Federal Register Vol. 81, No.243,

This rule is issued under Marketing Order No. 984, as amended (7 CFR part 984), regulating the handling of walnuts grown in California, hereinafter referred to as the “order.” The order is effective under the Agricultural Marketing Agreement Act of 1937, as amended (7 U.S.C. 601-674), hereinafter referred to as the “Act.”

The Department of Agriculture (USDA) is issuing this rule in conformance with Executive Orders 12866, 13563, and 13175.

This rule has been reviewed under Executive Order 12988, Civil Justice Reform. Under the order now in effect, California walnut handlers are subject to assessments. Funds to administer the order are derived from such assessments. It is intended that the assessment rate as issued herein will be applicable to all assessable walnuts beginning on September 1, 2016, and continue until amended, suspended, or terminated.

The Act provides that administrative proceedings must be exhausted before parties may file suit in court. Under section 608c(15)(A) of the Act, any handler subject to an order may file with USDA a petition stating that the order, any provision of the order, or any obligation imposed in connection with the order is not in accordance with law and request a modification of the order or to be exempted therefrom. Such handler is afforded the opportunity for a hearing on the petition. After the hearing, USDA would rule on the petition. The Act provides that the district court of the United States in any district in which the handler is an inhabitant, or has his or her principal place of business, has jurisdiction to review USDA's ruling on the petition, provided an action is filed not later than 20 days after the date of the entry of the ruling.

This rule increases the assessment rate for the 2016-17 and subsequent marketing years from $0.0379 to $0.0465 per kernelweight pound of assessable walnuts.

The order provides authority for the Board, with the approval of USDA, to formulate an annual budget of expenses and collect assessments from handlers to administer the program. All members of the Board, but one, are growers and handlers of California walnuts. They are familiar with the Board's needs and with the costs for goods and services in their local area and are thus in a position to formulate an appropriate budget and assessment rate. The assessment rate is formulated and discussed in a public meeting. Thus, all directly affected persons have an opportunity to participate and provide input.

For the 2015-16 and subsequent marketing years, the Board recommended, and USDA approved, an assessment rate of $0.0379 per kernelweight pound of assessable walnuts that would continue in effect from year to year unless modified, suspended, or terminated by USDA upon recommendation and information submitted by the Board or other information available to USDA.

The Board met on June 9, 2016, and unanimously recommended 2016-17 expenditures of $23,143,050 and an assessment rate of $0.0465 per kernelweight pound of assessable walnuts. In comparison, last year's budgeted expenditures were $22,668,980. The assessment rate of $0.0465 is $0.0086 per pound higher than the rate currently in effect. The quantity of assessable walnuts for the 2016-17 marketing year is estimated at 553,000 tons inshell or 497,700,000 kernelweight pounds, which is the three-year average of walnut production. At the recommended higher assessment rate of $0.0465 per kernelweight pound, the Board should collect approximately $23,143,050 in assessment income, making income and expenses equal. The Board estimates it will begin the 2016-17 marketing year with $9,827,284 in its monetary reserve, which is well within the requirements of the order.

The Board noted that sales of California walnuts in the domestic market have been declining in recent years, and embarked upon an enhanced market development and promotion program in the 2015-16 marketing year that was designed to reverse the trend. Noting that making such a commitment for a single year would likely not result in long-term gains, they voted to continue such market development and promotion programs. Thus, it is maintaining its programs at a level near that of the 2015-16 marketing year.

In addition, personnel changes will result in an overlap of duties and expenses, as some positions will be added so that experience and continuity can be maintained despite staff retirements. Thus, employee costs are expected to be higher this marketing year. Added to that, the implementation of the Food Safety Modernization Act (FSMA) may result in added costs to the industry and, in some cases, to the Board as well. For that reason, the Grades and Standards Committee and the Production Research Committee requested increased budgets.

The following table compares major budget expenditures recommended by the Board for the 2015-16 and 2016-17 marketing years:

The assessment rate recommended by the Board was derived by dividing anticipated assessment revenue needed by estimated shipments of California walnuts certified as merchantable. The 553,000 ton (inshell) estimate for merchantable shipments is an average of shipments during three prior years. Pursuant to § 984.51(b) of the order, this figure is converted to a merchantable kernelweight basis using a factor of 0.45 (553,000 tons × 2,000 pounds per ton × 0.45), which yields 497,700,000 kernelweight pounds. At $0.0465 per pound, the new assessment rate should generate $23,143,050 in assessment income, which is equal to estimated expenses.

Section 984.69 of the order authorizes the Board to carry over excess funds into subsequent marketing years as a reserve, provided that funds already in the reserve do not exceed approximately two years' budgeted expenses. Current reserve funds total $9,827,284 and are well within that requirement.

The assessment rate established in this rule will continue in effect indefinitely unless modified, suspended, or terminated by USDA upon recommendation and information submitted by the Board or other available information.

Although this assessment rate will be effective for an indefinite period, the Board will continue to meet prior to or during each marketing year to recommend a budget of expenses and consider recommendations for modification of the assessment rate. The dates and times of Board meetings are available from the Board or USDA. Board meetings are open to the public, and interested persons may express their views at these meetings. USDA will evaluate Board recommendations and other available information to determine whether modification of the assessment rate is needed. Further rulemaking will be undertaken as necessary. The Board's 2016-17 budget and those for subsequent marketing years would be reviewed and, as appropriate, approved by USDA.

