82 FR 37177 - Bonding Requirements for Recipients
LEGAL SERVICES CORPORATION Federal Register Volume 82, Issue 152 (August 9, 2017)
Federal Register Volume 82, Issue 152 (August 9, 2017)
| Page Range | 37177-37181 | |
| FR Document | 2017-16765 |
[Federal Register Volume 82, Number 152 (Wednesday, August 9, 2017)] [Rules and Regulations] [Pages 37177-37181] From the Federal Register Online [www.thefederalregister.org] [FR Doc No: 2017-16765] ======================================================================= ----------------------------------------------------------------------- LEGAL SERVICES CORPORATION 45 CFR Part 1629 Bonding Requirements for Recipients AGENCY: Legal Services Corporation. ACTION: Final rule. ----------------------------------------------------------------------- SUMMARY: This final rule revises the Legal Services Corporation's (LSC or the Corporation) regulation about bonding requirements for LSC recipients. It requires recipients to bond all their employees and to ensure that third parties who handle recipients' funds have bond coverage, allows recipients to use other forms of insurance similar to fidelity bonds, raises the minimum level of coverage, and allows recipients to use LSC funds to pay for bonding costs. This final rule updates regulations to reflect current insurance practices and simplifies the language in the rule to reduce confusion. [[Page 37178]] DATES: This final rule is effective September 8, 2017. LSC recipients and subrecipients must comply with the rule no later than December 31, 2017. FOR FURTHER INFORMATION CONTACT: Stefanie K. Davis, Assistant General Counsel, Legal Services Corporation, 3333 K Street NW., Washington, DC 20007; (202) 295-1563 (phone), (202) 337-6519 (fax), or [email protected]. SUPPLEMENTARY INFORMATION: I. Regulatory Background LSC created part 1629 in 1984 after several situations in which recipients lost LSC funds through the dishonest behavior of persons associated with the recipient. 49 FR 28717, July 16, 1984. While the recipient recovered the funds in some cases, in others, the recipient had to absorb the loss. Id. Before enacting part 1629, LSC recommended that recipients have fidelity coverage as a basic internal control. See LSC Audit and Accounting Guide for Recipients and Auditors, revised June 1977, p. 3- 3. LSC intended part 1629 to ``make mandatory [this] important protection for the limited funds available to serve eligible clients.'' 49 FR 23396, June 6, 1984. LSC originally proposed requiring programs to obtain fidelity bond coverage at a minimum level equal to 25% of the recipient's annualized LSC funding. Id. Based on comments received in response to the proposed rule, LSC decreased the required coverage level to 10%. 49 FR 28717, July 16, 1984. LSC also set a $50,000 minimum coverage level ``in response to the recognition that a loss to a small program is proportionally greater in effect than a similar one to a large program.'' Id. LSC added rulemaking on part 1629 to its annual rulemaking agenda in April 2016. Regulatory action is justified for three reasons. First, the regulation is outdated. LSC has not revised part 1629 since it was adopted in 1984, and LSC should update it to reflect current insurance practices. Second, the regulation was derived from a source that does not provide the optimal model for a federally funded grant-making entity today. The original rule was based on fidelity bonding provisions found in the Employee Retirement Income Security Act of 1974 (ERISA). See Section 412 of Pub. L. 93-406, and related regulations at 29 CFR 2550.412-1 and 29 CFR part 2580. ERISA concerns minimum standards for retirement plans in private industry. LSC no longer believes that this is an appropriate model for LSC to follow, and that instead LSC should look to current regulations governing similar grant-making entities and to reflect current insurance practices. Third, the current regulation is in some respects unclear or ambiguous. LSC has received requests for guidance on how to interpret certain provisions in part 1629, particularly those sections about the form and extent of coverage required by the rule. LSC does not believe that the language in part 1629 provides sufficiently clear guidance to LSC recipients or to LSC staff. LSC proposed an approach that is tailored to LSC's needs and that simplifies the language in the rule. On October 17, 2016, the Operations and Regulations Committee (Committee) of LSC's Board of Directors (Board) voted to recommend that the Board authorize rulemaking on part 1629. On October 19, 2016, the Board authorized LSC to begin rulemaking. On April 23, 2017, the Committee voted to recommend that the Board approve publication of a Notice of Proposed Rulemaking (NPRM) in the Federal Register for notice and public comment. On April 24, 2017, the Board accepted the Committee's recommendation and voted to approve publication of the NPRM in the Federal Resister. 82 FR 20555, May 3, 2017. On July 21, 2017, the Committee recommended publication of this final rule to the Board. On July 22, 2017, the Board voted to publish this final rule. Material about this rulemaking is available in the open rulemaking section of LSC's Web site at http://www.lsc.gov/about/regulations-rules/open-rulemaking. After the effective date of this rule, those materials will appear in the closed rulemaking section of LSC's Web site at http://www.lsc.gov/about/regulations-rules/closed-rulemaking. II. Section-by-Section Discussion of Comments LSC received one comment during the public comment period from Legal Action of Wisconsin, Inc. (Legal Action), an LSC recipient. Legal Action generally supported LSC's proposed changes but expressed concern about the inclusion of ``volunteers'' as among the persons required to be bonded. Legal Action also asked that LSC allow recipients to charge bonding costs as ``direct'' costs to their LSC grant. These comments and LSC's response will be discussed in more detail below. Section 1629.1 Purpose Part 1629 currently does not have a purpose section. LSC proposed to add a purpose section