[Federal Register Volume 62, Number 50 (Friday, March 14, 1997)]
[Rules and Regulations]
[Pages 12101-12104]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 97-6542]


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LEGAL SERVICES CORPORATION

45 CFR Part 1610


Use of Non-LSC Funds

AGENCY: Legal Services Corporation.

ACTION: Interim rule with request for comments.

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SUMMARY: This interim rule revises the Legal Services Corporation's 
(``Corporation'' or ``LSC'') rule concerning the use of non-LSC funds 
by LSC recipients. The revisions are intended to address constitutional 
challenges raised by the previous rule, and to ensure that no LSC-
funded entity engages in restricted activities. This revised rule 
deletes the provisions on transfers of non-LSC funds and adds a new 
section setting out standards for the integrity of recipient programs.

DATES: The interim rule is effective on March 14, 1997. Comments must 
be submitted on or before April 14, 1997.

ADDRESSES: Comments should be submitted to the Office of the General 
Counsel, Legal Services Corporation, 750 First St. NE., 11th Floor, 
Washington, DC 20002-4250.

FOR FURTHER INFORMATION CONTACT: Victor Fortuno, General Counsel, (202) 
336-8910.

SUPPLEMENTARY INFORMATION: On December 2, 1996, the Corporation 
published a completely revised final rule to implement Section 504 in 
the Corporation's FY 1996 appropriations act, Pub. L. 104-134, 110 
Stat. 1321 (1996), as incorporated by the Corporation's FY 1997 
appropriations act, Pub. L. 104-208, 110 Stat. 3009. Section 504 
applies certain restrictions to any person or entity receiving LSC 
funds, effectively restricting the use of virtually all of a 
recipient's funds to the same degree that it restricts LSC funds. 
Although not required to by law, the Corporation extended the 
restrictions on a recipient's funds to a transfer of a recipient's non-
LSC funds. Thus, the rule required that when a recipient transferred 
its non-LSC funds to an entity that had no LSC funds, the conditions 
would remain attached to the transferred funds. However, the other 
funds of the entity would not be affected.
    In January 1997, five legal services recipients in Hawaii, Alaska, 
and California, together with two of their program lawyers, two non-
federal funders and a client organization, filed suit in the United 
States District Court for the District of Hawaii challenging a number 
of the Section 504 restrictions as unconstitutional conditions on their 
use of non-LSC funds. Legal Aid Society of Hawaii, et al. v. Legal 
Services Corporation, Civil Action No. 97-00032 ACK. On February 14, 
1997, the Court entered an order which preliminarily enjoined the 
Corporation from enforcing restrictions on the recipients'' use of non-
LSC funds for certain restrictions as to which the Court determined 
that the plaintiffs'' had a fair likelihood of demonstrating an 
infringement of First Amendment rights. The Court's preliminary ruling 
was grounded in pertinent part on its understanding of the 
Corporation's interrelated organization policy, but also implicated the 
expansive reach of the Corporation's restrictions on non-LSC funds. The 
effect of the preliminary order is to allow those recipients who are 
plaintiffs in the case to use their non-LSC funds to engage in certain 
prohibited activities within their recipient programs during the 
interim period before a trial on the merits and a final ruling by the 
judge. This creates at least a temporary situation clearly at odds with 
congressional intent.
    The Corporation has reviewed its policies and regulations and is 
making certain limited adjustments, which are intended both to preserve 
the statutory system created by Congress that forbids recipients from 
engaging in prohibited activities and subsidizing prohibited activities 
with LSC funds and to respond to the constitutional concerns addressed 
by the Court. In making these limited revisions, the Corporation is 
acting to reinforce its commitment to the statutory structure of 
prohibitions and restrictions intended by Congress without risking the 
possible infringement of constitutional rights where the prohibited 
activities are supported entirely by non-LSC funds and carried out 
without subsidization by the LSC grantee. Under the Court's decision, 
an LSC-funded entity can engage in restricted activities. While 
recognizing that this initial decision is not dispositive of the issue, 
the Corporation is mindful that Congress clearly intended to assure 
that no LSC-funded entity engage in restricted activities.
    The Operations and Regulations Committee (``Committee'') of the 
Corporation's Board of Directors (``Board'') held public hearings on 
this matter and considered a draft interim rule on March 7, 1997. The 
Committee recommended and the Board agreed on March 8, 1997, to publish 
this revised rule as an interim rule. An interim rule is necessary in 
order to provide prompt and critically necessary guidance to LSC 
recipients on the revised legal status of these regulations, address 
the alleged constitutional infirmities, and yet preserve the integrity 
of LSC-funded programs consistent with congressional intent. 
Accordingly, prior notice and public comment are impracticable, 
unnecessary, and contrary to the public interest. See 5 U.S.C. Sections 
553(b)(3)(B) and 553(d)(3). This rule is effective upon publication. 
However, the Corporation also solicits comment on this interim rule for 
review and consideration by the Committee and Board. After receipt of 
written public comment, the Committee intends to hold public hearings 
to discuss the written comments and to hear oral comments. It is 
anticipated that a final rule will be issued, which will supersede this 
interim rule.
    Generally, this rule deletes provisions in Section 1610.7 on the 
transfer of non-LSC funds and adds a new section dealing with the 
integrity of recipient programs. This section also formally replaces 
and nullifies Section 1-7 of the Corporation's 1986 Audit and 
Accounting Guide, which sets out the Corporation's policy on 
interrelated organizations.
    A section-by-section analysis is provided below.

