LM-2. A 
labor organization not in trusteeship that has total annual receipts 
less than $10,000 for its fiscal year may elect to file Form LM-4 
instead of Form LM-2 or Form LM-3. 29 CFR 403.4(a)(2). The Form LM-4 is 
a two-page document that requires a labor organization to report only 
the total aggregate amounts of its assets, liabilities, receipts, 
disbursements, and payments to officers and employees.
    In 2003, the Department enacted extensive changes to the Form LM-2, 
the largest regulatory change to that form in the history of the LMRDA 
(2003 rule, 68 FR 58374 (Oct. 9, 2003)). As a result of the changes, 
labor organizations with annual receipts of $250,000 or more are 
required to file a Form LM-2 report 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. Such disbursements are 
required to be reported in specific categories such as 
``Representational Activities'' and ``Union Administration.'' The 
changes eliminated a category entitled ``Other Disbursements'' and, 
overall, sought much more detailed reporting. Labor organizations were 
permitted 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 
indicated that it had done so and offered union members access to 
review the underlying data upon request pursuant to the statute (29 
U.S.C. 431(c); 29 CFR 403.8(b)).
    The 2003 rule also included schedules for reporting information 
regarding delinquent accounts payable and receivable, and it required 
labor organizations to report investments with a book value of over 
$5,000 that exceed 5% or more of the union's investments. Another new 
schedule required labor organizations to report the number of members 
by membership category, and allowed each labor organization to define 
the categories used for reporting. Finally, the 2003 rule required 
reporting labor organizations to estimate the proportion of each 
officer's and employee's time spent and the corresponding percentage of 
gross salary in each of the functional categories on the Form LM-2 and 
to report that percentage of gross salary in the relevant schedule.

III. Rescission of the 2009 Changes to the Form LM-2 Reporting 
Requirements

    For the reasons discussed below, the Department withdraws the 
January 21 rule. Its withdrawal, however, does not affect a labor 
union's continuing obligation to file detailed annual financial 
disclosure reports, as prescribed by the 2003 rule for Form LM-2 
filers, thereby ensuring disclosure of financial information to union 
members, the Department, and the public as required under the LMRDA. 
The Form LM-3 was not changed by the January 21 rule and the existing 
form, therefore, continues in effect.

A. Background

    The January 21 rule modified Form LM-2 by requiring labor 
organizations to disclose additional information about their financial 
activities. On the revised form, labor organizations would provide 
additional information in Schedule 3 (``Sale of Investments and Fixed 
Assets'') and Schedule 4 (``Purchase of Investments and Fixed 
Assets''), which the rule justified by stating that the changes would 
allow verification that these transactions were performed at arm's 
length and without conflicts of interest. 74 FR at 3684-87. Schedules 
11 and 12 were also revised to require reporting of the value of 
benefits paid to and on behalf of officers and employees. 74 FR at 
3687-91. Labor organizations would report on Schedules 11 and 12 travel 
reimbursements indirectly paid on behalf of labor organization officers 
and employees. 74 FR at 3687-88. The preamble to the rule stated that 
these changes would provide a more accurate picture of total 
compensation received by labor organization officers and employees. 74 
FR at 3689. The Form LM-2 changes also included additional schedules 
corresponding to the following categories of receipts: Dues

[[Page 52404]]

and Agency Fees; Per Capita Tax; Fees, Fines, Assessments, Work 
Permits; Sales of Supplies; Interest; Dividends; Rents; On Behalf of 
Affiliates for Transmittal to Them; and From Members for Disbursement 
on Their Behalf. 74 FR at 3691-93. These new schedules would require 
the reporting of additional information, by receipt category, of 
aggregated receipts of $5,000 or more. Id.

B. Discussion of Comments and Reasons for Withdrawing the January 21 
Rule

    In its NPRM proposing rescission of the changes to the Form LM-2, 
the Department justified its proposed rescission on two grounds. First, 
the additional reporting requirements were imposed without an adequate 
review of the Department's experience under the relatively recent 
revisions to Form LM-2 in 2003, with the result that the Department may 
have underestimated the increased burden that would be placed on 
reporting labor organizations and overestimated the additional benefits 
to union members and the public of the increased data disclosures. 74 
FR 18173, 18175. Second, this failure to consider the utility of 
increased reporting and its attendant burdens may have resulted in a 
reporting regime that lacks the balance between the need for 
transparency in union financial reporting and the need to protect 
unions from excessive burdens attendant with such reporting, a result 
contrary to the purpose of the LMRDA. Id. After considering carefully 
the comments received on the proposal to withdraw the January 21 rule, 
the Department, for the reasons just mentioned and those discussed 
below, has concluded to withdraw the rule.
    The Department received comments from 27 individuals or entities on 
the proposed withdrawal of the January 21 rule. Four unions and a 
federation of unions supported the withdrawal of the rule. The 
remaining 22 commenters opposed rescission, arguing that the rule 
should be allowed to take effect. Of this total, 18 were submitted by 
individuals, including nine form letters. An employer trade 
association, a business federation, two public policy groups, and a 
Congressman submitted comments. For discussion, the comments and the 
Department's responses to them have been grouped as follows: the 
Department's process for withdrawing the January 21 rule, the necessity 
to balance transparency with burden in setting reporting requirements, 
and the adequacy of the Department's review of the 2003 Form LM-2 
changes as a predicate to the January 21 rule.
1. The Department's Process for Withdrawing the January 21 Rule
    A few of the commenters asserted that the Department was mistaken 
in delaying the effective date of the January 21 rule and proposing its 
rescission. They asserted that the rule did not raise questions of law 
or policy of the nature contemplated by the instructions provided 
Executive Branch agencies. See memorandum of January 20, 2009, from the 
Assistant to the President and Chief of Staff, entitled ``Regulatory 
Review'' and the memorandum of January 21, 2009, from the Director of 
OMB, entitled ``Implementation of Memorandum Concerning Regulatory 
Review.'' The Department disagrees. Agencies were directed to consider 
extending the effective date of regulations for the purpose of 
reviewing questions of law and policy raised by the regulations in 
question. Thus, on February 3, 2009, the Department published a request 
for comments (74 FR 5899) on a proposed 60-day extension of the 
effective date of the January 21 rule, inviting comment on legal and 
policy questions relating to the rule, including the merits of 
rescinding or retaining the rule.\1\ To the extent these commenters may 
be suggesting that it should have been self evident that the January 21 
rule did not pose any questions of policy or law warranting review, the 
Department disagrees. As noted in the Department's proposal to withdraw 
the January 21 rule, the rule presented issues warranting the delay of 
its effective date and ultimately its withdrawal. These issues, which 
are discussed at length below, rebut any contention that the rule's 
further review by the Department was unwarranted.
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    \1\ The guidance identified the following factors to be 
considered in identifying rules that should be reviewed: (1) Whether 
the rulemaking process was procedurally adequate; (2) whether the 
rule reflected proper consideration of all the facts; (3) whether 
the rule reflected due consideration of the agency's statutory or 
legal obligations; (4) whether the rule is based on a reasonable 
judgment about legally relevant policy considerations; (5) whether 
the rulemaking process was open and transparent; (6) whether 
objections to the rule were properly considered, including whether 
interested parties had fair opportunities to present contrary facts 
and arguments; (7) whether interested parties had the benefit of 
access to the facts, data, or other analyses on which the agency 
relied; and (8) whether the final rule found adequate support in the 
rulemaking record.
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    These same commenters assert that the Administrative Procedure Act, 
5 U.S.C. 551, (APA) effectively prevents the Department from lawfully 
withdrawing the January 21 rule. The commenters apparently believe that 
the Department may not withdraw the rule without first conducting a 
comprehensive study, including a new burden analysis in place of the 
analysis perceived as inadequate.\2\ A commenter suggested that the 
withdrawal of the rule operates as prejudgment of the requirements 
established by the 2009 rule.\3\ One commenter asserted that the 
rulemaking record underlying the January 21 rule fails to support the 
conclusion that the Department, in promulgating that rule, was remiss 
in considering the benefits and burdens associated with that rule. As 
stated below, the Department holds the view, based on its consideration 
of the January 21 rule and the rulemaking record, that the January 21 
rule was promulgated without undertaking a comprehensive review of 
experience under the 2003 rule. Given this material deficiency, the 
only logical option is to withdraw the January 21 rule. Any future 
proposals to change the reporting requirement would be shaped by such 
review of experience under the 2003 rule. The Department's approach 
comports fully with the APA.
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    \2\ The Department disagrees that a review of the 2003 changes 
is a necessary precursor to this final rule, as the rescission of 
the January 21 rule preserves the status quo for LM-2 filers and 
users of Form LM-2 information. This rule does not impose any 
additional reporting on labor unions, nor does it relieve labor 
unions from any reporting currently in effect. Similarly, the 
Department disagrees with the suggestion that the January 21 rule 
should remain in place until a meaningful review of experience under 
the 2003 rule has been completed. The Department believes that a 
better course of action would be to conduct a meaningful review of 
the 2003 revisions as a first step in proposing any changes to the 
Form LM-2. In this manner, the Department would be able to 
articulate the need for any proposed changes, and the public would 
be able to comment on the Department's review of the 2003 revisions 
at the same time as they comment on the proposed changes. Continuing 
to extend the effective and applicability dates of the rule would 
continue the uncertainty for all stakeholders. Labor organization 
members and the public would likely not know what information labor 
organizations were required to report and when that information 
would be available through DOL disclosure, and Form LM-2 reporting 
labor organizations would experience confusion with respect to their 
reporting requirements and any needed modifications to their 
recordkeeping and accounting systems.
    \3\ The Department rejects the suggestion that the withdrawal of 
the January 21 rule will somehow affect any future judgment by the 
Department about any particular reporting requirement that now 
exists or may be proposed in the future. In this regard, the 
Department notes that some of the commenters on the proposed 
rescission of the January 21 rule have addressed particular aspects 
of that rule, identified particular benefits or problems with the 
rule, or suggested additional reporting requirements. The Department 
has not reached a determination on the merits of these contentions 
in deciding to withdraw the rule. These comments, along with the 
other information submitted in connection with the proposed 
rescission of the January 21 rule, will help inform any future 
rulemaking.