Pursuant to requirements set forth in the Regulatory Flexibility Act (RFA) (5 U.S.C. 601-612), the Agricultural Marketing Service (AMS) has considered the economic impact of this rule on small entities. Accordingly, AMS has prepared this final regulatory flexibility analysis.

The purpose of the RFA is to fit regulatory actions to the scale of businesses subject to such actions in order that small businesses will not be unduly or disproportionately burdened. Marketing orders issued pursuant to the Act, and the rules issued thereunder, are unique in that they are brought about through group action of essentially small entities acting on their own behalf.

There are approximately 5,700 growers of California walnuts in the production area and approximately 90 handlers subject to regulation under the order. The Small Business Administration (SBA) defines small agricultural businesses as those having annual receipts of less than $750,000, and small agricultural service firms are defined as those having annual receipts of less than $7,500,000 (13 CFR 121.201).

According to USDA's National Agricultural Statistics Service's (NASS's) 2012 Census of Agriculture, approximately 86 percent of California's walnut farms were smaller than 100 acres. Further, NASS reports that the average yield for 2014 was 1.97 tons per acre, and the average price received for 2014 was $3,230 per ton.

A 100-acre farm with an average yield of 1.97 tons per acre would therefore have been expected to produce about 197 tons of walnuts during the 2014-15 marketing year. At $3,230 per ton, that farm's production would have had an approximate value of $636,310. Since Census of Agriculture information indicates that the majority of California's walnut farms are smaller than 100 acres, it could be concluded that the majority of the growers had receipts of less than $636,310 in 2014-15, which is well below the SBA threshold of $750,000. Thus, the majority of California's walnut growers would be considered small growers according to SBA's definition.

According to information supplied by the Board, approximately two-thirds of California's walnut handlers shipped merchantable walnuts valued under $7,500,000 during the 2014-15 marketing year and would, therefore, be considered small businesses according to the SBA definition.

This rule increases the assessment rate established for the Board and collected from handlers for the 2016-17 and subsequent marketing years from $0.0379 to $0.0465 per kernelweight pound of assessable walnuts. At its meeting on June 9, 2016, the Board unanimously recommended 2016-17 expenditures of $23,143,050 and an assessment rate of $0.0465 per kernelweight pound of assessable walnuts. The assessment rate of $0.0465 is $0.0086 higher than the 2015-16 rate. The quantity of assessable walnuts for the 2016-17 marketing year is estimated at 553,000 tons inshell weight, or 497,700,000 kernelweight pounds. Thus, the $0.0465 rate should provide $23,143,050 in assessment income, which is equal to the estimated expenses.

The increased assessment rate is due to continuing domestic marketing and promotion programs, as well as to increased personnel and committee expenses. The Board believes that California walnut sales can be improved in the domestic market through continued promotional activities. In addition, the Grades and Standards Committee and Production Research Committee have asked for additional funds in case the implementation of FSMA requires new methods or processes for growing, harvesting, and shipping walnuts.

The major expenses for the 2016-17 marketing year include: $2,292,000 for employee expenses; $206,000 for travel, Board expenses, and annual audit expenses; $262,000 for office expenses; $10,000 for controlled purchases; $0 for the crop acreage survey; $130,000 for the crop estimate; $175,000 for the salary of the Production Research Director; $1,800,000 for production research; $75,000 for sustainability; $800,000 for grades and standards research; $18,398,040 for domestic market development projects; and $59,010 for the contingency reserve.

In comparison, the major expenses for the 2015-16 marketing year included: $1,846,500 for employee expenses; $191,000 for travel, board expenses, and annual audit expenses; $254,000 for office expenses; $10,000 for controlled purchases; $100,000 for the crop acreage survey; $130,000 for the crop estimate; $94,500 for the salary of the Production Research Director; $1,700,000 for production research; $75,000 for sustainability; $600,000 for grades and standards research; $18,478,440 for domestic market development projects; and $32,790 for the contingency reserve.

The Board reviewed and unanimously recommended 2016-17 expenditures of $23,143,050 at its meeting on June 9, 2016. Prior to arriving at this budget, the Board considered a recommendation from the Budget and Personnel Committee (Committee), which also reviewed the proposed budget. The Committee debated the relative value of the increased assessment rate, given the focus on domestic promotion programs. It also considered information from various other committees, who deliberated and formulated their own budgets of expenses and made their recommendations to the Committee. Those committees include the Market Development, Production Research, and Grades and Standards Committees.

The Budget and Personnel Committee considered alternative expenditure levels, such as reducing the proposed budgets recommended by the other committees and changing the funding for domestic marketing projects, as well as not increasing the assessment rate. The Committee ultimately decided that the proposed expenditures and assessment rate were reasonable and necessary to assist in improving domestic sales, maintaining staff continuity, and preparing for potential FSMA mandates. Thus, the Committee unanimously agreed to recommend the budget to the Board.

The assessment rate of $0.0465 per kernelweight pound of assessable walnuts was derived by dividing anticipated assessment revenue needed by expected shipments of California walnuts certified as merchantable. Merchantable shipments for the year are estimated at 497,700,000 pounds. It was determined that $23,143,050 in assessment income was needed, and assessment income will equal expenses of $23,143,050.