[[Page 12102]]

Section 1610.1 Purpose

    The purpose section is revised to reflect congressional intent that 
no LSC-funded organization engage in any restricted activities.

Section 1610.7  Transfers of funds

    The provisions on the transfer of non-LSC funds are deleted from 
this section. The new Sec. 1610.8, which sets out standards to ensure 
the integrity of the recipient program, has been added.

Section 1610.8  Program Integrity of Recipient

    The purpose of this new section is to ensure the integrity of 
recipient programs. It provides that this part's restrictions on non-
LSC funds will be applied to an organization found to be interrelated 
with a recipient such that it controls, is controlled by or is subject 
to common control with another organization, unless the recipient can 
demonstrate that it meets this part's standards of program integrity. 
This new policy on program integrity is based in part on the 
Corporation's policy on interrelated organizations, which is modified 
in this rule to allow recipients to have an affiliation or relationship 
with separate organizations which may engage in prohibited activities 
funded solely with non-LSC funds, provided that the standards for 
program integrity in this rule are met. The standards of program 
integrity require that there be a wall of separation between the 
recipient and another organization so that LSC funds will not be used 
to subsidize prohibited activities. Thus, although the recipient's 
governing body could control the other organization, the separate and 
distinct integrity of the recipient program is required to be 
maintained.
    Paragraph (a) of this section essentially reflects the 
Corporation's old policy on interrelated organizations. It states that 
if a recipient controls, is controlled by or is subject to common 
control with another organization, the two organizations will be found 
to be interrelated and will be subject to the restrictions of this part 
unless they meet the standards of program integrity in paragraph (b). 
``Control'' is defined as the ability to determine or influence the 
management or policies of another organization. The test for 
determining whether such control exists is largely the same as in the 
old interrelated policy, with a few adjustments that are reflected in 
the Section 1610.8(a)(3). The old policy stated that a determination of 
interrelatedness will be based on the totality of the facts and that no 
one factor would be determinative. This new rule retains this provision 
except that it cites one factor that is determinative of 
interrelatedness. If there is an overlap of officers and directors such 
that the governing body of one organization includes enough 
representatives of the other to cause or prevent action by the other, 
interrelated status will be found. Nevertheless, this interrelation 
does not automatically mean that the restrictions of this part will be 
applied to both organizations. The restrictions would only be applied 
if the standards of program integrity in paragraph (b) are not met.
    Paragraph (b) sets out the standards of program integrity. First, 
the other organization must not receive any LSC funds. Second, the 
relationship of the recipient with the other organization must be 
approved by the recipient's governing body. This ensures that it is the 
local board, which is governed by the Corporation's governing body 
regulation, 45 CFR Part 1607, rather than a recipient's staff or 
management, that approves the relationship. The third standard requires 
clear physical and financial separation of the recipient from the other 
organization such that the recipient must have an objective integrity 
and independence. Factors considered to determine whether such 
objective integrity and independence exist include the existence of 
separate personnel, the existence of separate accounting and 
timekeeping records, the existence of separate facilities, and the 
extent to which signs or other forms of identification distinguish the 
recipient from the organization. Determinations taking into account 
these standards are necessary to ensure that there is no identification 
of the recipient with restricted activities and that the other 
organization is not a sham or paper organization and is not so closely 
identified with the recipient that there might be confusion or 
misunderstanding about the recipient's involvement with or endorsement 
of prohibited activities.