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[[Page 52405]]

2. The Necessity for a Balancing of Transparency With Burden
    The Department noted that a failure to consider adequately the 
utility of increased reporting and its attendant burdens on unions may 
result in reporting requirements at odds with the reporting regime 
intended by the Congressional authors of the LMRDA. The Department is 
obliged to ``strike a balance between the dangers of too much and too 
little legislation in this field.'' 105 Cong. Rec. 816 (daily ed. Jan. 
20, 1959) (quoting Senator John F. Kennedy), reprinted in 2 NLRB Leg. 
Hist. of the LMRDA, at 969. The Department pointed out that Congress 
expressed a preference that ``the major recommendations of the 
[McClellan] select committee [be implemented] within a general 
philosophy of legislative restraint.'' S. Rep. No. 187 (1959), 
reprinted in 1 NLRB Leg. Hist. of the LMRDA, at 403). The Department 
further noted that the January 21 rule failed to take into account an 
imperative underlying the LMRDA, i.e., that restraint and great care 
must be taken in regulating union internal affairs so as not to 
undermine union self governance by union members. 74 FR at 18175. 
Finally, the Department noted that Congress expressed a preference to 
avoid impeding legitimate unionism, citing to remarks by Senator Frank 
Church (105 Cong. Rec. 6024 (daily ed. Apr. 25, 1959), reprinted in 2 
NLRB Leg. Hist. of the LMRDA, at 1233), and by Senator John F. Kennedy, 
who observed that Congress intended ``to permit responsible unionism to 
operate without being undermined by either racketeering tactics or 
bureaucratic controls.'' 105 Cong. Rec. 816 (daily ed. Jan. 20, 1959), 
reprinted in 2 NLRB Leg. Hist. of the LMRDA, at 969.
    Multiple commenters agreed that the Department has an obligation to 
balance the need for transparency with the need to protect unions from 
excessive burdens when implementing the LMRDA's reporting and 
disclosure requirements. A federation of unions stated that the new 
provisions in the January 21 rule did not have any demonstrated utility 
that would justify their imposition, nor did the rule provide the 
information necessary to balance the competing interests.
    An international union stated that Congress gave the Secretary the 
discretion to prescribe the categories and details of the annual 
financial disclosure reports, in order to ensure that it properly 
maintains the balance Congress sought between transparency and not 
overburdening unions. The union asserted that Congress intended a 
balance, citing the right of members to examine the union's books 
pursuant to section 201(c) of the Act. Further, it specifically 
expressed concern over the potential release of ``trade secrets'' to 
employers and management consultants, such as those related to job 
targeting, market recovery, and union organizing programs. The union 
also asserted that detailed reporting requirements are unnecessary 
because union members are sophisticated enough to seek information 
about union financial matters from their unions, as well as seek 
publicly available information, such as that provided by IRS. The union 
thus concluded that the January 21 rule failed to achieve the balance 
required by the LMRDA.
    Only two commenters who opposed the proposal to rescind the January 
21 rule specifically addressed the intent of Congress in this regard. 
One commenter, a trade association, rejected the Department's 
conclusions on the need for balancing interests. Another commenter, a 
business federation acknowledged that the ``Department is certainly 
obliged to consider the intent of Congress'' but expressed its view 
that the January 21 rule ``carefully considered the intent of Congress 
to `strike a balance between too much and too little legislation in the 
field.' '' Therefore, although the business federation disagreed with 
the Department regarding whether or not it conducted an adequate review 
of the 2003 changes and whether it carefully considered congressional 
intent in drafting the regulations, it did not disagree with the 
Department's conclusion that reporting requirements should reflect 
Congressional desire to ``strike a balance.'' The trade association 
offered its view that Congress did not evidence an intent to strike a 
balance between too much and too little legislation in this field, but 
rather desired to establish union financial transparency, an object it 
believed to have been achieved by the January 21 rule. The Department 
disagrees. As stated in the key Senate Report on the legislation that 
ultimately became the LMRDA:
    In acting on this bill, the committee followed [these] principles:

    1. The committee recognized the desirability of minimum 
interference by Government in the internal affairs of any private 
organization. Trade unions have made a commendable effort to correct 
internal abuses; hence the committee believes that only essential 
standards should be imposed by legislation. Moreover, in 
establishing and enforcing statutory standards great care should be 
taken not to undermine union self-government or weaken unions in 
their role as collective-bargaining agents.
    2. Given the maintenance of minimum democratic safeguards and 
detailed essential information about the union, the individual 
members are fully competent to regulate union affairs. The committee 
strongly opposes any attempt to prescribe detailed procedures and 
standards for the conduct of union business. Such paternalistic 
regulation would weaken rather than strengthen the labor movement; 
it would cross over into the area of trade union licensing and 
destroy union independence.