stating who must be covered under the bond and what losses the bond must protect against. LSC received one comment on this section which will be addressed in the response to the comment on Sec. 1629.3 of the proposed rule. LSC does not propose to make any changes to this section in the final rule. Section 1629.2 Definitions LSC proposed to define annualized funding level to include the amount of the Basic Field Grant and special purpose grant funds a recipient receives annually from LSC. LSC believes it is necessary to include ``special purpose grants'' of LSC funds, such as Technology Initiative Grants, Pro Bono Innovation Fund grants, and emergency relief grants in the definition of annualized funding level to ensure that the maximum amount of LSC funds are protected. LSC received no comments on this section of the proposed rule. LSC will adopt the language as proposed in the final rule. Section 1629.3 Who must be bonded? LSC currently requires recipients to bond ``[e]very director, officer, employee and agent of a program who handles funds or property of the program . . . .'' 45 CFR 1629.2(a) (emphasis added). LSC considers the term ``handles'' to include access to funds or other recipient property or ``decision-making powers with respect to funds or property which can give rise to [] risk of loss.'' Id. Through a review of recipient insurance policies, LSC has found that most grantees have fidelity coverage for all their employees. This common practice exceeds the current minimum requirements of part 1629. When employees who were not required to be bonded under part 1629 have misappropriated LSC funds, grantees that exceeded the minimum part 1629 coverage have typically been protected from loss. LSC believes this common practice is desirable and proposes to require that recipients carry coverage for all employees, regardless of whether the employees ``handle'' program funds. LSC does not believe that requiring coverage for all employees will impose more costs on the recipients. LSC examined 136 recipient policies from 2015-2017, including recipients that are no longer receiving an LSC grant, and only one recipient had a schedule policy covering a select number of individuals. LSC compared that schedule policy to blanket policies purchased by grantees of similar size and determined that the schedule policy was more expensive than the blanket policies of the other recipients. This analysis supports the conclusion that LSC is not imposing costs that the [[Page 37179]] recipients do not already bear, and that the proposed update to the regulation is consistent with recipients' existing practices. LSC currently requires grantees to bond ``agents'' who handle funds or property of the program. 45 CFR 1629.2(a). But LSC has found that most recipients' policies do not cover the dishonest or fraudulent actions of agents and independent contractors. In fact, many policies explicitly exclude agents and independent contractors from the definition of ``covered employee.'' This exclusion is problematic, as LSC recipients are now turning to third parties to handle payroll functions. See Legal Services Corporation Board of Directors, Operations and Regulations Committee, Transcript of Rulemaking Workshop, Wednesday, May 18, 2016, pp. 82-84 (comments of Diana White). This means that LSC funds are handled by persons outside of the recipient's control and insurance coverage. In areas where there are few insurers to choose from, it may be impossible for recipients to get insurance that covers ``agents'' or ``independent contractors.'' To address these issues and adequately protect LSC funds from misappropriation by recipients and third parties, LSC proposed three changes to the existing rule. First, LSC proposed to require that recipients' bonds cover volunteers, in addition to directors, officers, employees, and agents of the recipient. Second, LSC proposed to require recipients to ensure that third parties who provide payroll, billing, and collection services to the recipient have fidelity bond coverage or similar insurance. The recipient may accomplish this either by extending its own insurance to the third party or by ensuring that the third party has its own fidelity bond coverage sufficient to protect LSC funds in the third party's hands. Finally, LSC proposed to include language allowing recipients to either cover subrecipients through their own fidelity policies or ensure that the subrecipients have policies adequate to protect subgranted funds. Comments: Legal Action provided three comments about this section. First, Legal Action expressed support for LSC's proposal to extend the coverage requirement under Sec. 1629.3(b) to third parties that only provide payroll, billing, or collection services. Legal Action believed that it would not need to buy more insurance coverage to comply with this requirement. Legal Action also expressed concern, however, about the proposal to require recipients to bond ``volunteers.'' Legal Action stated that this will make obtaining coverage more difficult because its current policy covers directors, officers, and employees, but not volunteers. Per Legal Action's insurance agent and its carrier's underwriting staff, Legal Action will need to purchase a stand-alone crime policy with an added endorsement to broaden its coverage to include ``volunteers.'' Legal Action's agent believes this could increase annual premiums by 26%. Because of the increased premiums, Legal Action asked LSC to drop ``volunteers'' from the proposed rule in Sec. Sec. 1629.1 & 1629.3(a). Legal Action also suggested that if LSC decided to keep ``volunteers'' in the proposed rule, then LSC should define ``volunteers.'' Legal Action suggested that LSC limit the requirement to volunteers who have access to LSC funds and exclude volunteer attorneys who accept cases referred from Legal Action. Finally, Legal Action asked that LSC drop the requirement under Sec. 1629.3(c)(1) that subrecipients supply coverage for volunteers. Legal Action expressed concern that subrecipients also would likely incur additional costs to meet