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News July 25, 2005 Issue

Industry Fights New DOL Gift Reporting Requirement

Unless the U.S. Department of Labor can be persuaded otherwise, it looks as if advisers that have Taft-Hartley trust clients will have to start tracking the value of gifts made to those clients and annually report them on a detailed DOL disclosure form, Form LM-10.

Itís not going to be fun. LM-10 (form and instructions) requires detailed information regarding each gift (including meals, entertainment, and other things of value) provided to a union official, such as the date, amount, and description of the gift, the name, address, and title of the person who received it, and an explanation of the circumstances surrounding the gift. Even occasional, de minimis gifts of $25 or less must be reported if they are given in circumstances related to the recipientís status in a labor organization. The accuracy of information reported on the form must be certified by the firmís president and treasurer, under penalty of perjury. And willful failure to file the form can result in criminal sanctions.

Turns out, the form has been around for years. Who knew?

Certainly not investment advisers, broker-dealers, banks, and other Taft-Hartley plan service providers, at least until June 22. Thatís when the DOL staff posted a Q&A titled "Trusts and Form LM-30 and Form LM-10" on its website (LM-30s are filed by labor organizations to report gifts they receive).

Among other things, the Q&A states that all "employers" must file LM-10s to report gifts to union officials, even if the "employer" in question is a Taft-Hartley plan service provider whose own employees are not unionized.

The Q&A caused a firestorm. Industry lawyers and trade groups quickly questioned the DOL staffís broad definition of "employer," as well as the application of LM-10 to gifts made to clients who wear two hats as a trust fiduciary and a union official.

Substantive concerns aside, many in the industry were stunned by the procedural manner in which the DOL staff imposed a new and potentially burdensome reporting requirement on virtually the entire securities industry.

"They just popped something on their website," said Investment Adviser Association executive director David Tittsworth. "Itís like, youíve got to be kidding me."

The trade groups got busy. On July 12, the IAA and the Securities Industry Association jointly met with the DOLís top lawyer, solicitor Howard Radzely, and other DOL officials. In a July 14 follow-up letter, the IAA said that while it would continue to pursue its substantive concerns about the "legality and propriety" of requiring advisers to file LM-10s, it was writing to express its more immediate concerns about DOLís lack of process. Prior to June 22, when the Q&A was posted, "investment advisers to Taft-Hartley plans were not aware of the Departmentís interpretative position that such service providers are required to file Form LM-10," said the group. "It is a matter of fundamental fairness that new requirements and interpretations not be imposed on investment advisers or other companies retroactively." The group asked DOL to publicly state that advisers to Taft-Hartley plans are not required to file LM-10s for fiscal years beginning before January 1, 2006. The IAA also asked that DOL engage in formal rulemaking to provide opportunity for notice and public comment.

The SIA separately submitted a July 14 letter, similarly asking the DOL to require LM-10 prospectively, to engage in formal rulemaking, to wait a year before requiring the forms.

A July 11 letter sent in by the American Bankers Association asked DOL to confirm that banks are carved out of the definition of "employer" and are therefore not subject to LM-10 filing requirements. The ABAís letter also questioned whether Congress had ever intended to require all service providers to Taft-Hartley plans, regardless of whether a service providerís own employees were unionized, to report gifts on LM-10. Like the IAA and the SIA, the ABA asked for prospective application and a yearís delay in applicability.

The groupsí advocacy efforts paid off, at least temporarily.

On July 15, DOL issued a statement indicating that it would give potential LM-10 filers a breather. The agency stated that it expects to issue LM-10 reporting guidance "soon in the near future." This guidance, it said, "will assist affected employers in fully understanding Form LM-10ís recordkeeping and reporting requirements" and will include a grace period in which statements filed by a certain date need only cover the past year, and not all prior years.