S. Rep. No. 187, reprinted in 2 NLRB Leg. Hist. of the LMRDA, at 
403.\4\
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    \4\ The report also identified as a third principle the need to 
avoid imposing sanctions on the union or its members where officer 
conduct is at issue. This principle, like the two quoted, evidences 
a purpose of balance and restraint in regulating union affairs.
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    These principles (which are not referenced in the trade 
association's comments) show an effort to strike a balance between 
regulation of union affairs and interference with such affairs, i.e., 
on the exercise of ``legislative restraint.'' Further, there is nothing 
in the House Report, H. Rep. No. 741, reprinted in 1 NLRB Leg. Hist. of 
the LMRDA, at 759-33, or other legislative materials suggesting an 
alternative regulatory approach. Moreover, as a matter of policy, the 
Department believes that it should achieve the goal of transparency in 
union financial reporting without imposing unnecessary requirements.
    The Department acknowledges the commenter's important observation 
that the Senate Report recognizes that ``[t]he 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'' and 
``[t]his bill insures that full information'' concerning the unions' 
financial operations are ``available to the members of such 
organizations.'' S. Rep. No. 187, at 8, reprinted in 1 NLRB Leg. Hist. 
of the LMRDA, at 404 (emphasis added). At the same time, this statement 
in no way suggests that the Department was to achieve transparency in a 
way that would overburden unions with ``bureaucratic controls.'' 
Congress provided the members an additional right through section 
201(c) of the Act, which permits them to see the underlying documents 
of the submitted annual financial reports if they provide ``just 
cause.'' 29 U.S.C. 431(c). The language of that section, which of 
necessity confers on members a right to receive information unavailable 
to others, logically imposes bounds on the information available to 
individuals and entities lacking that status.

[[Page 52406]]

    In this regard, the Department agrees with the statement of an 
international union, which argued that Congress never intended that the 
annual reports designed by the Secretary should disclose to members, 
much less the general public, every ``bit of probative financial 
information.'' Rather, section 201(c) of the Act exists to enable the 
members, and not the general public, to have access to their unions' 
books if they can show ``just cause.'' The union cited decisions that 
illustrate that the ``just cause'' requirement is nominal, and that it 
does ``not pose any barrier to a union member's honest inquiry into the 
supporting records [of the union].'' Fruit & Vegetable Packers' Local 
760 v. Morley, 378 F.2d 738, 743 (9th Cir. 1967). The union also 
asserted that Congress did not want management agents or consultants to 
unfairly take advantage of the financial disclosure requirements, 
relying on the remarks of Senator Javits on the justification for 
requiring union members to show good cause to examine the data 
underlying a union's financial reports. See 105 Cong. Rec. 5853-54 
(daily ed. Apr. 23, 1959), reprinted at 2 NLRB Leg. Hist. of the LMRDA, 
at 1127-28. The union stated that preventing public disclosure of 
certain areas of union finances does not deprive union members of this 
information, but it would prevent employers from exploiting this 
information in order to prevent workers from organizing or for the 
employers to otherwise engage in ``union avoidance.'' At the same time, 
the Department acknowledges, as pointed out by a trade association, 
that litigation, with the attendant costs of time and money, is 
sometimes necessary to obtain such information and that a union's 
refusal to provide the information may not always be reasonable. 
Nonetheless, Congress established this procedure to protect the 
interests of both the union and its members and financial reporting 
cannot be justified on the basis that the protections embodied in 
section 201(c) may be trumped on the claim that the Department 
possesses unbounded authority under section 201 to require complete and 
unlimited disclosure of union financial information.
3. Failure To Conduct a Meaningful Review of the 2003 Form LM-2 Changes
    Several commenters expressed support for withdrawing the January 21 
rule, agreeing with the Department's observations in the NPRM that the 
rule was promulgated too soon after the 2003 changes to the Form LM-2 
reporting regime and without an adequate review of the benefits and 
costs of the changes. In support of the proposed rescission, a 
federation of unions stated that the Department had failed to properly 
consider the benefits and costs associated with such changes. It 
referenced earlier comments it had submitted, in which it stated the 
principle that a regulatory agency's first obligation in establishing 
and improving financial accounting and reporting is ``to determine that 
a proposed standard will fill a significant need and that costs imposed 
to meet that standard, as compared with other alternatives, are 
justified in relation to the overall benefits of the resulting 
information.'' FASB, Statement of Financial Accounting Standards No. 
117; Financial Statements of Not-for-Profit Organizations (June 1993) 
Section 38. In the federation's view, the January 21 rule failed this 
test. It asserted that the Department had ignored the experience under 
the 2003 rule in imposing additional reporting requirements; instead, 
it merely relied on the explanation it had offered in support of the 
2003 rule. The federation explained that the 2003 rule imposed 
unprecedented itemization requirements on unions, necessarily requiring 
the Department at that time to make a speculative assessment of costs 
and benefits. However, it argued that this approach was an unacceptable 
substitute four years later when actual data and experience under the 
2003 rule was available. Because itemization costs impose the principal 
recordkeeping and reporting burden on unions, it was imperative, in the 
federation's opinion, to obtain information on such costs before 
imposing additional itemization requirements. With respect to the 
anticipated public benefit of the reporting imposed by the 2003 rule, 
the federation asserted that the Department's own annual reports failed 
to show a significant increase in the number of enforcement actions--an 
expected outcome if the 2003 rule was fulfilling the objective of 
disclosing financial improprieties. Thus, it concluded that there was 
no basis for the Department's assessment that additional reporting 
would achieve the benefits predicted.
    One international union recognized that the Department has 
collected ``vastly increased amounts of information'' from unions since 
the 2003 changes, but it has not conducted any empirical study of the 
costs or effects of those revisions. Further, the 2003 changes 
contained significant ``start-up'' costs, such as revising computer 
programs and accounting practices and training staff, which the union 
alleged cost millions of dollars for some unions, as well as more long-
term costs regarding ongoing compliance. The union provided as an 
example the hundreds of additional pages that it filed in 2007 as 
opposed to 2004, the last year before the 2003 changes became 
effective. The 2007 report, in its view, was filled with ``financial 
minutia'' costly to track and without any purpose or benefit. 
Ultimately, it views the 2003 changes as ``punitive and unnecessary.'' 
The federation of unions and an international union explicitly 
supported the Department's assertion that a review of the information 
received since 2003, as well as an examination of the data regarding 
burden since 2003, would provide a foundation on which the Department 
could determine whether or not additional changes are needed. One 
national union offered several suggestions for calculating the burden 
on unions following the 2003 rule and the January 21 rule. For example, 
it asserted that the Department should have considered the increased 
costs incurred by unions in using outside accountants as opposed to 
internal ones in complying with Form LM-2 reporting, a practice that 
this national union and other large ones like it employ.
    Other commenters related concerns with regard to the burdens and 
benefits of the 2003 rule, and opined that such a review would reveal 
undue burden, and thus militate against any additional reporting 
requirements such as those imposed by the January 21 rule. These union 
commenters argued that the Department should rescind the January 21 
rule until it can accurately assess both the benefits and burdens of 
the 2003 rule. One international union referred to the 2003 revisions 
as ``punitive and excessive'' and urged the Department to examine their 
impact with a goal of significantly reducing the recordkeeping burden 
to a ``more rational level, consistent with the LMRDA.'' A national 
union stressed the ``onerous'' burden that the 2003 rule created for it 
and its affiliates, in terms of economics and operations, and argued 
that any additional burdens imposed by the rule are not justified by 
any meaningful benefits, the existence of which it doubted.
    The remainder of the commenters opposed rescission of the January 
21 rule. Most emphasized the general importance of union financial 
reporting and disclosure requirements, some asserting that withdrawal 
of the rule ran counter to the President's focus upon transparency. Six 
commenters opposed the rescission of the rule on substantive grounds. 
One individual, a retired union

[[Page 52407]]

associate member, argued in support of the January 21 rule. While 
commenting on the value of the reports submitted under the 2003 rule, 
he also expressed the view that the additional reporting by union 
officials would be beneficial to union members. Three commenters 
offered several recent examples of union corruption as support for the 
January 21 rule. An employer trade association referenced several 
comments from individuals, including union members, who offered support 
for the January 21 rule. The trade association emphasized its interest 
in disclosure of union job targeting expenditures. The trade 
association submitted a study as support for its view that unions 
significantly underreport the amount they spend on job targeting, a 
problem recognized and partially addressed by the January 21 rule.\5\ 
In its view, the study also demonstrated that the 2003 rule required 
additional reporting requirements if union members were to be given a 
true picture of their unions' financial health and its use of members' 
funds, especially in reconciling membership and dues numbers.
---------------------------------------------------------------------------