Unexpended funds may be retained in a financial reserve, provided that funds in the financial reserve do not exceed approximately two years' budgeted expenses.

According to NASS, the season average grower prices for the years 2013 and 2014 were $3,710 and $3,230 per ton, respectively. These prices provide a range within which the 2016-17 season average price could fall. Dividing these average grower prices by 2,000 pounds per ton provides an inshell price per pound range of $1.62 to $1.86. Dividing these inshell per pound prices by the 0.45 conversion factor (inshell to kernelweight) established in the order yields a 2016-17 price range estimate of $3.60 to $4.13 per kernelweight pound of assessable walnuts.

To calculate the percentage of grower revenue represented by the assessment rate, the assessment rate of $0.0465 per kernelweight pound is divided by the low and high estimates of the price range. The estimated assessment revenue for the 2016-17 marketing year as a percentage of total grower revenue will thus likely range between 1.13 and 1.29 percent.

This action increases the assessment obligation imposed on handlers. While assessments impose some additional costs on handlers, the costs are minimal and uniform on all handlers. However, these costs are offset by the benefits derived by the operation of the marketing order. In addition, the Board's meeting was widely publicized throughout the California walnut industry, and all interested persons were invited to attend the meeting and encouraged to participate in Board deliberations on all issues. Like all Board meetings, the June 9, 2016, meeting was a public meeting, and all entities, both large and small, were free to express views on this issue.

In accordance with the Paperwork Reduction Act of 1995 (44 U.S.C. Chapter 35), the order's information collection requirements have been previously approved by the Office of Management and Budget (OMB) and assigned OMB No. 0581-0178 (Vegetable and Specialty Crop Marketing Orders). No changes in those requirements as a result of this action are necessary. Should any changes become necessary, they would be submitted to OMB for approval.

This rule imposes no additional reporting or recordkeeping requirements on either small or large California walnut handlers. As with all Federal marketing order programs, reports and forms are periodically reviewed to reduce information requirements and duplication by industry and public sector agencies. USDA has not identified any relevant Federal rules that duplicate, overlap, or conflict with this action.

AMS is committed to complying with the E-Government Act, to promote the use of the internet and other information technologies to provide increased opportunities for citizen access to Government information and services, and for other purposes.

A proposed rule concerning this action was published in the Federal Register on September 16, 2016 (FR 81 63718). Copies of the rule were provided to all walnut handlers, as well as to Board members. Finally, the proposal was made available through the internet by USDA and the Office of the Federal Register. A 30-day comment period, ending October 17, 2016, was provided for interested persons to respond to the proposal. Two comments were received: one supportive of the increase and the other questioning the impact of the rule on small businesses.

The commenter who questioned the increase noted that the budget for the 2016-17 marketing year contained not only funds to continue the expanded marketing programs but also to fund additional staff members hired to work alongside existing staff who are preparing to retire. The Board's goal is for the newly hired staff members to learn from the retiring employees so that minimal staff expertise is lost. While the commenter did not object to the practice, the commenter questioned why small California walnut handlers, who comprise the majority of walnut handlers, have to bear the burden of the increased assessment rate.

As previously noted, assessments are minimal and uniform on all handlers. Thus, small handlers bear a proportional burden compared to larger handlers. The increase was recommended unanimously by the Board, which is made up of small and large handlers, as well as small and large growers, representing the entire California walnut industry. The Board made the unanimous recommendation based upon deliberations by four of its standing committees: the Market Development Committee, Production Research Committee, Grades and Standards Committee, and Budget and Personnel Committee. All four committees reviewed the proposed expenses and crop size, and considered alternative assessment rates. All of the committees recommended the increased assessment rate and determined that the budget was prudent, resulting in a unanimous recommendation from the Board.

Accordingly, no changes will be made to the rule as proposed, based on the comments received.

A small business guide on complying with fruit, vegetable, and specialty crop marketing agreements and orders may be viewed at: http://www.ams.usda.gov/rules-regulations/moa/small-businesses. Any questions about the compliance guide should be sent to Richard Lower at the previously mentioned address in the FOR FURTHER INFORMATION CONTACT section.

After consideration of all relevant material presented, including the information and recommendation submitted by the Board and other available information, it is hereby found that this rule, as hereinafter set forth, will tend to effectuate the declared policy of the Act.

Pursuant to 5 U.S.C. 553, it is also found and determined that good cause exists for not postponing the effective date of this rule until 30 days after publication in the Federal Register because handlers are already receiving 2016-17 crop walnuts from growers, the crop year began on September 1, 2016, and the assessment rate applies to all walnuts received during the 2016-17 and subsequent seasons. Further, handlers are aware of this rule, which was recommended at a public meeting. Also, a 30-day comment period was provided for in the proposed rule.

For the reasons set forth in the preamble, 7 CFR part 984 is amended as follows:

The Form I-94 (Arrival/Departure Record) is issued by DHS to certain nonimmigrant foreign nationals upon arrival in the United States or when they change status in the United States. The Form I-94 is used to document arrival and departure and provides evidence of the terms of admission or parole. The Form I-94 is also used by individuals granted asylum in the United States as a proof of their grant of asylum and by refugees as proof of their refugee status. CBP, a component of DHS, generally issues the Form I-94 to nonimmigrants at the time they lawfully enter the United States. Nonimmigrant travelers use the Form I-94 for various purposes such as completing the Form I-9 to verify employment eligibility, applying for immigration benefits, or presenting to a university to verify eligibility for enrollment.