"Absent extraordinary circumstances," added DOL, "until such guidance is issued and the full grace period has expired, as an exercise of enforcement discretion, the Department will not take action to enforce the Form LM-10 reporting requirements, unless there is already a pending investigation." DOL encouraged employers to advise its Office of Labor-Management Standards of "any potential compliance difficulties" and to suggest "methods for increasing compliance with Form LM-10ís requirements . . . without imposing undue hardships on affected employers."

So what, exactly, is this Form LM-10?

You may have heard of the Taft-Hartley Act, officially known as the Labor Management Relations Act of 1947. The Taft-Hartley Act amended an earlier law, the Wagner Act, which made it unlawful for an employer to interfere with its employeesí union activities. The Taft-Hartley Act, in turn, outlawed a number of unlawful practices by labor organizations. The key point: both the Wagner Act and the Taft-Hartley Act were designed to address an employerís activities vis a vis its own employees.

In the years after the Taft-Hartley Act was enacted, Congress found that some employers and labor organizations had failed to comply with the statuteís standards of ethical conduct and that there had been breaches of trust, corruption, and general disregard of the rights of individual employees. Under the theory that sunlight is the best disinfectant, Congress enacted the Labor-Management Reporting and Disclosure Act (LMRDA), which, among other things, requires employers and labor organizations to make certain public disclosures. The goal of the LMRDA, explained Congress, was "to eliminate or prevent improper practices on the part of labor organizations, employers, labor relations consultants, and their officers and representatives which distort and defeat the policies of the [Taft-Hartley Act]."

Section 203(a) of the LMRDA states that every "employer" who makes a payment of money or other thing of value to any labor organization or any officer or agent of a labor organization must file a report with DOL. Which brings us to LM-10: the form DOL created to implement Section 203(a) of LMRDA.

Since the creation of LM-10 stemmed from a series of statutes designed to govern the relationship between an employer and its own employees, it wasnít surprising that historically, Congressís use of the term "employer" in Section 203(a) of LMRDA was interpreted to address reporting by employers who made gifts to labor organizations representing their own employees.

However, the DOL staff, in its June 22 Q&A, more expansively interpreted the word "employer" to include any employer, regardless of whether the companyís employees had unionized. Under that interpretation, nearly all U.S. business are potentially subject to LM-10 reporting requirements.

Can that be right?

The LMRDA broadly defines "employer" as "any employer . . . engaged in an industry affecting commerce which is . . . an employer within the meaning of any law of the United States relating to the employment of any employees." The definition doesnít say anything about the employerís own employees necessarily being involved in a union.

So, under the definition, an advisory firm with a receptionist and a trading assistant would seem to be an "employer" potentially subject to LM-10 reporting requirements.

Of course, whether the broad interpretation of "employer" is correct as a narrow technical matter and whether it is sound judgment as a policy call are two different questions. The ABA, for one, has hinted that the interpretation did not comport with Congressís intent when enacting LMRDA.

Hereís another way to think about it: By analogy, DOLís interpretation is equivalent to the SEC requiring all "issuers" ó a broad group over which it clearly has authority ó to file a disclosure form about their dealings with a much more narrow subset of regulated entities on which the SEC has decided to crack down (say, pension consultants),

For now, at least, DOL appears to be sticking to its interpretation. "They donít seem to be stepping back" from the broad definition of employer, said Tittsworth. "They donít seem to be sympathetic." However, he said that the IAA is going to continue arguing that point because "we donít think there was ever an intent" to regulate advisers as employers, "nor that there is a good policy rationale now" for doing so.

Even if the "employer" argument fails, advisers hoping to avoid filing LM-10s may still have an out under the so-called "two hat" argument. Under this theory, gifts provided to clients who are Taft-Hartley plan trustees arguably should not have to be reported on LM-10 because they are provided to clients in their capacity as trust fiduciaries, not as union officials.