List of Subjects in 45 CFR Part 1610

    Grant programs, Legal services.

    For reasons set forth in the preamble, LSC revises 45 CFR Part 1610 
to read as follows:

PART 1610--USE OF NON-LSC FUNDS

Sec.
1610.1  Purpose.
1610.2  Definitions.
1610.3  Prohibition.
1610.4  Authorized use of other funds.
1610.5  Notification.
1610.6  Applicability.
1610.7  Transfers of recipient funds.
1610.8  Program integrity of recipient.
1610.9  Accounting.

    Authority: 42 U.S.C. 2996i; Pub. L. 104-208, 110 Stat. 3009 Pub. 
L. 104-134 110 Stat. 1321 (1996).

Sec. 1610.1  Purpose.

    This part is designed to implement statutory restrictions on the 
use of non-LSC funds by LSC recipients and to ensure that no LSC-funded 
entity shall engage in any activities restricted by this part.


Sec. 1610.2  Definitions.

    (a) Purpose prohibited by the LSC Act means any activity prohibited 
by the following sections of the LSC Act and those provisions of the 
Corporation's regulations that implement such sections of the Act:
    (1) Sections 1006(d)(3), 1006(d)(4), 1007(a)(6), and 1007(b)(4) of 
the LSC Act and 45 CFR part 1608 of the LSC Regulations (Political 
activities);
    (2) Section 1007(a)(10) of the LSC Act (Activities inconsistent 
with professional responsibilities);
    (3) Section 1007(b)(1) of the LSC Act and 45 CFR part 1609 of the 
LSC regulations (Fee-generating cases);
    (4) Section 1007(b)(2) of the LSC Act and 45 CFR part 1613 of the 
LSC Regulations (Criminal proceedings);
    (5) Section 1007(b)(3) of the LSC Act and 45 CFR part 1615 of the 
LSC Regulations (Actions challenging criminal convictions);
    (6) Section 1007(b)(7) of the LSC Act and 45 CFR part 1612 of the 
LSC Regulations (Organizing activities);
    (7) Section 1007(b)(8) of the LSC Act (Abortions);
    (8) Section 1007(b)(9) of the LSC Act (School desegregation); and
    (9) Section 1007(b)(10) of the LSC Act (Violations of Military 
Selective Service Act or military desertion).
    (b) Activity prohibited by or inconsistent with Section 504 means 
any activity prohibited by, or inconsistent with the requirements of, 
the following sections of 110 Stat. 1321 (1996) and those provisions of 
the Corporation's regulations that implement those sections:
    (1) Section 504(a)(1) and 45 CFR part 1632 of the LSC Regulations 
(Redistricting);
    (2) Sections 504(a)(2) through (6), as modified by Sections 504(b) 
and (e), and 45 CFR part 1612 of the LSC Regulations (Legislative and 
administrative advocacy);
    (3) Section 504(a)(7) and 45 CFR part 1617 of the LSC Regulations 
(Class actions);
    (4) Section 504(a)(8) and 45 CFR part 1636 of the LSC Regulations 
(Statement of facts and client identification);

[[Page 12103]]