    \5\ Armand J. Thieblot, Job Targeting and Market Recovery 
Practices of Construction Unions: Their Apparent and Hidden Costs 
(2008) (John M. Olin Institute for Employment Practice and Policy, 
George Mason University). Rescinding the January 21 rule leaves in 
place the 2003 instructions concerning the reporting of expenses 
involved in job targeting. The Department takes no position on the 
observations and conclusions made by this author. It deserves 
mention, however, that this private study, which focuses primarily 
on only a small aspect of union financial reporting, involved 
considerable research and review of reporting data under the 2003 
rule, including the review of a considerable number of Form LM-2s. 
(The study is not part of the January 21 rulemaking record, 
presumably because it was published after the close of the comment 
period for that rule). The author describes his research and 
explains his methodology and the reasoning in arriving at his 
conclusions. The study highlights the absence of anything comparable 
in the January 21 rule or its rulemaking record.
---------------------------------------------------------------------------

    Another individual commenter opposing rescission of the January 21 
rule stressed the Department's enforcement record (e.g., the number of 
indictments and convictions recorded) over the past eight years as a 
reason not to reduce the financial disclosure requirements and ``weaken 
the government's ability to fight'' union corruption. A Congressman 
cited similar enforcement statistics and highlighted other aspects of 
the Department's enforcement efforts. He also outlined arguments for 
the additional reporting obligations--to better understand officer and 
employee compensation by identifying benefits payable to particular 
individuals, to allow union members to see the travel and related 
expenses incurred by the union in connection with an individual's 
travel and lodging, the itemization of receipts received by unions in 
excess of $5,000, and the names and other information about the 
purchase and sale of union assets. He also relied on a 1999 legislative 
report (as did another commenter) as support for the requirement to 
disclose all payments made to particular union officials. Subcomm. on 
Oversight and Inv. of the Comm. on Education and the Workforce, Report 
on the Financial Operating and Political Affairs of the International 
Brotherhood of Teamsters (1999). The Congressman also summarized the 
steps taken by the Department in revising its burden estimates, 
concluding that the estimate reflected the most accurate data available 
to create a fair and accurate representation of the compliance costs 
associated with the January 21 rule.
    The Department disagrees that rescinding the rule will weaken the 
agency's ability to fight fraud and embezzlement. The Department has 
not carefully reviewed the potential deterrent effect, if any, 
associated with the 2003 revisions to the Form LM-2, and there is no 
support in the rulemaking record for drawing a reasonable inference 
about the probable impact of the additional reporting requirements 
prescribed by the January 21 rule. Indeed, the prior eight-year period 
of 1993-2000 actually yielded slightly higher results than the eight-
year period of 2001-2008, with 1,193 indictments and 1,159 convictions. 
The year 2000 totals, 204 indictments and 191 convictions, are higher 
than any of the yearly totals from 2001-2008. Moreover, these results 
all derive from a period prior to the 2003 changes to the Form LM-2. In 
making this point, however, the Department does not suggest that 
previous versions of the Form LM-2 were more effective tools in 
fighting union corruption, or that there is a link between any specific 
Form LM-2 data and the overall rate of fraud and embezzlement. These 
figures are offered solely to show that there is an insufficient record 
to justify increases or reductions in reporting form data collection by 
reference to changes in enforcement statistics.
    In particular, there has been no review as to whether the 2003 
changes resulted in increased indictments or convictions; improved 
compliance; offered members information needed for self-governance, 
accountability or fiscal management; or otherwise aided the Department 
or the public in exposing union fraud or corruption. The Department 
concurs with commenters who have suggested that before moving forward 
with the additional reporting requirements imposed by the 2009 final 
rule, it should have engaged in a meaningful review to assess the 
benefits, effectiveness, and usefulness of the 2003 changes. The lack 
of such a review justifies today's rescission of the January 21 rule.
    The Department fully recognizes and supports the importance of 
union reporting and disclosure to the union members and to the public, 
but it also believes that the LMRDA requires a balancing of 
transparency with the need to maintain union autonomy without 
overburdening unions with reporting requirements. The Form LM-2, as 
established by the January 21 rule, did not adequately consider this 
balance. In this regard, the Department does not believe that this 
necessary balancing is possible without a review of the 2003 changes to 
the Form LM-2, which the rulemaking process that culminated in the 
January 21 rule did not undertake. The commenters did not provide any 
contrary reasoning.
    In proposing rescission of the January 21 rule, the Department 
stated that it was a mistake to propose further changes to the Form LM-
2 reporting requirements so soon after the 2003 rule without proper 
consideration of the effects of these changes. Without undertaking such 
review, the Department could not adequately weigh the merits of the 
increased disclosure against the associated burdens on the union 
filers. 74 FR 18175. As there stated, the Department recognized that 
the January 21 rule did not adequately consider the effects of the 2003 
changes, particularly regarding the assumed benefits of the changes. 
The January 21 rule did not adequately show that the 2003 changes 
either succeeded or failed in achieving their intended purpose. 
Further, the Department explained that additional review of the post-
2003 reporting history would be beneficial before deciding that 
additional regulatory changes would facilitate these purposes. 
Additionally, the Department recognized that financial transparency is 
necessary to protect against union fraud and corruption, enhance 
accountability among union officials, and that it is necessary for 
members to effectively engage in union self-governance. However, it 
also noted that a review of the usefulness of the information that has 
been reported since the Form LM-2 was revised in 2003, as well as the 
burden placed on unions by that revision, would provide a better basis 
for determining whether additional changes are necessary than the 
unverified assumptions underlying the January 21 rule. This review 
would

[[Page 52408]]

permit the Department to properly balance the need for transparency 
with the need to protect unions from excessive burdens imposed by 
reporting and disclosure requirements.
    In contrast to the Department's assessment that no meaningful 
review of prior Form LM-2 changes had been undertaken in connection 
with the January 21 rule, one commenter expressed the view that the 
rule reflects a ``well reasoned culmination to eight years of solid 
work'', while another characterized it as a product of the 
``expertise'' of Department officials and others in identifying and 
reviewing areas of the Form LM-2 that could be improved. A business 
federation stated that the rule is supported by comments that verified 
the assumptions underlying the 2003 burden estimates and that the 
Department had made significant changes to improve the methodology for 
estimating burden and improve the accuracy of its burden estimates.
    After carefully considering the competing points of view among the 
commenters, the Department continues to hold the opinion that the 
Department failed to conduct an adequate analysis of the effects of the 
2003 Form LM-2 revisions before it developed the additional reporting 
requirements adopted in the January 21 rule. Although the Department 
justified the January 21 rule, in part, on experience under the 2003 
rule, see 74 FR 3681-82, that experience was neither documented not 
comprehensively analyzed. The informal, anecdotal information on which 
the Department relied was simply inadequate for the task. It was no 
substitute for a more comprehensive review such as, for example, a 
survey of all Department investigators or a documented review of the 
thousands of filings received by Department under the 2003 rule. See 74 
FR at 3681 (referring to ``opportunity to review thousands of forms and 
to tap the experience gained by its staff in investigating Form LM-2 
issues and from their dialogue with union officials and union members 
while providing Form LM-2 compliance assistance to them''); 74 FR 3684 
(citing to ``OLMS experience over years of auditing and investigating 
union financial activities''). While such experience is valid, it is a 
poor substitute for a comprehensive review of experience under the 2003 
rule.\6\ It is the Department's opinion that, as a matter of policy, 
the regulated community and the public should have the benefit of the 
Department's best analysis of its regulatory experience before it 
proposes to place additional burdens on unions. Despite ``the benefit 
of three cycles of reviewing forms,'' the Department did not undertake 
a comprehensive review of the 2003 changes, and it did not provide any 
assessment in the January 21 rule of benefits obtained from such 
changes. 74 FR 3681. Instead, it merely provided arguments as to why 
further reporting changes were needed, rather than addressing the 
impact of the previous changes in terms of benefits and burdens. See 74 
FR 3681-84.
---------------------------------------------------------------------------