On March 27, 2013, CBP published an interim final rule (IFR) in the Federal Register (78 FR 18457) that added to the regulations a definition of “Form I-94” to allow the Form I-94 to be in either paper or electronic format. Prior to the effective date of the IFR, the Form I-94 was a paper form only. The IFR made necessary changes to the regulations to enable CBP to transition from only paper to allow for an electronic form. In the case of air and sea ports of entry, the regulation allowed CBP to transition to an automated process whereby CBP creates an electronic Form I-94 based on information collected via the Advance Passenger Information System (APIS) along with visa information transmitted to CBP by the Department of State. The automated process applies only to nonimmigrants arriving at air and sea ports of entry because APIS data is currently collected only for air and sea. The automation of the Form I-94 process for nonimmigrants arriving by air or sea eliminates duplicative information collections and saves time and money for the traveling public, carriers, and CBP.

CBP makes the electronic Form I-94 available through a Web site. To access the Form I-94 through the Web site the traveler inputs information from his/her passport. If needed, nonimmigrants may print out a copy of the Form I-94 from the Web site and present it to third parties in lieu of the paper form. CBP continues to provide a paper Form I-94 to certain classes of aliens, such as asylees, certain parolees, and others upon request or whenever CBP determines the issuance of a paper form is appropriate.1

This regulation also is consistent with CBP's enhancements to the I-94 Web site to enable travelers arriving at a land port of entry to submit the Form I-94 information to CBP and pay the required fee prior to arrival. Unlike the automated process for air and sea where CBP creates an electronic Form I-94 based on information collected via APIS and other sources, this I-94 land border process enables travelers to provide the Form I-94 information to CBP electronically prior to arrival to facilitate the land border issuance process. The enhanced I-94 Web site launched on September 29, 2016.

DHS received eighteen submissions in response to the IFR. Most of these submissions contained comments providing support, voicing concerns, highlighting issues, or offering suggestions for modifications to the automation process. After review of the comments, CBP has decided to finalize the interim final rule without change. However, CBP has made some operational changes, primarily to the I-94 Web site, in response to the comments. These changes, which are described in the comment responses, are intended to help travelers retrieve their Form I-94 information and travel history more easily.

CBP has completed an updated economic assessment analyzing the effects of the automation of the Form I-94. This rule affects CBP, air and sea carriers that transport foreign nationals to the United States, and the foreign nationals themselves. CBP will incur costs associated with linking its data systems and building and maintaining the I-94 Web site. CBP benefits through lower printing, storage, and contract costs. CBP estimated a net benefit of $15.5 million for CBP in 2013. Carriers benefit as a result of lower printing and storage costs. CBP estimated a net benefit of $1.3 million for carriers in 2013. Foreign nationals traveling to the United States incur opportunity costs associated with logging onto the Web site to access their electronic Form I-94, printing their Form I-94, and, for some travelers, the cost to drive to a location with internet access so they can access and print their electronic Form I-94. Foreign nationals benefit from a reduced opportunity cost associated with filling out a paper Form I-94 and reduced opportunity and fee costs associated with filing a Form I-102 to replace a lost Form I-94. CBP estimates a net benefit of between $4141.1 million and $6565.9 million in 2013 for foreign travelers. In total, CBP estimates that net benefits to all parties ranged from $5757.9 million to $8282.7 million in 2013. Net benefits to U.S. entities (carriers and CBP) totaled $16.8 million in 2013. Net benefits are summarized in table ES-1 below.

Background

FSIS periodically issues regulations that require changes in the labeling of meat and poultry food products. Many meat and poultry establishments also produce non-meat and non-poultry food products that are subject to the jurisdiction of the Food and Drug Administration (FDA). FDA also periodically issues regulations that require changes in the labeling of products under its jurisdiction.

On December 14, 2004, FSIS issued a final rule that established January 1, 2008, as the uniform compliance date for new meat and poultry labeling regulations issued between January 1, 2005, and December 31, 2006. The 2004 final rule also provided that the Agency would set uniform compliance dates for new labeling regulations in 2-year increments and periodically issue final rules announcing those dates. Consistent with that final rule, the Agency has published five final rules establishing the uniform compliance dates of January 1, 2010, January 1, 2012, January 1, 2014, January 1, 2016, and January 1, 2018 (72 FR 9651, 73 FR 75564, 75 FR 71344, 77 FR 76824, and 79 FR 71007).

This final rule establishes January 1, 2020, as the uniform compliance date for new meat and poultry product labeling regulations that are issued between January 1, 2017 and December 31, 2018, and is consistent with the previous final rules that established uniform compliance dates. In addition, FSIS's approach for establishing uniform compliance dates for new food labeling regulations is consistent with FDA's approach. FDA is also planning to publish a final rule establishing a new compliance date.