As noted above, Section 203(a) of the LMRDA applies to every employer who makes a payment of money or other thing of value to ó read closely here ó "any labor organization or officer, agent, shop steward, or other representative of a labor organization, or employee of any labor organization." The statute doesnít explicitly require employers to report gifts made to Taft-Hartley trusts, or trust officials. In their July 12 meeting with DOL, the IAA and SIA argued that an adviser shouldnít have to report gifts made to an individual who happens to wear two hats as union official and trustee, if the gifts were made to the individual solely in his capacity as trustee. Early indications, however, are that DOL officials are not sympathetic to this argument.

To put the argument into context, take the example of Joe Smith, who is a 1) union official, 2) a Taft-Hartley trust fiduciary, and 3) a worker in a local plumbing business. Letís say your firm manages Joeís Taft-Hartley trust. You have gotten to know Joe well over the years, and want to treat Joe to dinner and a baseball game. Under the logic of the DOL Q&A, your firm would have to report the value of the dinner and baseball tickets under LM-10. Under that same logic, however, it would seem that an interior decorator who is aware that Joe is a union official and sends Joe a $30 gift certificate in appreciation for his quality bathroom remodeling work also would have to file an LM-10.

In other words, DOL seems to be taking the view that once Joe is found to wear a hat as a union official, it doesnít matter how many other hats he wears.

Thereís another argument that can be made in favor of the two-hat theory: LMRDA Section 203(a), by its terms, does not address reporting by trusts. Under the LMRDA, a "trust in which a labor organization is interested" is a specifically defined term, separate and apart from a "labor organization." While Section 203(a) requires reporting of payments to "labor organizations," it does not require reporting of payments to "trusts in which a labor organization is interested."

DOL acknowledges that in the instructions to LM-10, where it notes that the definition of a "trust in which a labor organization is interested" is "Not applicable" to the form.

Nonetheless, despite this apparent non-applicability, the DOL staffís June 22 Q&A seems to attempt to address how gifts to and from trusts must be reported on LM-10. In fact, the Q&A starts off with a citation of the definition of "trust in which a labor organization is interested."

Thatís because Form LM-30s does explicitly relate to both labor organizations and "trusts in which a labor organization is interested" (ďHave you, your spouse, or minor child directly or indirectly held an interest in or derived income or economic benefit with monetary value from a business . . . any part of which consists of buying from or selling or leasing directly or indirectly to, or otherwise dealing with your labor organization or with a trust in which your labor organization is interested.") Based on that, an argument could perhaps be made that DOL knows how to write a form that covers trusts when they want to.

Turning from the legal to the procedural: the bit of good news in all this is that DOL does appear to be receptive to the procedural concerns raised by the various trade groups, some of which have contacted the U.S. Office of Management and Budget to complain about the costs involved in completing the LM-10s. On July 21, the Investment Company Institute continued the push, meeting with DOL officials.

The betting money is that DOL, when it issues its additional LM-10 guidance in the next week or so, will require prospective reporting only. However, it remains to be seen whether they will issue a formal rulemaking, or, more importantly, scale back on their initial interpretations.

In one sense, it may not matter. The current conventional wisdom is that regardless of what DOL decides to do vis a vis LM-10, advisers will be affected by DOLís crackdown on labor organizations' LM-30 filings. Tittsworth reported that some of his groupís members have received inquiries from Taft-Hartley trust clients along the lines of "You had a holiday party last year, I attended along with my spouse, what was the value of the cheese and wine you provided?" Tittsworth noted that these inquiries can "get into some really interesting interpretative questions," such as what if the adviser provided an educational forum for union officials relating to investments at its office, and a lunch is brought in. Is the value of what is provided the training? The lunch? Both? And how is that valued? There will be a "fair amount of activity out there" generated by the LM-30, Tittsworth predicted.

Kirkpatrick & Lockhart partner David Pickle agreed. "Even if the DOL does a 180 and says that LM-10 doesnít apply to investment advisers, advisers still will be asked by some of their clients to provide information for LM-30 reporting purposes," he said. "I think DOL is not going to bend on LM-30 reporting."

As for LM-10, said Pickle, "I think the DOLís position here is developing."