    \6\ Although the rulemaking record contains support for the 
various examples used to illustrate a concern about a particular 
aspect of Form LM-2 reporting, the record does not allow an 
inference to be drawn about the frequency at which the circumstances 
described occur.
---------------------------------------------------------------------------

    The Department attempted to partially account for the absence of 
appropriate review by characterizing the January 21 rule as 
``incremental'' reform to the Form LM-2. 74 FR at 3681. Indeed, the 
2008 NPRM proposing the January 21 rule stated that the 2003 changes to 
the Form LM-2 ``helped to fulfill the LMRDA's reporting mandate.'' 73 
FR 27348. However, the NPRM provided no indication that this conclusion 
was based on a comprehensive review of experience under the 2003 rule. 
Only when the Department has engaged in such review can it determine if 
``incremental'' changes to the 2003 Form LM-2 reporting regime, such as 
those implemented in the January 21 rule, are justified in light of the 
need to balance competing interests. While increased disclosure 
provides beneficial information to members, it is by no means clear 
that such benefits outweigh the institutional cost to unions and the 
members themselves by disclosing information, in some instances 
comparable to trade secrets, to the general public. Thus, a review of 
experience under the 2003 rule should include an assessment of the 
burden that such increased reporting imposes on unions, not merely in 
terms of cost but also in terms of its impact on the unions' ability to 
represent its members. Yet the January 21 rule fails altogether to 
account for this cost to unions and their members. The Department, 
therefore, disagrees with the business federation's assertion that the 
Department evidenced ``a meaningful and adequate review'' in its 
January 21 rulemaking. A general reference in the preamble to the 
January 21 rule--to ``the benefit of three cycles of reviewing forms * 
* * to assess the utility of the form and to identify areas in which 
improvement was needed''--falls short of a meaningful review of the 
benefits of the form to the reader or the burden to the filer. Such 
analysis simply cannot be completed within the four corners of the 
filed reports.
    The same commenter asserted that the Department in revising its 
initial burden estimates for the January 21 rule had taken into account 
``actual costs and data that were identified by labor organizations in 
their comments and other data sources.'' On the contrary, the 
Department expressly rejected the concept of using actual post-2003 
costs. See 74 FR 3703. In the burden analysis to the January 21 rule, 
the Department conceded that ``after considering the comments regarding 
actual costs associated with the LM-2 revision in 2003, the Department 
has decided to retain the approach adopted in the NPRM and use the 
costs estimates developed in 2003 as a baseline for the costs 
associated with this [2009] revision.'' 74 FR 3703 (emphasis added). A 
Congressman, commenting on this issue, acknowledged that ``the 2009 
burden estimates were based on 2003 estimates which were applied to 
actual data taken from 2007 Form LM-2s.''
    The business federation asserted that the Department provided for 
comment its 2006 publication of its paperwork burden package in the 
Federal Register, and that no comments were received from any union or 
anyone else indicating that there were any problems or issues with the 
Department's 2003 burden hour estimates or the methodology used to 
calculate those estimates (OMB ICR Reference No. 200609-1215-016). In 
the Department's view, the absence of comments does not excuse the 
failure to undertake a proper review of reporting burdens. The 
Department believes that there is a need for a meaningful review of the 
consequences of the 2003 changes, a review that has not yet been 
performed, and such a review is necessary to determine the actual 
benefits and burdens of the 2003 changes.
    In the course of this rulemaking, the Department received comments 
from labor organizations regarding burden issues that merit review. 
Even though such comments would be helpful in gauging the 2003 rule's 
impact on union members, information from a much larger sample of union 
members would be needed to provide a reasonable benchmark for 
considering changes in the reporting regimen. Review of such 
experience, among other lines of inquiry, might include the effects of 
the 2003 changes in such areas as the detection, prosecution, and 
deterrence of fraud and corruption; compliance assistance; the aiding 
of members in exercising their rights to view additional materials 
under section 201(c); the support of members in utilizing their

[[Page 52409]]

rights under the trusteeship, election, and other provisions of the 
LMRDA in furthering union accountability, fiscal management, and self-
governance; the provision to the public of tools that advance labor-
management transparency and union democracy; or in ascertaining the 
actual, as opposed to estimated, costs to unions in reshaping and 
maintaining their recordkeeping and accounting systems to comply with 
the 2003 changes. Therefore, the Department does not know the extent to 
which the need of union members and the public for transparency has 
been met by the 2003 rule, or whether the rule appropriately balances 
that need for transparency without overburdening unions.
    The failure to conduct appropriate review as a predicate for the 
new reporting requirements in the January 21 rule is compounded by the 
weaknesses in the 2003 data that was used to estimate the compliance 
burden. A national union asserted, based on its experience, that the 
2003 burden estimates were ``grossly underestimated.'' This union 
estimates that the 2003 rule resulted in a 40-45% increase in its 
initial compliance costs, which were substantially larger than the 
Department's estimates in 2003, and the union offered similar data for 
its annual cost to comply with the 2003 changes, which it alleges are 
also multiple times higher than the Department's estimates. The 
commenter expressed fear that these errors led to equally erroneous 
calculations in the January 21 rule. As an example, the union states 
that the itemization for interest and dividends will result in 
substantially greater costs than estimated, because its accounting 
system does not maintain information on payment sources, payment 
amounts, payment dates, or payment purposes.
    The Department agrees with the comments that the Department, in 
fashioning the January 21 rule, effectively overlooked the problem of 
relying on the necessarily speculative estimates for costs associated 
with the itemization of substantial disbursements, as required by the 
2003 rule. In crafting that rule, the Department had no real cost 
experience to draw on in making the estimates. Indeed, as the 
Department's own explanation makes plain, see 74 FR at 3704-05, the 
Department had to substantially revise its own estimates of the burden 
associated with the 2003 rule, based on comments it received from labor 
organizations.
    The Department agrees with a national union's comments regarding 
the necessity to review the post-2003 data in terms of the perceived 
benefits of the 2003 changes in such areas as protecting unions against 
fraud and corruption, assisting the Department in enforcing compliance, 
and providing meaningful information to union members so they can 
engage in self-governance. The union asserted that no evidence exists 
as to whether those objectives have been met by the 2003 changes. It 
shared its own experience under the 2003 rule: no instances of fraud or 
embezzlement have been uncovered; the new schedules have had no impact 
on the governance of the union; and no questions or issues related to 
the information reported on the new schedules have been raised by any 
member of the union, as evidenced by a review of correspondence from 
the members to the union's president, as well as member meetings 
attended by the president. As noted above, these issues need to be 
considered in reviewing the costs and benefits associated with the 2003 
rule and that such review is a necessary predicate to any proposal to 
revise the 2003 reporting requirements.
    For the reasons articulated above, the Department disagrees with a 
business federation's defense of the process and conclusions leading up 
to the January 21 rule, suggesting that the review was adequate and 
that at best the proposed rescission was merely a ``policy 
disagreement'' with the past Administration. Regardless of whether the 
Department agrees or disagrees with the January 21 rule, the rescission 
is based primarily on the Department's failure to undertake meaningful 
review of experience under the 2003 rule, including the benefits and 
burdens associated with the rule, leaving the Department unable to 
assess whether the reporting requirements achieve the balance intended 
by Congress.
    A public policy group requested the Department to engage in a 
burden analysis, viewing the absence of a new burden analysis for the 
January 21 rule as fatal to the proposed rescission of that rule. Such 
analysis is not required for this action, as the Department is not 
proposing any changes to the existing Form LM-2 but, rather, is 
rescinding the changes made on January 21, 2009.
    Additionally, the Department disagrees with the contention of a 
commenter that it was an improper use of government resources to engage 
in further rulemaking on the Form LM-2. The Department believes that 
resources spent on rescinding a poorly-justified rule are well-spent. 
Moreover, the burden on the public and the Department from permitting 
the January 21 rule to go into effect far outweigh the costs of 
rescinding them.
    The Department's current view is that before implementing 
additional financial reporting requirements, a more comprehensive 
review of the experience under the 2003 rule should have been 
completed, along with engagement in a meaningful dialogue with labor 
unions and public policy groups interested in union financial 
reporting. The parties with a particular interest in financial 
reporting should be able to fully understand the Department's support 
for its proposals and, as appropriate, to comment on its sufficiency as 
rulemaking begins. In promoting transparency and accountability--
purposes served by the disclosure and reporting provisions of the 
LMRDA--the Department must share with the public all the information it 
relies on in support of a proposed rule change.