Two-year increments enhance the industry's ability to make orderly adjustments to new labeling requirements without unduly exposing consumers to outdated labels. With this approach, the meat and poultry industry is able to plan for use of label inventories and to develop new labeling materials that meet the requirements of all labeling regulations made within the two year period, thereby minimizing the economic impact of labeling changes.

This compliance approach also serves consumer's interests because the cost of multiple short-term label revisions that would otherwise occur would likely be passed on to consumers in the form of higher prices.

FSIS encourages meat and poultry companies to comply with new labeling regulations as soon as it is feasible. If companies initiate voluntary label changes, they should consider incorporating any new requirements that have been published as final regulations.

The new uniform compliance date will apply only to final FSIS regulations that require changes in the labeling of meat and poultry products and that are published after January 1, 2017, and before December 31, 2018. For each final rule that requires changes in labeling, FSIS will specifically identify January 1, 2020, as the compliance date. All meat and poultry food products that are subject to labeling regulations promulgated between January 1, 2017, and December 31, 2018, will be required to comply with these regulations on products introduced into commerce on or after January 1, 2020. If any food labeling regulation involves special circumstances that justify a compliance date other than January 1, 2020, the Agency will determine an appropriate compliance date and will publish that compliance date in the rulemaking.

In rulemaking that began with the May 4, 2004, proposed rule, FSIS provided notice and solicited comment on the concept of establishing uniform compliance dates for labeling requirements (69 FR 24539). In the March 5, 2007, final rule, FSIS noted that the Agency received only four comments in response to the proposal, all fully supportive of the policy to set uniform compliance dates. Therefore, in the March 5, 2007, final rule, FSIS determined that further rulemaking for the establishment of uniform compliance dates for labeling requirements is unnecessary (72 FR 9651). The Agency did not receive comments on the 2007 final rule, and the comments FSIS received on the 2012 final rule on the uniform compliance date were outside the scope of the rule (77 FR 76824). Consistent with its statement in 2007, FSIS finds at this time that further rulemaking on this matter is unnecessary. However, FSIS is providing an opportunity for comment on the uniform compliance date established in this final rule.

This final rule has been reviewed under the Executive Order 12988, Civil Justice Reform. Under this final rule: (1) All state and local laws and regulations that are inconsistent with this rule will be preempted; (2) no retroactive effect will given to this rule; and (3) no retroactive proceedings will be required before parties may file suit in court challenging this rule.

Executive Orders 12866 and 13563 direct agencies to assess all costs and benefits of available regulatory alternatives and, if regulation is necessary, to select regulatory approaches that maximize net benefits (including potential economic, environmental, public health and safety effects, distributive impacts, and equity). Executive Order (E.O.) 13563 emphasizes the importance of quantifying both costs and benefits, of reducing costs, of harmonizing rules, and of promoting flexibility. This final rule has been reviewed under E.O. 12866. The Office of Management and Budget (OMB) has determined that it is a not significant regulatory action under section 3(f) of E.O. 12866 and, therefore, it has not been reviewed by OMB.

This rule does not have a significant economic impact on a substantial number of small entities; consequently, a regulatory flexibility analysis is not required (5 U.S.C. 601-612).

There are no paperwork or recordkeeping requirements associated with this policy under the Paperwork Reduction Act of 1995 (44 U.S.C. 3501-3520).

FSIS and USDA are committed to achieving the purposes of the E-Government Act (44 U.S.C. 3601, et seq.) by, among other things, promoting the use of the Internet and other information technologies and providing increased opportunities for citizen access to Government information and services, and for other purposes.

No agency, officer, or employee of the USDA shall, on the grounds of race, color, national origin, religion, sex, gender identity, sexual orientation, disability, age, marital status, family/parental status, income derived from a public assistance program, or political beliefs, exclude from participation in, deny the benefits of, or subject to discrimination any person in the United States under any program or activity conducted by the USDA.

To file a complaint of discrimination, complete the USDA Program Discrimination Complaint Form, which may be accessed online at http://www.ocio.usda.gov/sites/default/files/docs/2012/Complain_combined_6_8_12.pdf, or write a letter signed by you or your authorized representative.

Send your completed complaint form or letter to USDA by mail, fax, or email:

Mail: U.S. Department of Agriculture, Director, Office of Adjudication, 1400 Independence Avenue SW., Washington, DC 20250-9410.

Fax: (202) 690-7442

Email: [email protected].

Persons with disabilities who require alternative means for communication (Braille, large print, audiotape, etc.), should contact USDA's TARGET Center at (202) 720-2600 (voice and TDD).

FSIS will announce this rule online through the FSIS Web page located at http://www.fsis.usda.gov/regulations_&_policies/Interim_&_Final_Rules/index.asp.

FSIS will also make copies of this Federal Register publication available through the FSIS Constituent Update, which is used to provide information regarding FSIS policies, procedures, regulations, Federal Register notices, FSIS public meetings, and other types of information that could affect or would be of interest to constituents and stakeholders. The Update is communicated via Listserv, a free electronic mail subscription service for industry, trade groups, consumer interest groups, health professionals, and other individuals who have asked to be included. The Update is also available on the FSIS Web page. In addition, FSIS offers an electronic mail subscription service which provides automatic and customized access to selected food safety news and information. This service is available at http://www.fsis.usda.gov/News_&_Events/Email_Subscription/. Options range from recalls to export information to regulations, directives and notices. Customers can add or delete subscriptions themselves, and have the option to password protect their accounts.