this requirement. Legal Action stated this requirement may discourage potential subrecipients from partnering with LSC recipients in cases where the subgrant is small and the cost of compliance is high. Response: LSC will retain the language from the proposed rule. For most recipients, the proposed rule will not impose additional costs. This is because most recipients' policies already include ``volunteers'' in the definition of a covered ``employee.'' In those policies, ``volunteers'' are limited to those who are subject to the recipient's direction and control and who perform services for the recipient. LSC reviewed the policies of six recipients similar in size to Legal Action who have policies that include ``volunteers'' as employees covered by the policy. Policies ranged in amount from $250,000 to $1 million in coverage, with deductibles ranging from $2,500 to $10,000, and annual premiums ranging from $1,124 to $3,628. From this analysis, it appears that insurers offer policies Legal Action could consider purchasing that would provide coverage for the actions of volunteers without additional expense. As to the requirement that subrecipients also provide coverage for volunteers, LSC will retain the proposed language. Anytime a recipient delegates tasks to another entity, often with less capacity and/or fewer controls than the recipient itself has, that recipient runs the risk that LSC funds may be misappropriated. Because most subgrantee agreements may entail a greater risk, LSC thinks it would be imprudent to relax the requirements proposed in the NPRM. Section 1629.4 What forms of bonds can recipients use? Current Sec. 1629.5 allows recipients to choose different forms of bonds, such as individual, blanket, or schedule. 45 CFR 1629.5. Section 1629.5 currently does not address whether recipients may choose types of insurance other than a fidelity bond that achieve the same purpose as a fidelity bond. Most LSC recipients now protect against employee dishonesty through riders to their standard commercial crime policies. Few grantees obtain separate fidelity bonds. In 1999, LSC issued an external opinion permitting recipients to use employee dishonesty insurance to satisfy the bonding requirements of part 1629 if the recipient could show that the policy gives the same level of protection as a fidelity bond. See External Opinion 1999-10- 26, Part 1629 Purchase of Employee Dishonesty Insurance in Lieu of a Fidelity Bond (October 26, 1999). To reflect this long-standing LSC policy, LSC proposed revising part 1629 to expressly allow recipients to substitute employee dishonesty policies or other methods of coverage for fidelity bonds. This revision would give recipients greater flexibility to choose the most readily available and cost-effective methods of insuring LSC funds. The revision also would make clear that the substance and amount of coverage is more important than the form. LSC received no comments on this section of the proposed rule. LSC will adopt the language as proposed in the final rule. Section 1629.5 What losses must the bond cover? Current Sec. 1629.4 requires recipients to have bonds that protect them against ``all those risks of loss that might arise through dishonest or fraudulent acts in the handling of funds[.]'' The strict language--``all those risks of loss''--implies that recipients must be completely covered in the event of a loss, and that policies with deductibles would not be acceptable under current part 1629. This is because if a recipient has LSC funds stolen, and the policy requires the recipient to absorb a portion of that loss by paying a deductible, then the recipient's policy did not cover against ``all those risks of loss.'' Such strict language makes sense under ERISA statutes and regulations, as they are designed to protect retirees' pension funds. But such language may [[Page 37180]] prevent recipients from obtaining policies that will protect LSC funds adequately if policies without deductibles are prohibitively expensive. In the NPRM, LSC proposed to simplify the language about the types of losses that the bond must cover and revise the rule to allow recipients to purchase policies that require payment of deductibles. LSC proposed revising the definition to state simply that the ``bond must provide recovery for loss caused by such acts as: Fraud, dishonesty, larceny, theft, embezzlement, forgery, misappropriation, wrongful abstraction, wrongful conversion, willful misapplication, or any other fraudulent or dishonest act committed by an employee, officer, director, agent, or volunteer.'' LSC received no comments on this section of the proposed rule. LSC will adopt the language as proposed in the final rule. Section 1629.6 What is the required minimum level of coverage? Under the existing rule, recipients must maintain bond coverage equal to at least 10% of the recipient's annualized LSC funding or of the initial grant if the program is a new grantee. 45 CFR 1629.1(a). The minimum level of coverage may never be less than $50,000. Id. In the NPRM, LSC proposed to increase the minimum coverage level, which has remained unchanged since 1984. Based on a sampling of current recipients' policies, most recipients already exceed the $50,000 minimum level of coverage. In fact, most policies provided coverage in excess of $100,000. For those recipients that currently have a $100,000 policy limit, the average annual premium was $561. Because the common practice among recipients already is to insure recipient funds above the minimum amount required by current Sec. 1629.1(a), LSC believes it is reasonable for LSC to raise the minimum coverage level to $100,000. LSC does not propose to change the minimum percentage for coverage. LSC received no comments on this section of the proposed rule. LSC will adopt the language as proposed in the final rule. Section 1629.7 May LSC funds be used to cover bonding costs? Part 1629 currently is silent as to which costs associated with fidelity bond coverage--deductibles, premiums, rates, and single loss retention--are allowable using LSC funds. To