IV. Rescission of the Procedure To Revoke the Form LM-3 Filing 
Authorization

A. Background

    The January 21 rule established standards and procedures for 
revoking the simplified report filing authorization provided by 29 CFR 
403.4(a)(1) for those labor organizations that are delinquent in their 
Form LM-3 filing obligation, fail to cure a materially deficient Form 
LM-3 report after notification by OLMS, or where other situations exist 
where revoking the Form LM-3 filing authorization furthers the purposes 
of LMRDA section 208.
    Under the revocation procedure, where there appear to be grounds 
for revoking a labor organization's authorization to file the Form LM-
3, the Department could conduct an investigation to confirm the facts 
relating to the delinquency or other possible basis for revocation. If 
the Department after investigation finds grounds for revocation, the 
Department could send the labor organization a notice of the proposed 
Form LM-3 revocation stating the reason for the proposed revocation and 
explaining that revocation, if ordered, would require the labor 
organization to file the more detailed Form LM-2. The letter would 
provide notice that the labor organization has the right to a hearing 
if it chooses to challenge the proposed revocation, and that the 
hearing would be limited to written submissions due within 30 days of 
the date of the notice.
    In its written submission, the labor organization would be required 
to present relevant facts and arguments that address whether (1) the 
report was delinquent or deficient or other grounds for the proposed 
revocation exist; (2) the deficiency, if any, was material; (3) the

[[Page 52410]]

circumstances concerning the delinquency or other grounds for the 
proposed revocation were caused by factors reasonably outside the 
control of the labor organization; and (4) any factors exist that 
mitigate against revocation.
    After review of the labor organization's submission, the Secretary 
would issue a written determination, stating the reasons for the 
determination, and, as appropriate based on neutral criteria, inform 
the labor organization that it is required to file the Form LM-2 for 
such reporting periods as she finds appropriate.

B. Reasons for Rescission of the Revocation Standards and Procedure

    In proposing to rescind the Form LM-3 standards and procedure for 
revocation, the Department justified its proposal on two grounds. 
First, the Department stated that the January 21 rule did not 
adequately assess the burden placed on smaller labor organizations by 
the standards and revocation procedure. The Department also stated its 
belief that, in light of that burden, there was no realistic likelihood 
that the standards and procedure would accomplish the intended results 
of increased transparency and more disclosure. The Department explained 
that there is no realistic likelihood that most small unions would have 
the information or means to file the more detailed Form LM-2. 74 FR 
18176-77. Second, the Department explained, as discussed above, that 
the LMRDA requires a balancing of transparency and union autonomy, a 
balance that the January 21 rule failed to achieve. Id.
    After having considered the comments received on this issue, the 
Department remains of the view that the standards and procedure for 
revocation should be withdrawn. As discussed below, the January 21 rule 
predicted that less than 100 labor unions per year would suffer 
revocation. Nevertheless, many times this number of unions would be 
drawn into the process, requiring the expenditure of time and effort 
without any demonstrated showing that Form LM-3 filers subject to 
revocation will be able to properly file a Form LM-2. Furthermore, as 
discussed below, the Act requires a balancing of transparency and union 
autonomy, and the January 21 rule did not take this mandate into 
account in formulating the standards for revocation (i.e., delinquency 
or deficiency in filing, which it argued indicated a greater need for 
transparency, as those unions were more likely to experience financial 
corruption). There is nothing in the preamble to establish what 
percentage of filers delay their filings or file incomplete reports for 
``benign,'' as distinct from more culpable reasons, and nothing to 
suggest that a significant number of filers delay their filings or 
submit incomplete reports because they have reason to conceal financial 
information. For these reasons, the Department is not persuaded that 
the approach crafted in the January 21 rule ensures the required 
balance or is likely to improve compliance. Instead, this approach 
seems less likely to achieve compliance than establishing cooperative 
arrangements between the Department and national/international unions 
to assist smaller unions with fulfilling their reporting obligations
    The January 21 rule establishing the standards and procedure for 
revocation stated that unions that are deficient or delinquent in their 
Form LM-3 filings are more likely to experience financial corruption 
and, therefore, are in greater need of increased financial transparency 
through Form LM-2 reporting. 74 FR at 3697. However, as stated in the 
April 21 NPRM, the Department reevaluated the efficacy of the standards 
and procedure in achieving this end. 74 FR at 18176-77. In coming to 
this view, the Department determined that the January 21 rule did not 
adequately assess the burden on smaller unions in filing a Form LM-2 
report and, therefore, misjudged the effectiveness of the revocation as 
a means to increase transparency. As stated in the proposal to rescind 
the January 21 rule, the revocation provisions of the rule are counter-
intuitive and the rule fails to demonstrate that Form LM-3 filers 
required to file the more detailed and complicated Form LM-2 reports 
are likely to submit timely, complete, and accurate Form LM-2 reports. 
74 FR at 18176. Moreover, the Department stated that there was 
insufficient support in the rule for the conclusion that revocation 
will reduce delinquency and deficiencies in reporting. Id.
    As explained in the NPRM, the January 21 rule projected that 96 
filers would be required to file the Form LM-2 and calculated the 
associated burden on that projection. This burden is necessarily 
understated due to the fact that some associated burden applies to all 
Form LM-3 filers, not merely those whose right to file a Form LM-3 is 
revoked. In order to file a Form LM-2, steps must be taken at the start 
of the fiscal year. Accounting systems and procedures must be in place 
that will track and maintain the data required by the Form LM-2. 
Therefore, as explained in the NPRM, the Department concluded that 
there is no realistic likelihood that most small unions would have the 
information or the means to file the more detailed Form LM-2, and that 
the revocation standards and procedure established by the rule will be 
unlikely to result in more disclosure. Id.
    As stated in the NPRM, the Department agreed with comments that had 
previously been submitted that advocated a compliance assistance 
approach, particularly one drawing upon the cooperative efforts of 
national and international unions, rather than a revocation procedure. 
As stated in the NPRM, a revocation procedure is not likely to improve 
delinquency and deficiencies in Form LM-3 reporting, and it could 
actually contribute to continuing non-compliance since filers may have 
greater difficulty successfully meeting the Form LM-2 reporting 
requirements. The Department explained that a compliance assistance 
approach is more likely to increase proper reporting than a revocation 
approach that is counter-intuitive and likely to damage compliance 
assistance efforts. Id.
    In response to the NPRM, four union commenters expressed specific 
support for the Department's proposal to rescind the revocation 
standards and procedure. A federation of unions stated that with 
outreach and compliance assistance, it would be a rare event that a 
small union would not comply with its Form LM-3 filing obligation, 
noting that in such instances it would be appropriate to use the 
enforcement mechanism provided by the LMRDA. The federation also 
referenced its earlier comments where it stated ``[t]here is no reason 
to believe that a small labor organization that was not set up to 
fil[e] a timely or complete Form LM-2 report would be able to meet the 
enormous burden of retroactively adjusting its accounting system in a 
manner sufficient to file Form LM-2 reports.''
    A national union offered specific evidence in support of the notion 
that smaller unions would not be able to file the Form LM-2, and it 
noted that the retroactive nature of the revocation procedure 
particularly impacted Form LM-3 filers. This union also felt that the 
``enormous financial strain'' that revocation would cause could lead to 
further compliance problems, and it therefore stressed compliance 
assistance in its place. An international union expressed similar 
concerns, noting that Form LM-2 preparation requires electronic 
accounting and the professional assistance that will not be available 
to small unions. Another union concurred with the view expressed in the 
NPRM that the Department did not adequately consider