Section 19(b)(2) of the Federal Reserve Act (12 U.S.C. 461(b)(2)) requires each depository institution to maintain reserves against its transaction accounts and nonpersonal time deposits, as prescribed by Board regulations, for the purpose of implementing monetary policy. Section 11(a)(2) of the Federal Reserve Act (12 U.S.C. 248(a)(2)) authorizes the Board to require reports of liabilities and assets from depository institutions to enable the Board to conduct monetary policy. The Board's actions with respect to each of these provisions are discussed in turn below.

Pursuant to section 19(b) of the Federal Reserve Act (Act), transaction account balances maintained at each depository institution are subject to reserve requirement ratios of zero, three, or ten percent. Section 19(b)(11)(A) of the Act (12 U.S.C. 461(b)(11)(A)) provides that a zero percent reserve requirement shall apply at each depository institution to total reservable liabilities that do not exceed a certain amount, known as the reserve requirement exemption amount. Section 19(b)(11)(B) provides that, before December 31 of each year, the Board shall issue a regulation adjusting the reserve requirement exemption amount for the next calendar year if total reservable liabilities held at all depository institutions increase from one year to the next. No adjustment is made to the reserve requirement exemption amount if total reservable liabilities held at all depository institutions should decrease during the applicable time period. The Act requires the percentage increase in the reserve requirement exemption amount to be 80 percent of the increase in total reservable liabilities of all depository institutions over the one-year period that ends on the June 30 prior to the adjustment.

Total reservable liabilities of all depository institutions increased by 2.3 percent, from $7,477 billion to $7,648 billion between June 30, 2015, and June 30, 2016. Accordingly, the Board is amending Regulation D to set the reserve requirement exemption amount for 2017 at $15.5 million, an increase of $0.3 million from its level in 2016.1

Pursuant to Section 19(b)(2) of the Act (12 U.S.C. 461(b)(2)), transaction account balances maintained at each depository institution over the reserve requirement exemption amount and up to a certain amount, known as the low reserve tranche, are subject to a three percent reserve requirement. Transaction account balances over the low reserve tranche are subject to a ten percent reserve requirement. Section 19(b)(2) also provides that, before December 31 of each year, the Board shall issue a regulation adjusting the low reserve tranche for the next calendar year. The Act requires the adjustment in the low reserve tranche to be 80 percent of the percentage increase or decrease in total transaction accounts of all depository institutions over the one-year period that ends on the June 30 prior to the adjustment.

Net transaction accounts of all depository institutions increased 5.5 percent, from $2,064 billion to $2,178 billion between June 30, 2015 and June 30, 2016. Accordingly, the Board is amending Regulation D to increase the low reserve tranche for net transaction accounts by $4.9 million, from $110.2 million for 2016 to $115.1 million for 2017.

The new low reserve tranche and reserve requirement exemption amount will be effective for all depository institutions for the fourteen-day reserve maintenance period beginning Thursday, January 19, 2017. For depository institutions that report deposit data weekly, this maintenance period corresponds to the fourteen-day computation period that begins December 20, 2016. For depository institutions that report deposit data quarterly, this maintenance period corresponds to the seven-day computation period that begins December 20, 2016.

Section 11(b)(2) of the Federal Reserve Act authorizes the Board to require depository institutions to file reports of their liabilities and assets as the Board may determine to be necessary or desirable to enable it to discharge its responsibility to monitor and control the monetary and credit aggregates. The Board screens depository institutions each year and assigns them to one of four deposit reporting panels (weekly reporters, quarterly reporters, annual reporters, or nonreporters). The panel assignment for annual reporters is effective in June of the screening year; the panel assignment for weekly and quarterly reporters is effective in September of the screening year.

In order to ease reporting burden, the Board permits smaller depository institutions to submit deposit reports less frequently than larger depository institutions. The Board permits depository institutions with net transaction accounts above the reserve requirement exemption amount but total transaction accounts, savings deposits, and small time deposits below a specified level (the “nonexempt deposit cutoff”) to report deposit data quarterly. Depository institutions with net transaction accounts above the reserve requirement exemption amount and with total transaction accounts, savings deposits, and small time deposits greater than or equal to the nonexempt deposit cutoff are required to report deposit data weekly. The Board requires certain large depository institutions to report weekly regardless of the level of their net transaction accounts if the depository institution's total transaction accounts, savings deposits, and small time deposits exceeds or is equal to a specified level (the “reduced reporting limit”). The nonexempt deposit cutoff level and the reduced reporting limit are adjusted annually, by an amount equal to 80 percent of the increase, if any, in total transaction accounts, savings deposits, and small time deposits of all depository institutions over the one-year period that ends on the June 30 prior to the adjustment.