improve clarity on this point, LSC proposed to allow recipients to use LSC funds to pay for the costs of bonding under this part if they are (1) consistent with 45 CFR part 1630, (2) in accordance with sound business practice, and (3) reasonable. This proposed rule is based on the Uniform Guidance, which allows for such costs. See 2 CFR 200.427. LSC considered limiting the amount of deductibles that LSC would consider reasonable in the proposed rule. During the process of drafting this proposed rule, LSC examined a sample of recipients' current fidelity bonds and found that most of those recipients' policies have deductibles ranging from $1,000 to $5,000. LSC could not determine, based on research of external sources, whether there are current best practices in the nonprofit insurance world that would help LSC establish a reasonable limit on deductibles. LSC determined that it would need more data to set deductible limits and has therefore chosen to allow recipients the flexibility to consider the losses they are willing to absorb when deciding the appropriate deductibles, if the deductibles are consistent with part 1630, in accordance with sound business practice, and reasonable. Comments: Legal Action suggested that LSC allow recipients to charge bonding costs to the LSC grant as either direct or indirect costs. Legal Action reasoned that some recipients may not utilize ``indirect'' cost allocation or may not have an approved ``indirect'' cost rate. Response: LSC will retain the language from the NPRM in the final rule. LSC does not think it should make an exception to the standard principle set out in the Uniform Guidance that the costs of bonding required by non-Federal entities in the general conduct of their operations are allowable as an indirect cost. List of Subjects in 45 CFR Part 1629 Fidelity bond, Grant programs-law, Insurance. For the reasons set forth in the preamble, the Legal Services Corporation revises 45 CFR part 1629 to read as follows: PART 1629--BONDING REQUIREMENTS FOR RECIPIENTS Sec. 1629.1 Purpose. 1629.2 Definitions. 1629.3 Who must be bonded? 1629.4 What forms of bonds can recipients use? 1629.5 What losses must the bond cover? 1629.6 What is the required minimum level of coverage? 1629.7 Can LSC funds be used to cover bonding costs? Authority: 42 U.S.C. 2996e(1)(A) and 2996f(3). Sec. 1629.1 Purpose. This part is intended to protect LSC funds by requiring that recipients be bonded or have similar insurance coverage to indemnify recipients against losses resulting from fraudulent or dishonest acts committed by one or more employees, officers, directors, agents, volunteers, and third-party contractors who handle LSC funds. Sec. 1629.2 Definitions. Annualized funding level means the amount of: (1) Basic Field Grant funds (including Agricultural Worker and Native American) and (2) Special grants of LSC funds, including Technology Initiative Grants, Pro Bono Innovation Fund grants, and emergency relief grants, awarded by LSC to the recipient for the fiscal year included in the recipient's annual audited financial statements. Sec. 1629.3 Who must be bonded? (a) A recipient must supply fidelity bond coverage for all employees, officers, directors, agents, and volunteers. (b) If a recipient uses a third party for payroll, billing, or collection services, the recipient must either supply coverage covering the third party or ensure that the third party has a fidelity bond or similar insurance coverage. (c) For recipients with subgrants: (1) The recipient must extend its fidelity bond coverage to supply identical coverage to the subrecipient and the subrecipient's directors, officers, employees, agents, and volunteers to the extent required to comply with this Part; or (2) The subrecipient must supply proof of its own fidelity bond coverage that meets the requirements of this Part for the subrecipient's directors, officers, employees, agents, and volunteers. Sec. 1629.4 What forms of bonds can recipients use? (a) A recipient may use any form of bond, such as individual, name schedule, position schedule, blanket, or any combination of such forms of bonds, as long as the type or combination of bonds secured adequately protects LSC funds. (b) A recipient may use similar forms of insurance that essentially fulfill the same purpose as a fidelity bond. Sec. 1629.5 What losses must the bond cover? The bond must provide recovery for loss caused by such acts as fraud, dishonesty, larceny, theft, [[Page 37181]] embezzlement, forgery, misappropriation, wrongful abstraction, wrongful conversion, willful misapplication, or any other fraudulent or dishonest act committed by an employee, officer, director, agent, or volunteer. Sec. 1629.6 What is the required minimum level of coverage? (a) A recipient must carry fidelity bond coverage or similar coverage at a minimum level of at least ten percent of its annualized funding level for the previous fiscal year. (b) If a recipient is a new recipient, the coverage must be at a minimum level of at least ten percent of the initial grant. (c) Notwithstanding paragraphs (a) and (b) of this section, recipients must not carry coverage under this part at a level less than $100,000. Sec. 1629.7 Can LSC funds be used to cover bonding costs? Costs of bonding required by this part are allowable if expended consistent with 45 CFR part 1630. Costs of bonding such as rates, deductibles, single loss retention, and premiums, are allowable as an indirect cost if such bonding is in accordance with sound business practice and is reasonable. Dated: August 3, 2017. Mark Freedman, Senior Associate General Counsel. [FR Doc. 2017-16765 Filed 8-8-17; 8:45 am] BILLING CODE 7050-01-P
![Federal Register / Vol. 82, No. 152 / Wednesday, August 9, 2017 / Rules and Regulations 37177
businesses, not-for-profit organizations principles and preemption requirements List of Subjects in 33 CFR Part 147
that are independently owned and described in Executive Order 13132. Continental shelf, Marine safety,
operated and are not dominant in their Also, this rule does not have tribal Navigation (water).