[[Page 52411]]

the burden on smaller unions to file the Form LM-2 in place of the Form 
LM-3, and went further to propose that the Department consider raising 
the threshold for Form LM-2 filers from the current $250,000 in annual 
receipts due to the burden on smaller unions. Finally, an international 
union agreed that the revocation is unlikely to achieve its intended 
goals, and instead promoted the idea of devoting the Department's 
resources to education of the regulated community.
    The Department received three comments that specifically opposed 
the proposal to rescind the Form LM-3 revocation standards and 
procedure. Only one commenter, a business federation, addressed the 
Department's concerns, as outlined in the NPRM, that the January 21 
rule failed to adequately assess the burden the procedure would impose 
on the smaller labor organizations and the likelihood that, in light of 
that burden, the rule would accomplish the intended results of 
increased transparency and more disclosure. This commenter argued that 
the rulemaking record illustrated that smaller unions could file the 
Form LM-2, and cited Form LM-3 filers who ordinarily have less than 
$250,000 in annual receipts, but due to the sale of an asset or other 
reason, finish a fiscal year with greater than $250,000 in receipts 
and, therefore, must file a Form LM-2 report. The business federation 
also cited unions in trusteeship, for which a Form LM-2 must be filed 
on their behalf, regardless of the annual receipts of the union in 
trusteeship. Additionally, this commenter challenged the NPRM's 
reference to the ``counter-intuitive'' nature of the revocation 
procedure, explaining its view that the approach outlined in the 
January 21 rule was a sensible one that augmented other enforcement 
tools such as criminal enforcement and voluntary compliance.
    The Department disagrees with those commenters questioning the 
NPRM's conclusions pertaining to the burden on smaller unions. The 
Department continues to believe that revocation is unlikely to result 
in the increased transparency and greater disclosure intended by the 
January 21 rule in view of the Form LM-2 burden it places on Form LM-3 
filers. Initially, the Department notes that its argument is not that 
all Form LM-3 filers are unable to file a Form LM-2, but that those 
that do not properly or timely file a Form LM-3 are not likely to 
properly or timely file a Form LM-2, particularly given the retroactive 
nature of the revocation procedure, as several commenters noted. The 
Department finds the revocation procedure's steps of notification and 
voluntary cooperation only reinforce this notion, as unions that have 
difficulty properly filing a Form LM-3 are unlikely to properly submit 
a written statement contesting the revocation of the Form LM-3 filing 
authorization and unions that do not properly file a Form LM-3 after 
these efforts would seem less likely to properly file a Form LM-2.
    Moreover, assuming that the revocation procedure is a tool 
available to the Department to address delinquent and deficient 
reporting, the problem remains that the revocation procedure is a 
poorly designed, burdensome method of resolving this problem. In fact, 
the stated goal of the revocation standards and procedure was to 
increase transparency in unions with reporting deficiencies and 
delinquencies, which the January 21 rule concluded were in need of 
greater disclosure. However, the Department, on its review of the rule, 
does not believe that increased transparency is likely through the 
revocation provisions, because it is unreasonable to expect delinquent 
and deficient Form LM-3 filers to properly and timely file the more 
complicated Form LM-2. No commenter adequately refuted this assertion.
    In response to comments referencing those Form LM-3 filers that, 
under the 2003 rule and certain conditions, must file a Form LM-2 
report, the Department stresses the statutory distinction between the 
requirement for the Secretary to establish simplified reports for 
certain smaller unions and the discretionary authority to revoke such 
authorization for simplified reports under certain conditions. The fact 
that some Form LM-3 filers during occasional fiscal years are required 
to alter their reporting procedures and file a Form LM-2 does not 
negate the fact that the burden placed on Form LM-3 filers by 
revocation makes the goal of increased transparency unlikely to be met. 
Indeed, as commenters have attested, their experience demonstrates that 
even smaller Form LM-2 filers, those only marginally exceeding the 
$250,000 filing threshold, have a great deal of difficulty meeting 
their requirements, thus justifying the mandate for simplified forms 
for smaller unions. Further, the Department recognizes that nonexistent 
records cannot be created retroactively. In this regard, the Department 
notes that section 206 of the Act, 29 U.S.C. 436, requires ``[e]very 
person required to file any report under this title'' to ``maintain 
records on the matters required to be reported which will provide in 
sufficient detail the necessary basic information and data from which 
the documents filed with the Secretary may be verified * * *.'' 
(emphasis added). Therefore, each person required to file a report 
under LMRDA Title II must keep sufficient records for the matters 
required to be reported in the particular report that such person must 
file. Thus, a Form LM-3 filer would not ordinarily be required to 
maintain records sufficient to complete a Form LM-2 report, and only 
acquires such an obligation upon reaching $250,000 in annual receipts 
for a given fiscal year. Moreover, the union that places the 
subordinate union in trusteeship is obliged to file the Form LM-2, not 
the union placed in trusteeship. The trustee union, which generally 
will be larger than the union in trusteeship, likely will possess the 
experience, resources and information necessary to file a Form LM-2.
    In its NPRM proposing the rescission of the January 21 rule, the 
Department also defended its proposal to withdraw the revocation 
standards and procedure by arguing that the LMRDA requires a balancing 
of transparency and union autonomy, a balance that the January 21 rule 
failed to achieve. All three of the commenters opposing rescission of 
the standards and procedure, asserted, in essence, that the Secretary 
possesses ``clear and unambiguous'' authority under section 208 to 
establish the revocation procedure. Two of these commenters contend 
that section 208 is self-operative, asserting that the Secretary 
retains the authority to revoke the simpler filing authorization even 
if the rule is rescinded. According to their view, the regulations 
merely ``flesh[] out'' the necessary procedures to implement the 
existing authority. As explained by one of commenters, the language of 
section 206 of the LMRDA (requiring covered unions to maintain records 
underlying required reports) prevents the Department from finding that 
``there is no realistic likelihood that most small unions would have 
the information'' necessary to complete the Form LM-2.
    The Department is not persuaded that section 208 is self-operating. 
As the commenters themselves point out, section 208 contemplates that 
the Department follow required procedures, the details of which are not 
prescribed. Thus, it is necessary for the Department to establish 
procedures as a condition for rescinding a filer's authorization to 
file a Form LM-3. In proposing rescission, the Department noted both 
that section 208 specifically mandates that the Secretary must issue 
simplified reports for labor organizations for which she finds that 
``by virtue of their size a