From June 30, 2015 to June 30, 2016, total transaction accounts, savings deposits, and small time deposits at all depository institutions increased 5.8 percent, from $10,807 billion to $11,433 billion. Accordingly, the Board is increasing the nonexempt deposit cutoff level by $19.3 million to $436.2 million in 2017 (from $416.9 million for 2016). The Board is also increasing the reduced reporting limit by $88 million to $1.989 billion for 2017 (from $1.901 billion in 2016).2

Beginning in 2017, the boundaries of the four deposit reporting panels will be defined as follows. Those depository institutions with net transaction accounts over $15.5 million (the reserve requirement exemption amount) or with total transaction accounts, savings deposits, and small time deposits greater than or equal to $1.989 billion (the reduced reporting limit) are subject to detailed reporting, and must file a Report of Transaction Accounts, Other Deposits and Vault Cash (FR 2900 report) either weekly or quarterly. Of this group, those with total transaction accounts, savings deposits, and small time deposits greater than or equal to $436.2 million (the nonexempt deposit cutoff level) are required to file the FR 2900 report each week, while those with total transaction accounts, savings deposits, and small time deposits less than $436.2 million are required to file the FR 2900 report each quarter. Those depository institutions with net transaction accounts less than or equal to $15.5 million (the reserve requirement exemption amount) and with total transaction accounts, savings deposits, and small time deposits less than $1.989 billion (the reduced reporting limit) are eligible for reduced reporting, and must either file a deposit report annually or not at all. Of this group, those with total deposits greater than $15.5 million (but with total transaction accounts, savings deposits, and small time deposits less than $1.989 billion) are required to file the Annual Report of Deposits and Reservable Liabilities (FR 2910a) report annually, while those with total deposits less than or equal to $15.5 million are not required to file a deposit report. A depository institution that adjusts reported values on its FR 2910a report in order to qualify for reduced reporting will be shifted to an FR 2900 reporting panel.

Notice and Regulatory Flexibility Act. The provisions of 5 U.S.C. 553(b) relating to notice of proposed rulemaking have not been followed in connection with the adoption of these amendments. The amendments involve expected, ministerial adjustments prescribed by statute and by the Board's policy concerning reporting practices. The adjustments in the reserve requirement exemption amount, the low reserve tranche, the nonexempt deposit cutoff level, and the reduced reporting limit serve to reduce regulatory burdens on depository institutions. Accordingly, the Board finds good cause for determining, and so determines, that notice in accordance with 5 U.S.C. 553(b) is unnecessary. Consequently, the provisions of the Regulatory Flexibility Act, 5 U.S.C. 601, do not apply to these amendments.

For the reasons set forth in the preamble, the Board is amending 12 CFR part 204 as follows:

The eleven Banks are wholesale financial institutions organized under the Federal Home Loan Bank Act (Bank Act).1 The Banks are cooperatives; only members of a Bank may purchase the capital stock of a Bank, and only members or certain eligible housing associates (such as state housing finance agencies) may obtain access to secured loans, known as advances, or other products provided by a Bank.2 Each Bank serves the public interest by enhancing the availability of residential credit through its member institutions. Any eligible institution (generally, a federally insured depository institution or state-regulated insurance company) may become a member of a Bank if it satisfies certain criteria and purchases a specified amount of the Bank's capital stock.3 As government-sponsored enterprises (GSEs), the Banks have certain privileges under federal law, which allow them to borrow funds at spreads over the rates on U.S. Treasury securities of comparable maturity that are narrower than those available to corporate borrowers generally. The Banks pass along a portion of their funding advantage to their members and housing associates—and ultimately to consumers—by providing advances 4 and other financial services at rates that would not otherwise be available to their members. Among those financial services are the Banks' AMA programs, under which the Banks provide financing for members' housing finance activities by purchasing mortgage loans that meet the requirements of the AMA regulation.

The current AMA regulation has been in effect since July 2000. It authorizes the Banks to acquire certain assets (principally, conforming residential mortgage loans) from their members and housing associates as a means of advancing their housing finance mission, and prescribes the parameters within which the Banks may do so.

The core of the current AMA regulation is a three-part test, which establishes the requirements for a mortgage loan or other asset to qualify as AMA. The three-part test embodies the underlying policy regarding the acquisition of mortgages and other eligible AMA assets by the Banks. First, the asset requirement establishes that assets must be whole conforming mortgage loans, certain interests in such loans, whole loans secured by manufactured housing, certain state and local housing finance agency (HFA) bonds, and certain other assets that qualify as eligible collateral for a Bank advance. Second, assets must meet a member nexus requirement, meaning that a Bank must acquire the AMA assets from a member or housing associate that is a participating financial institution 5 in the Bank's AMA program or that of another Bank. In either case, the assets acquired by a Bank must be originated or held for a valid business purpose by a participating financial institution (or an affiliate thereof). Finally, to meet the credit risk-sharing requirement, a Bank must structure its AMA products such that a substantial portion of the associated credit risk of the acquired asset is borne by a participating financial institution.

The Federal Housing Finance Board (Finance Board) 6 adopted the current AMA regulation in July 2000, and neither the Finance Board nor FHFA subsequently has amended the regulation. FHFA issued the proposed rule in part to incorporate the AMA provisions into its own regulations and in part to give effect to section 939A of the Dodd-Frank Act, which requires federal agencies to remove from their regulations all references to, or requirements based on, ratings issued by NRSROs.7 To comply with the Dodd-Frank Act requirements, the proposed rule would have eliminated the existing requirement for the Banks' members to credit enhance the AMA assets to specific NRSRO rating levels. Instead, the proposal would have required the Banks to establish a level of credit enhancement for each AMA product, using models and methodologies of their own choosing.