fields, and governmental jurisdictions implications under Executive Order
13175, Consultation and Coordination For the reasons discussed in the
with populations of less than 50,000.
with Indian Tribal Governments, preamble, the Coast Guard amends 33
The Coast Guard received no comments
because it does not have a substantial CFR part 147 as follows:
from the Small Business Administration
on this rulemaking. The Coast Guard direct effect on one or more Indian
tribes, on the relationship between the PART 147—SAFETY ZONES
certifies under 5 U.S.C. 605(b) that this
rule will not have a significant Federal Government and Indian tribes, ■ 1. The authority citation for part 147
economic impact on a substantial or on the distribution of power and continues to read as follows:
number of small entities. responsibilities between the Federal
While some owners or operators of Government and Indian tribes. If you Authority: 14 U.S.C. 85; 43 U.S.C. 1333;
and Department of Homeland Security
vessels intending to transit the safety believe this rule has implications for Delegation No. 0170.1.
zone may be small entities, for the federalism or Indian tribes, please
reasons stated in section V.A above, this ■ 2. Add § 147.867 to read as follows:
contact the person listed in the FOR
rule will not have a significant FURTHER INFORMATION CONTACT section. § 147.867 Stampede TLP facility safety
economic impact on any vessel owner zone.
E. Unfunded Mandates Reform Act
or operator. (a) Description. The Stampede
Under section 213(a) of the Small The Unfunded Mandates Reform Act Tension Leg Platform (TLP) system is in
Business Regulatory Enforcement of 1995 (2 U.S.C. 1531–1538) requires the deepwater area of the Gulf of Mexico
Fairness Act of 1996 (Pub. L. 104–121), Federal agencies to assess the effects of at Green Canyon Block 468. The facility
we want to assist small entities in their discretionary regulatory actions. In is located at 27°30′33.3431″ N.
understanding this rule. If the rule particular, the Act addresses actions 90°33′22.963″ W. (NAD 83) and the area
affects your small business, that may result in the expenditure by a within 500 meters (1640.4 feet) from
organization, or governmental State, local, or tribal government, in the each point on the facility structure’s
jurisdiction and you have questions aggregate, or by the private sector of outer edge is a safety zone.
concerning its provisions or options for $100,000,000 (adjusted for inflation) or (b) Regulation. No vessel may enter or
compliance, please contact the person more in any one year. Though this rule remain in this safety zone except the
listed in the FOR FURTHER INFORMATION will not result in such an expenditure, following:
CONTACT section. we do discuss the effects of this rule (1) An attending vessel, as defined by
Small businesses may send comments elsewhere in this preamble. 33 CFR 147.20;
on the actions of Federal employees (2) A vessel under 100 feet in length
F. Environment
who enforce, or otherwise determine overall not engaged in towing; or
compliance with, Federal regulations to We have analyzed this rule under (3) A vessel authorized by the Eighth
the Small Business and Agriculture Department of Homeland Security Coast Guard District Commander.
Regulatory Enforcement Ombudsman Management Directive 023–01 and
Dated: July 14, 2017.
and the Regional Small Business Commandant Instruction M16475.lD,
which guide the Coast Guard in David R. Callahan,
Regulatory Fairness Boards. The
complying with the National Rear Admiral, U.S. Coast Guard, Commander,
Ombudsman evaluates these actions Eighth Coast Guard District.
annually and rates each agency’s Environmental Policy Act of 1969 (42
U.S.C. 4321–4370f), and have made a [FR Doc. 2017–16685 Filed 8–8–17; 8:45 am]
responsiveness to small business. If you
wish to comment on actions by preliminary determination that this BILLING CODE 9110–04–P
employees of the Coast Guard, call 1– action is one of a category of actions that
888–REG–FAIR (1–888–734–3247). The do not individually or cumulatively
Coast Guard will not retaliate against have a significant effect on the human LEGAL SERVICES CORPORATION
small entities that question or complain environment. This rule involves
establishing a safety zone around an 45 CFR Part 1629
about this rule or any policy or action
of the Coast Guard. offshore deepwater facility. Normally
Bonding Requirements for Recipients
such actions are categorically excluded
C. Collection of Information from further review under paragraph AGENCY: Legal Services Corporation.
This rule will not call for a new 34(g) of Figure 2–1 of Commandant ACTION: Final rule.
collection of information under the Instruction M16475.lD. A preliminary
Paperwork Reduction Act of 1995 (44 environmental analysis checklist and SUMMARY: This final rule revises the
U.S.C. 3501–3520). Categorical Exclusion Determination, Legal Services Corporation’s (LSC or the
prepared and signed before April 3, Corporation) regulation about bonding
D. Federalism and Indian Tribal requirements for LSC recipients. It
2017, are available in the docket where
Governments requires recipients to bond all their
indicated under ADDRESSES.