    (5) Section 504(a)(9) and 45 CFR part 1620 of the LSC Regulations 
(Priorities);
    (6) Section 504(a)(10) and 45 CFR part 1635 of the LSC Regulations 
(Timekeeping);
    (7) Section 504(a)(11) and 45 CFR part 1626 of the LSC Regulations 
(Aliens);
    (8) Section 504(a)(12) and 45 CFR part 1612 of the LSC Regulations 
(Public policy training);
    (9) Section 504(a)(13) and 45 CFR part 1642 of the LSC Regulations 
(Attorneys' fees);
    (10) Section 504(a)(14) (Abortion litigation);
    (11) Section 504(a)(15) and 45 CFR part 1637 of the LSC Regulations 
(Prisoner litigation);
    (12) Section 504(a) (16), as modified by Section 504(e), and 45 CFR 
part 1639 of the LSC Regulations (Welfare reform);
    (13) Section 504(a)(17) and 45 CFR part 1633 of the LSC Regulations 
(Drug-related evictions); and
    (14) Section 504(a)(18) and 45 CFR part 1638 of the LSC Regulations 
(In-person solicitation).
    (c) IOLTA funds means funds derived from programs established by 
State court rules or legislation that collect and distribute interest 
on lawyers' trust accounts.
    (d) Non-LSC funds means funds derived from a source other than the 
Corporation.
    (e) Private funds means funds derived from an individual or entity 
other than a governmental source or LSC.
    (f) Public funds means non-LSC funds derived from a Federal, State, 
or local government or instrumentality of a government. For purposes of 
this part, IOLTA funds shall be treated in the same manner as public 
funds.
    (g) Transfer means a transfer of a recipient's funds for the 
purpose of conducting programmatic activities that are normally 
conducted by the recipient, such as the representation of eligible 
clients, or that provide direct support to the recipient's legal 
assistance activities.
    (h) Tribal funds means funds received from an Indian tribe or from 
a private nonprofit foundation or organization for the benefit of 
Indians or Indian tribes.


Sec. 1610.3  Prohibition.

    A recipient may not use non-LSC funds for any purpose prohibited by 
the LSC Act or for any activity prohibited by or inconsistent with 
Section 504, unless such use is authorized by Secs. 1610.4, 1610.6 or 
1610.7 of this part.


Sec. 1610.4  Authorized use of other funds.

    (a) A recipient may receive tribal funds and expend them in 
accordance with the specific purposes for which the tribal funds were 
provided.
    (b) A recipient may receive public or IOLTA funds and use them in 
accordance with the specific purposes for which they were provided, if 
the funds are not used for any activity prohibited by or inconsistent 
with Section 504.
    (c) A recipient may receive private funds and use them in 
accordance with the purposes for which they were provided, provided 
that the funds are not used for any activity prohibited by the LSC Act 
or prohibited or inconsistent with Section 504.
    (d) A recipient may use non-LSC funds to provide legal assistance 
to an individual who is not financially eligible for services under 
part 1611 of this chapter, provided that the funds are used for the 
specific purposes for which those funds were provided and are not used 
for any activity prohibited by the LSC Act or prohibited by or 
inconsistent with Section 504.


Sec. 1610.5  Notification.

    (a) Except as provided in paragraph (b) of this section, no 
recipient may accept funds from any source other than the Corporation, 
unless the recipient provides to the source of the funds written 
notification of the prohibitions and conditions which apply to the 
funds.
    (b) A recipient is not required to provide such notification for 
receipt of contributions of less than $250.


Sec. 1610.6  Applicability.

    Notwithstanding Sec. 1610.7(a), the prohibitions referred to in 
Secs. 1610.2(a)(4) (Criminal proceedings), (a)(5) (Actions challenging 
criminal convictions), (b)(7) (Aliens) or (b)(11) (Prisoner litigation) 
of this part will not apply to:
    (a) A recipient's or subrecipient's separately funded public 
defender program or project; or
    (b) Criminal or related cases accepted by a recipient or 
subrecipient pursuant to a court appointment.


Sec. 1610.7  Transfers of recipient funds.