[[Page 52412]]

detailed report would be unduly burdensome,'' and that she is permitted 
to revoke such filing authorization if ``the purposes of this section 
would be served thereby.'' Therefore, consistent with the language of 
section 208 and the required balance between disclosure and unnecessary 
burden, the ``purposes'' of section 208 must include ensuring that a 
more detailed report for a smaller union would not be ``unduly 
burdensome'' by virtue of its size.
    The third commenter opposing rescission also addressed the 
Secretary's authority under section 208. This commenter stressed the 
``unambiguous authority'' granted to the Secretary and argued that 
section 208 thus does not require the Department to ``balance'' the 
need for financial transparency with burden. Further, the commenter 
emphasized that revocation was just one ``tool'' that the Secretary has 
to ensure compliance with the statute, and that the ``purpose'' of the 
section is preventing the ``circumvention or evasion'' of the Act's 
reporting requirements, not ensuring that the requirements are not 
unduly burdensome. The Department rejects these arguments, as it notes 
that section 208 grants the Secretary authority to rescind only if she 
determines that the ``purposes'' of the section would be served. The 
Department maintains that section 208 explicitly intends, among other 
purposes, that smaller labor organizations should not be subject to 
``unduly burdensome'' reporting requirements.
    Section 208 requires the Department to properly balance the size of 
the union and its burden to file the Form LM-2 with the need of greater 
transparency for that union. An international union asserted that 
revoking the Form LM-3 filing authorization for smaller unions merely 
because of delinquency or deficiency in their Form LM-3 reporting is 
``overkill,'' constituting ``collective punishment.'' As such, it 
asserted that the Department had failed to properly balance these 
concerns, noting that the rule failed even as a ``prophylactic'' means 
to detect a ``lack of sophistication and awareness'' or ``the rare 
instances'' of financial corruption. The union stated that the root 
causes of delinquent and deficient reporting are ``honest mistakes'' 
and other ``benign reasons'' such as ``over-worked, under-trained, 
part-time, officials often lacking both technical expertise in union 
administration and any institutional knowledge base from which to 
draw,'' and not ``the rare instances'' of financial corruption. An 
international union predicted that if small unions were required to 
file the Form LM-2 local officials likely would quit their positions.
    The Department concurs with these assertions, as it does not 
believe that the purpose of balancing the need for transparency without 
overburdening smaller unions is met by standards for revocation 
(delinquency or deficiency in reporting) that are so sweeping in 
nature, i.e., revoking the Form LM-3 filing authorization for 
potentially any delinquent or deficient smaller unions, even though 
most are not plagued by financial corruption. The standards established 
by the January 21 rule potentially increase the filing burden for all 
Form LM-3 filers, a result that is not justified by the ``relatively 
benign'' (see the January 21 rule at 74 FR 3696) causes of most 
delinquent or deficient reporting. Therefore, they do not properly 
balance the size of the unions and reporting burden with the need for 
greater transparency for such smaller unions. Indeed, for those unions 
that are delinquent or deficient in their filing as a result of 
``relatively benign'' reasons, there is no justification for more 
stringent reporting requirements.
    Additionally, instead of risking the loss of union officials who 
may quit rather than assume the burden associated with the revocation 
procedure, an international union urged the Department to address the 
root causes of delinquent reporting by educating smaller unions. The 
union noted that where education and voluntary compliance efforts are 
unsuccessful, criminal investigations and prosecutions are effective 
tools to address financial corruption in smaller unions. The Department 
agrees with these comments. As stated in the proposal to rescind the 
January 21 rule, the Department, as a matter of policy, does ``not 
intend to encourage or discourage the participation of union members 
from running and serving in union office, nor does it otherwise desire 
to unnecessarily interfere in the internal affairs of unions.'' 74 FR 
at 18176-77. The Department further stated that it intends to implement 
the LMRDA with as little interference as possible, with an overarching 
goal of empowering members to govern their unions democratically. It 
also addressed other possibly detrimental consequences of the 
revocation procedure, such as the diversion of union officials from 
grievance handling and other core business, and stated its view that 
revocation cannot be justified by merely lessening or downplaying the 
acknowledged increased burden imposed by the Form LM-2 reporting 
requirements. Id. Compliance assistance is a vital aspect of this 
approach, as are audit and enforcement options, and both are better 
approaches than a revocation procedure that is viewed as punitive to 
Form LM-3 filers. The unions commented that criminal investigations and 
prosecutions are better used in addressing financial corruption in 
smaller unions. The Department agrees that the selective use of 
criminal investigation and enforcement is preferable to the approach in 
the January 21 rule because it is doubtful that the Department will 
discover embezzlements and other corruption through revocation (which 
theoretically would result in the filing of a Form LM-2), since the 
procedure is unlikely to result in increased reporting.
    Finally, the Department disagrees with the commenter that suggested 
that, even if the revocation procedure is now deemed to be overly 
burdensome, the Department should not rescind the rule without first 
establishing a replacement procedure. In its view, section 208 requires 
the Department to have a published revocation procedure available in 
case it is needed. The commenter stated that if the Department is 
dissatisfied with the procedure in the rule, it should have proposed a 
procedure based on a ``realistic assessment'' of the ability of smaller 
unions to complete a Form LM-2, with the goal of preventing the 
circumvention or evasion of section 208. The Department believes that, 
for the reasons stated above, the revocation procedure and standards 
established by the regulations are flawed and, therefore, rescinds 
them. The Department retains the authority under section 208 to propose 
a new revocation procedure and standards, based upon a necessary 
balancing of transparency with union autonomy as required by the 
section and the Act, if it decides that such an action is necessary and 
appropriate.

V. Regulatory Procedures

Executive Order 12866

    This rule is considered to be a significant regulatory action 
within the meaning of Executive Order 12866, and was submitted to OMB 
for review before publication, because the proposed rule may raise 
novel legal or policy issues arising out of legal mandates, the 
President's priorities, or the principles set forth in Executive Order 
12866.

Regulatory Flexibility Act

    The Regulatory Flexibility Act of 1980, 5 U.S.C. 601 et seq., 
requires agencies to prepare regulatory flexibility analyses, and to 
develop alternatives wherever possible, in drafting

[[Page 52413]]

regulations that will have a significant impact on a substantial number 
of small entities. The Department does not believe that this rule will 
have a significant economic impact on a substantial number of small 
entities, as the rule relieves the additional burden imposed upon labor 
organizations through the rescission of the regulations published on 
January 21, 2009. Therefore, a regulatory flexibility analysis under 
the Regulatory Flexibility Act is not required. The Secretary has 
certified this conclusion to the Chief Counsel for Advocacy of the 
Small Business Administration.

Unfunded Mandates Reform

    This rule will not include any Federal mandate that may result in 
increased expenditures by State, local, and tribal governments, in the 
aggregate, of $100 million or more, or in increased expenditures by the 
private sector of $100 million or more.

Paperwork Reduction Act

    This rule contains no new information collection requirements for 
purposes of the Paperwork Reduction Act of 1995 (PRA) (44 U.S.C. 3501 
et seq.). If the January 21 rule had gone into effect, it would have 
increased the burden of reporting under OMB No. 1215-0188. Under the 
January 21 rule, the total burden hours per Form LM-2 respondent would 
have increased by approximately 60.06 hours, and the total burden hours 
would have increased by 274,539. The average cost per Form LM-2 
respondent would have been increased by $1,939 and the total cost would 
have increased by $8,863,038. Since this rule rescinds the January 21 
rule, the increases in reporting burden under OMB No. 1215-0188 will 
not occur. The Department will seek OMB approval of any revisions of 
the existing information collection requirements, in accordance with 
the PRA.

Small Business Regulatory Enforcement Fairness Act of 1996

    This rule is not a major rule as defined by section 804 of the 
Small Business Regulatory Enforcement Fairness Act of 1996, 5 U.S.C. 
804. This rule will not result in an annual effect on the economy of 
$100,000,000 or more; a major increase in costs or prices; or 
significant adverse effects on competition, employment, investment, 
productivity, innovation, or on the ability of the United States-based 
companies to compete with foreign-based companies in domestic and 
export markets.

List of Subjects in 29 CFR Part 403

    Labor unions, Reporting and recordkeeping requirements.

0
For the reasons set forth in the preamble, the Final Rule published 
January 21, 2009 amending 29 CFR parts 403 and 408 (74 FR 3678), for 
which the effective date was delayed on February 20, 2009 (74 FR 7814) 
and April 21, 2009 (74 FR 18132) is withdrawn.

    Signed in Washington, DC, this 7th day of October 2009.
Shelby Hallmark,
Acting Assistant Secretary for Employment Standards.
John Lund,
Deputy Assistant Secretary for Labor-Management Programs.
[FR Doc. E9-24571 Filed 10-9-09; 8:45 am]

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