JULY 2005
Investment Management
Recent DOL Guidance May Require Investment Advisers,
Broker-Dealers and Other Financial Institutions to Report
Costs of Marketing to Taft-Hartley Plans
The U.S. Department of Labor (“DOL”) recently released question and answer guidance (“Q&A”) that
has serious compliance implications for investment
advisers, broker-dealers and other financial institutions that do business with union-affiliated pension
plans (commonly called “Taft-Hartley” plans). Federal labor law has long required employers of unionized employees to report payments or gifts to persons
associated with a union (“covered persons”), including trustees of Taft-Hartley plans. But this requirement was understood to apply when an employer gave
gifts or made payments to a covered person associated
with a union that represented employees of that employer. In contrast to this long-held interpretation, the
DOL’s Office of Labor-Management Standards
(“OLMS”) just issued Q&A guidance stating that every employer that makes any gift or payment (collectively “gifts”), including gifts such as a client dinner,
to a covered person must report the gift to OLMS.
The fact that OLMS announced this interpretation in a
Q&A raises the question of whether it is a “staff” position or whether it has been endorsed by the Secretary
of Labor and other senior officials. If the Q&A is a
staff interpretation, the Secretary or her delegate could
modify or reverse it. Certain trade associations are in
the process of contacting the DOL on this issue. However, the Q&A may represent the views of the Secretary
or she may affirm the Q&A. If so, the investment advisers, broker-dealers and other financial institutions
may be subject to a new and unfamiliar reporting requirement.
BACKGROUND: DOL TOUGHENS UNION
REPORTING REQUIREMENTS
OLMS enforces laws designed to deter union-related
corruption and normally has limited dealings with investment advisers, broker-dealers and other financial
institutions. To deter corruption, federal labor law has
long required unions, union officials and employers to
file financial reports. In early 2001, OLMS became
very aggressive about union-related reporting. The
U.S. Court of Appeals for the D.C. Circuit recently upheld regulations requiring new and highly detailed reports from unions. AFL-CIO v. Chao, No. 04-5057
(May 31, 2005). It is clear from the arguments in that
case that the DOL views the required reports as tools
for informing union members of how unions are managed and how union officials are compensated.
OLMS may view employer reports as a way to track
payments to union officers and other covered persons.
EXPANSIVE DEFINITIONS OF “EMPLOYER”
AND REPORTABLE GIFTS
The Q&A is troubling because it applies a very broad
definition of “employer” and because it states that
many common marketing expenses are reportable.
According to the Q&A, “employer” means every business that has employees, i.e., virtually all businesses.
Gifts and payments must be reported both by the recipient (on DOL Form LM-30) and by employers (on
DOL Form LM-10). According to the Q&A, employers
are required to report gifts to covered persons even if
there is no relationship between the employer and a
union. Failure to report is a civil violation and, if the
failure is “willful,” a crime.
Kirkpatrick & Lockhart Nicholson Graham LLP
Reportable gifts include many items that are routinely
offered to clients and prospective clients. The Q&A
specifically lists dinners, golf outings, tickets to baseball games and invitations to holiday parties as reportable “gifts.” Indeed, it states that all gifts and
payments must be reported unless “they (1) have a
value of $25 or less, (2) are sporadic or occasional,
and (3) are given under circumstances unrelated to
the recipient’s status in a labor organization.” Although the law provides that certain payments need
not be disclosed, the statutory exemption does not
clearly apply to normal marketing expenses. The full
Q&A can be found at http://www.dol.gov/esa/regs/
compliance/olms/LM30_LM10_Trusts_Info.htm.
$10,000 or both. A related labor law makes any payments by an “employer” to a union officer or employee with the intent to influence that person in his
duties a crime punishable by up to five years in prison
and a $15,000 fine. If this law is interpreted in the
same fashion as the Q&A interprets the LM-10 reporting requirement, mere payment of normal marketing
expenses may be treated as a crime if the recipient is a
covered person and the event is perceived as intending to influence the person. Although the language of
the two statutes is not identical, the differences in language may not be sufficient to keep payment of the
marketing expenses at issue from being characterized
as criminal conduct.
REPORTING DEADLINES
CONCLUSION
Normally, employer reports on DOL Form LM-10
must be filed not later than 90 days after the end of
the employer’s fiscal year. It is unclear whether
OLMS will try to require reports for past periods or
only for periods beginning in 2005. OLMS announced a grace period ending July 15, 2005, for
LM-30 filers (i.e., recipients of gifts) and suggested informally that there may be a grace period for LM-10
filers. But a grace period will only delay the reporting deadline and may not offer retroactive relief. In
any event, OLMS has not made any public announcement about grace periods for employers.
The Q&A represents a sweeping expansion of how the
employer reporting requirement has been interpreted
and applied. The DOL undoubtedly will hear from affected sectors of the business community and may revise or abandon the view that every employer must report every payment to a covered person.
IMPLICATIONS OF THE DOL Q&A
The new Q&A is troubling for several reasons. If the
Secretary or senior DOL officials support the literal
language of the Q&A, financial institutions that engage in normal marketing to union trustees or other
officials of Taft-Hartley plans—such as taking the
trustee to dinner or a baseball game—will be required
to report marketing expenses. This rule applies regardless of amount—even a gift worth less than $25
must be reported if it was made because of the
recipient’s relationship with a union. Arguably, every
marketing expense that involves a union-appointed
trustee of a Taft-Hartley plan has such a relationship—the desire to attract and retain union-associated
benefit plans as clients.
More ominous are the criminal law implications. An
employer’s “willful failure” to report gifts is a crime,
punishable by one year in prison, a fine of up to
2 JULY 2005
Even if the DOL does change its views on the scope of
employer reporting on Form LM-10, it may not
change its views on what covered persons are required
to report on Form LM-30. That is, covered persons
may still have to report gifts that they receive from financial institutions. Taft-Hartley plans may try to address the issue by asking financial institutions to provide reporting information (e.g., the value of a dinner)
or may bar trustees and other covered persons from receiving such gifts altogether.
If you have any current or prospective clients that are
Taft-Hartley plans, we encourage you to be aware of
the issues raised by the Q&A and, as appropriate, discuss them with representatives of your Taft-Hartley clients and your K&LNG relationship attorney. We will
keep you apprised of developments regarding this issue.
David E. Pickle
dpickle@klng.com
202.778.9887
William A. Schmidt
william.schmidt@klng.com
202.778.9373
Catherine S. Bardsley
cbardsley@klng.com
202.778.9289
William P. Wade
wwade@klng.com
310.552.5072
KIRKPATRICK & LOCKHART NICHOLSON GRAHAM LLP
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Kirkpatrick & Lockhart Nicholson Graham (K&LNG) has approximately 950 lawyers and represents entrepreneurs, growth and middle market companies, capital markets
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