    (a) For a transfer of LSC funds, the prohibitions and requirements 
referred to in this part, except as modified by paragraphs (b) and (c) 
of this section, will apply both to the funds transferred and to the 
non-LSC funds of the person or entity.
    (b)(1) In regard to the requirement in Sec. 1610.2(b)(5) on 
priorities, persons or entities receiving a transfer of LSC funds shall 
either:
    (i) use the funds transferred consistent with the recipient's 
priorities; or
    (ii) establish their own priorities for the use of the funds 
transferred consistent with 45 CFR part 1620;
    (2) In regard to the requirement in Sec. 1610.2(b)(6) on 
timekeeping, persons or entities receiving a transfer of LSC funds are 
required to maintain records of time spent on each case or matter 
undertaken with the funds transferred.
    (c) For a transfer of LSC funds to bar associations, pro bono 
programs, private attorneys or law firms, or other entities for the 
sole purpose of funding private attorney involvement activities (PAI) 
pursuant to 45 CFR part 1614, the prohibitions or requirements of this 
part shall apply only to the funds transferred.


Sec. 1610.8  Program integrity of recipient.

    (a) If a recipient controls, is controlled by or is subject to 
common control with another organization, the two organizations are 
interrelated organizations and the restrictions in this part will be 
applied to both organizations, unless the association between the two 
organizations meets the standards of program integrity in paragraph (b) 
of this section.
    (1) Control means the direct or indirect ability to determine the 
direction of management and policies or influence the management or 
policies of another organization.
    (2) Factors considered to determine whether control exists are:
    (i) The extent and pattern of any overlap of officers, directors, 
or other managers between two organizations;
    (ii) The contractual and financial relationships (especially in 
terms of the proportion of the organization's funds or resources that 
are provided by the possibly controlling organization);
    (iii) The history of relationships among the organizations (e.g., 
the fact that one organization provided initial funding and named 
initial director of another would be a relevant fact; as would facts 
relating to decision-making on policies or transactions of mutual 
interest; actual control of particular decisions);
    (iv) A close identity of interest;
    (v) One organization has become a mere conduit, ``incorporation 
pocketbook,'' or ``straw'' party for another;
    (vi) Funds are solicited by a separate entity in the name of and 
with the expressed or implicit approval of the recipient and 
substantially all of the funds solicited are intended by the 
contributor or are otherwise required to be transferred to the 
recipient or used at its discretion or direction;
    (vii) A recipient transfers resources to another entity that holds 
these resources for the benefit of the recipient; and
    (viii) A recipient assigns functions to an entity whose funding is 
primarily

[[Page 12104]]

derived from sources other than public contributions.
    (3) A determination of interrelatedness will be based on the 
totality of the facts and the presence or absence of any one or more 
factors is not determinative, except that an overlap of officers and 
directors such that the governing body of one organization includes 
enough representatives of the other to cause or prevent action by the 
other will be determinative that the organizations are interrelated.
    (b) The restrictions in this part will not be applied to an 
organization found to be interrelated pursuant to paragraph (a) if:
    (1) The organization receives no LSC funds, and LSC funds do not 
directly or indirectly subsidize restricted activities;
    (2) The relationship with the organization is approved by the 
recipient's governing body; and
    (3) The recipient is physically and financially separate from the 
organization. Mere bookkeeping separation of LSC funds from other funds 
is not sufficient. In order to be physically and financially separate, 
the recipient and the organization must have an objective integrity and 
independence from one another. Factors considered to determine whether 
such objective integrity and independence exist shall include, but are 
not limited to:
    (i) The existence of separate personnel;
    (ii) The existence of separate accounting and timekeeping records;
    (iii) The existence of separate facilities; and
    (iv) The extent to which signs and other forms of identification 
which distinguish the recipient from the organization are present.


Sec. 1610.9  Accounting.

    Funds received by a recipient from a source other than the 
Corporation shall be accounted for as separate and distinct receipts 
and disbursements in a manner directed by the Corporation.

    Dated: March 11, 1997.
Victor M. Fortuno,
General Counsel.
[FR Doc. 97-6542 Filed 3-13-97; 8:45 am]
BILLING CODE 7050-01-P