A rule has implications for federalism employees and to ensure that third
under Executive Order 13132, G. Protest Activities parties who handle recipients’ funds
Federalism, if it has a substantial direct The Coast Guard respects the First have bond coverage, allows recipients to
effect on the States, on the relationship Amendment rights of protesters. use other forms of insurance similar to
between the national government and Protesters are asked to contact the fidelity bonds, raises the minimum level
the States, or on the distribution of person listed in the FOR FURTHER of coverage, and allows recipients to use
power and responsibilities among the INFORMATION CONTACT section to LSC funds to pay for bonding costs. This
various levels of government. We have coordinate protest activities so that your final rule updates regulations to reflect
analyzed this rule under that Order and message can be received without current insurance practices and
have determined that it is consistent jeopardizing the safety or security of simplifies the language in the rule to
with the fundamental federalism people, places or vessels. reduce confusion.
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DATES: This final rule is effective current regulations governing similar LSC received one comment on this
September 8, 2017. LSC recipients and grant-making entities and to reflect section which will be addressed in the
subrecipients must comply with the rule current insurance practices. response to the comment on § 1629.3 of
no later than December 31, 2017. Third, the current regulation is in the proposed rule. LSC does not propose
FOR FURTHER INFORMATION CONTACT: some respects unclear or ambiguous. to make any changes to this section in
Stefanie K. Davis, Assistant General LSC has received requests for guidance the final rule.
Counsel, Legal Services Corporation, on how to interpret certain provisions in
part 1629, particularly those sections Section 1629.2 Definitions
3333 K Street NW., Washington, DC
20007; (202) 295–1563 (phone), (202) about the form and extent of coverage LSC proposed to define annualized
337–6519 (fax), or sdavis@lsc.gov. required by the rule. LSC does not funding level to include the amount of
believe that the language in part 1629 the Basic Field Grant and special
SUPPLEMENTARY INFORMATION: purpose grant funds a recipient receives
provides sufficiently clear guidance to
I. Regulatory Background LSC recipients or to LSC staff. LSC annually from LSC. LSC believes it is
proposed an approach that is tailored to necessary to include ‘‘special purpose
LSC created part 1629 in 1984 after grants’’ of LSC funds, such as
LSC’s needs and that simplifies the
several situations in which recipients Technology Initiative Grants, Pro Bono
language in the rule.
lost LSC funds through the dishonest Innovation Fund grants, and emergency
On October 17, 2016, the Operations
behavior of persons associated with the and Regulations Committee (Committee) relief grants in the definition of
recipient. 49 FR 28717, July 16, 1984. of LSC’s Board of Directors (Board) annualized funding level to ensure that
While the recipient recovered the funds voted to recommend that the Board the maximum amount of LSC funds are
in some cases, in others, the recipient authorize rulemaking on part 1629. On protected.
had to absorb the loss. Id. October 19, 2016, the Board authorized LSC received no comments on this
Before enacting part 1629, LSC LSC to begin rulemaking. On April 23, section of the proposed rule. LSC will
recommended that recipients have 2017, the Committee voted to adopt the language as proposed in the
fidelity coverage as a basic internal recommend that the Board approve final rule.
control. See LSC Audit and Accounting publication of a Notice of Proposed
Guide for Recipients and Auditors, Section 1629.3 Who must be bonded?
Rulemaking (NPRM) in the Federal
revised June 1977, p. 3–3. LSC intended Register for notice and public comment. LSC currently requires recipients to
part 1629 to ‘‘make mandatory [this] On April 24, 2017, the Board accepted bond ‘‘[e]very director, officer,
important protection for the limited the Committee’s recommendation and employee and agent of a program who
funds available to serve eligible clients.’’ voted to approve publication of the handles funds or property of the
49 FR 23396, June 6, 1984. LSC NPRM in the Federal Resister. 82 FR program . . . .’’ 45 CFR 1629.2(a)
originally proposed requiring programs 20555, May 3, 2017. On July 21, 2017, (emphasis added). LSC considers the
to obtain fidelity bond coverage at a the Committee recommended term ‘‘handles’’ to include access to
minimum level equal to 25% of the publication of this final rule to the funds or other recipient property or
recipient’s annualized LSC funding. Id. Board. On July 22, 2017, the Board ‘‘decision-making powers with respect
Based on comments received in voted to publish this final rule. to funds or property which can give rise
response to the proposed rule, LSC Material about this rulemaking is to [] risk of loss.’’ Id. Through a review
decreased the required coverage level to available in the open rulemaking section of recipient insurance policies, LSC has
10%. 49 FR 28717, July 16, 1984. LSC of LSC’s Web site at http://www.lsc.gov/ found that most grantees have fidelity
also set a $50,000 minimum coverage about/regulations-rules/open- coverage for all their employees. This
level ‘‘in response to the recognition rulemaking. After the effective date of common practice exceeds the current
that a loss to a small program is this rule, those materials will appear in minimum requirements of part 1629.
proportionally greater in effect than a the closed rulemaking section of LSC’s When employees who were not required
similar one to a large program.’’ Id. Web site at http://www.lsc.gov/about/ to be bonded under part 1629 have
LSC added rulemaking on part 1629 regulations-rules/closed-rulemaking. misappropriated LSC funds, grantees
to its annual rulemaking agenda in April that exceeded the minimum part 1629
2016. Regulatory action is justified for II. Section-by-Section Discussion of coverage have typically been protected
three reasons. Comments from loss. LSC believes this common
First, the regulation is outdated. LSC LSC received one comment during the practice is desirable and proposes to
has not revised part 1629 since it was public comment period from Legal require that recipients carry coverage for
adopted in 1984, and LSC should Action of Wisconsin, Inc. (Legal all employees, regardless of whether the
update it to reflect current insurance Action), an LSC recipient. Legal Action employees ‘‘handle’’ program funds.
practices. generally supported LSC’s proposed LSC does not believe that requiring
Second, the regulation was derived changes but expressed concern about coverage for all employees will impose
from a source that does not provide the the inclusion of ‘‘volunteers’’ as among more costs on the recipients. LSC
optimal model for a federally funded the persons required to be bonded. Legal examined 136 recipient policies from
grant-making entity today. The original Action also asked that LSC allow 2015–2017, including recipients that are
rule was based on fidelity bonding recipients to charge bonding costs as no longer receiving an LSC grant, and
provisions found in the Employee ‘‘direct’’ costs to their LSC grant. These only one recipient had a schedule
Retirement Income Security Act of 1974 comments and LSC’s response will be policy covering a select number of
(ERISA). See Section 412 of Pub. L. 93– discussed in more detail below. individuals. LSC compared that
406, and related regulations at 29 CFR schedule policy to blanket policies
2550.412–1 and 29 CFR part 2580. Section 1629.1 Purpose purchased by grantees of similar size
ERISA concerns minimum standards for Part 1629 currently does not have a and determined that the schedule policy
retirement plans in private industry. purpose section. LSC proposed to add a was more expensive than the blanket
LSC no longer believes that this is an purpose section stating who must be policies of the other recipients. This
appropriate model for LSC to follow, covered under the bond and what losses analysis supports the conclusion that
and that instead LSC should look to the bond must protect against. LSC is not imposing costs that the
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![Federal Register / Vol. 82, No. 152 / Wednesday, August 9, 2017 / Rules and Regulations 37179
recipients do not already bear, and that because its current policy covers subgrantee agreements may entail a
the proposed update to the regulation is directors, officers, and employees, but greater risk, LSC thinks it would be
consistent with recipients’ existing not volunteers. Per Legal Action’s imprudent to relax the requirements
practices. insurance agent and its carrier’s proposed in the NPRM.
LSC currently requires grantees to underwriting staff, Legal Action will
bond ‘‘agents’’ who handle funds or Section 1629.4 What forms of bonds
need to purchase a stand-alone crime
property of the program. 45 CFR can recipients use?
policy with an added endorsement to
1629.2(a). But LSC has found that most broaden its coverage to include Current § 1629.5 allows recipients to
recipients’ policies do not cover the ‘‘volunteers.’’ Legal Action’s agent choose different forms of bonds, such as
dishonest or fraudulent actions of agents believes this could increase annual individual, blanket, or schedule. 45 CFR
and independent contractors. In fact, premiums by 26%. 1629.5. Section 1629.5 currently does
many policies explicitly exclude agents Because of the increased premiums, not address whether recipients may
and independent contractors from the Legal Action asked LSC to drop choose types of insurance other than a
definition of ‘‘covered employee.’’ This ‘‘volunteers’’ from the proposed rule in fidelity bond that achieve the same
exclusion is problematic, as LSC §§ 1629.1 & 1629.3(a). Legal Action also purpose as a fidelity bond. Most LSC
recipients are now turning to third suggested that if LSC decided to keep recipients now protect against employee
parties to handle payroll functions. See ‘‘volunteers’’ in the proposed rule, then dishonesty through riders to their
Legal Services Corporation Board of LSC should define ‘‘volunteers.’’ Legal standard commercial crime policies.
Directors, Operations and Regulations Action suggested that LSC limit the Few grantees obtain separate fidelity
Committee, Transcript of Rulemaking requirement to volunteers who have bonds.
Workshop, Wednesday, May 18, 2016, access to LSC funds and exclude In 1999, LSC issued an external
pp. 82–84 (comments of Diana White). volunteer attorneys who accept cases opinion permitting recipients to use
This means that LSC funds are handled referred from Legal Action. employee dishonesty insurance to
by persons outside of the recipient’s Finally, Legal Action asked that LSC satisfy the bonding requirements of part
control and insurance coverage. In areas drop the requirement under 1629 if the recipient could show that the
where there are few insurers to choose § 1629.3(c)(1) that subrecipients supply policy gives the same level of protection
from, it may be impossible for recipients coverage for volunteers. Legal Action as a fidelity bond. See External Opinion
to get insurance that covers ‘‘agents’’ or expressed concern that subrecipients 1999–10–26, Part 1629 Purchase of
‘‘independent contractors.’’ also would likely incur additional costs Employee Dishonesty Insurance in Lieu
To address these issues and to meet this requirement. Legal Action of a Fidelity Bond (October 26, 1999).
adequately protect LSC funds from stated this requirement may discourage To reflect this long-standing LSC policy,
misappropriation by recipients and potential subrecipients from partnering LSC proposed revising part 1629 to
third parties, LSC proposed three with LSC recipients in cases where the expressly allow recipients to substitute
changes to the existing rule. First, LSC subgrant is small and the cost of employee dishonesty policies or other
proposed to require that recipients’ compliance is high. methods of coverage for fidelity bonds.
bonds cover volunteers, in addition to Response: LSC will retain the This revision would give recipients
directors, officers, employees, and language from the proposed rule. For greater flexibility to choose the most
agents of the recipient. Second, LSC most recipients, the proposed rule will readily available and cost-effective
proposed to require recipients to ensure not impose additional costs. This is methods of insuring LSC funds. The
that third parties who provide payroll, because most recipients’ policies revision also would make clear that the
billing, and collection services to the already include ‘‘volunteers’’ in the substance and amount of coverage is
recipient have fidelity bond coverage or definition of a covered ‘‘employee.’’ In more important than the form.
similar insurance. The recipient may those policies, ‘‘volunteers’’ are limited LSC received no comments on this
accomplish this either by extending its to those who are subject to the section of the proposed rule. LSC will
own insurance to the third party or by recipient’s direction and control and adopt the language as proposed in the
ensuring that the third party has its own who perform services for the recipient. final rule.
fidelity bond coverage sufficient to LSC reviewed the policies of six
recipients similar in size to Legal Action Section 1629.5 What losses must the
protect LSC funds in the third party’s
who have policies that include bond cover?
hands. Finally, LSC proposed to include
language allowing recipients to either ‘‘volunteers’’ as employees covered by Current § 1629.4 requires recipients to
cover subrecipients through their own the policy. Policies ranged in amount have bonds that protect them against
fidelity policies or ensure that the from $250,000 to $1 million in coverage, ‘‘all those risks of loss that might arise
subrecipients have policies adequate to with deductibles ranging from $2,500 to through dishonest or fraudulent acts in
protect subgranted funds. $10,000, and annual premiums ranging the handling of funds[.]’’ The strict
Comments: Legal Action provided from $1,124 to $3,628. From this language—‘‘all those risks of loss’’—
three comments about this section. First, analysis, it appears that insurers offer implies that recipients must be
Legal Action expressed support for policies Legal Action could consider completely covered in the event of a
LSC’s proposal to extend the coverage purchasing that would provide coverage loss, and that policies with deductibles
requirement under § 1629.3(b) to third for the actions of volunteers without would not be acceptable under current
parties that only provide payroll, additional expense. part 1629. This is because if a recipient
billing, or collection services. Legal As to the requirement that has LSC funds stolen, and the policy
Action believed that it would not need subrecipients also provide coverage for requires the recipient to absorb a
to buy more insurance coverage to volunteers, LSC will retain the proposed portion of that loss by paying a
comply with this requirement. language. Anytime a recipient delegates deductible, then the recipient’s policy
Legal Action also expressed concern, tasks to another entity, often with less did not cover against ‘‘all those risks of
however, about the proposal to require capacity and/or fewer controls than the loss.’’ Such strict language makes sense
recipients to bond ‘‘volunteers.’’ Legal recipient itself has, that recipient runs under ERISA statutes and regulations, as
Action stated that this will make the risk that LSC funds may be they are designed to protect retirees’
obtaining coverage more difficult misappropriated. Because most pension funds. But such language may
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![Federal Register / Vol. 82, No. 152 / Wednesday, August 9, 2017 / Rules and Regulations 37181
embezzlement, forgery, its annualized funding level for the with 45 CFR part 1630. Costs of bonding
misappropriation, wrongful abstraction, previous fiscal year. such as rates, deductibles, single loss
wrongful conversion, willful (b) If a recipient is a new recipient, retention, and premiums, are allowable
misapplication, or any other fraudulent the coverage must be at a minimum as an indirect cost if such bonding is in
or dishonest act committed by an level of at least ten percent of the initial accordance with sound business
employee, officer, director, agent, or grant. practice and is reasonable.
volunteer. (c) Notwithstanding paragraphs (a)
and (b) of this section, recipients must Dated: August 3, 2017.
§ 1629.6 What is the required minimum not carry coverage under this part at a Mark Freedman,
level of coverage? level less than $100,000. Senior Associate General Counsel.
(a) A recipient must carry fidelity § 1629.7 Can LSC funds be used to cover [FR Doc. 2017–16765 Filed 8–8–17; 8:45 am]
bond coverage or similar coverage at a bonding costs? BILLING CODE 7050–01–P
minimum level of at least ten percent of Costs of bonding required by this part
are allowable if expended consistent
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Document Created: 2017-08-09 02:18:28
Document Modified: 2017-08-09 02:18:28
| Category | Regulatory Information | |
| Collection | Federal Register | |
| sudoc Class | AE 2.7: GS 4.107: AE 2.106: | |
| Publisher | Office of the Federal Register, National Archives and Records Administration | |
| Section | Rules and Regulations | |
| Action | Final rule. | |
| Dates | This final rule is effective September 8, 2017. LSC recipients and subrecipients must comply with the rule no later than December 31, 2017. | |
| Contact | Stefanie K. Davis, Assistant General Counsel, Legal Services Corporation, 3333 K Street NW., Washington, DC 20007; (202) 295-1563 (phone), (202) 337-6519 (fax), or [email protected] | |
| FR Citation | 82 FR 37177 | |
| CFR Associated | Fidelity Bond; Grant Programs-Law and Insurance |
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