The proposed rule also contemplated making a number of other substantive changes, which would have: (1) Added several credit enhancement model-related provisions; (2) allowed for the transfer of servicing on AMA loans to nonmembers, so long as the transfer did not cause the associated mortgage loan to cease to comply with the requirements of the AMA rule; (3) allowed for federal insurance or guarantees to provide the required credit enhancement, and eliminated the requirement for a member to bear the risk of loss from unreimbursed servicing expenses; (4) removed the provisions that allow for the use of SMI or pool insurance as part of the credit enhancement structure; (5) generally prohibited Banks from acquiring loans made to any insiders of the Bank or of the selling institution; and (6) added a new “grandfather” provision to allow a Bank to continue to hold AMA loans acquired as AMA products that the Finance Board or FHFA previously authorized.

Additionally, FHFA asked for comments relating to three specific issues. First, FHFA asked whether the regulation should continue to limit the size of AMA loans to those that meet the conforming loan limits and, more broadly, on any issues related to a Bank's purchase of AMA loans on properties located in designated high-cost areas. Second, FHFA asked whether FHFA should continue to authorize the purchase of AMA loans on manufactured housing that were deemed to be chattel loans under state law. Third, FHFA asked for comments related to the use and importance of SMI and pool insurance in credit enhancement structures that were acceptable under the regulation. FHFA specifically asked what type of standards should replace those in the current AMA regulation, which are based on an insurer's NRSRO rating, and how a Bank might evaluate the claims-paying ability of an insurer in the absence of a specific NRSRO credit rating requirement. FHFA also requested comments on whether, if it were to adopt specific requirements in the rule for SMI providers, such requirements also should apply to private mortgage insurance (PMI) providers.

In developing the proposed rule, FHFA retained the key policies underlying the original AMA regulation, which the Finance Board adopted in 2000, after the courts had upheld the authority of the Finance Board to permit the Banks to engage in this activity.8 More specifically, the proposed rule retained the Finance Board's determination that the acquisition of AMA loans is the functional equivalent of making advances such that it: (1) Allows the member or housing associate to use its eligible assets to access liquidity for further mission-related lending; and (2) requires all, or a material portion of, the credit risk attached to the mortgage assets to be borne by the member or housing associate.

FHFA also carried forward in the proposed rule the basic tenet of the current AMA regulation, which is that the Banks and their members each take advantage of their respective core competencies. As such, current AMA requirements allow members to do what they do best (manage their customer relationship) and for the Banks to do what they do best (manage the interest rate risk associated with those loans).9 The proposed rule also maintained the basic AMA credit risk-sharing structure of the current regulation, which the Finance Board purposefully designed to mirror the risk allocation of advances. Specifically, when a Bank extends an advance to a member, the member is exposed to the credit risk (on the housing assets that the advances ultimately support), and the Bank is exposed to the interest rate risk associated with funding the advance. Under the current AMA regulation, the Bank and its member similarly allocate the interest rate risk and credit risk associated with funding and holding mortgage loans whenever a member sells the Bank an AMA loan.10

The current AMA rule's “three-part test” also embodies additional underlying policy determinations related to the acquisition of mortgage assets by Banks. The asset requirement, i.e., limiting AMA to loans that do not exceed the conforming loan limit, addresses mission issues and establishes a level playing field among the Banks, Federal National Mortgage Association (Fannie Mae), and Federal Home Loan Mortgage Corporation (Freddie Mac) with respect to the types of residential mortgages loans eligible for purchase. The member or housing associate nexus requirement, i.e., limiting the potential sellers of AMA to a Bank member or housing associate, ensures that the Banks do not extend the benefits of their GSE status to institutions that are not part of the Bank System, thus aligning the program with the cooperative structure of the System. The credit risk-sharing requirement encourages members or housing associates to use sound underwriting practices by requiring them to retain a material exposure to the credit risk associated with the mortgage assets sold to the Bank.

The underlying policy considerations embodied in the current and proposed AMA rule are also closely aligned with the legal reasoning that supported the Finance Board's initial authorization of the mortgage loan purchase pilot program, an approval that predated adoption of the AMA regulation. Although the Federal Home Loan Bank Act (Bank Act) does not specifically authorize a Bank to purchase mortgage loans, the Finance Board determined that the authority conferred by section 11(e) of the Bank Act, which authorizes a Bank to carry out activities that are incidental to those specifically authorized by the Bank Act, provided authority for the Banks to purchase mortgage loans from their members.11 Certain parties challenged the Finance Board's approval of the pilot program, but the Fifth Circuit Court of Appeals agreed with the Finance Board that the incidental powers provision of the Bank Act provided authority for the mortgage purchase program and upheld the Finance Board approval of the program.12

In reaching its conclusion, the court considered the Finance Board's determination that a Bank's purchase of mortgages from its members involved an activity that was incidental to the Banks' housing finance mission and represented another method by which the Banks could act as a reservoir of liquidity for members' housing finance lending, albeit in a manner that was “technically more sophisticated than, yet functionally similar to, that which occur[red] when a [Bank] makes an advance.” 13 The court also determined that the Finance Board had authority to define the scope of the incidental powers provision, given its ambiguity, and that the Finance Board's construction of that power with regard to the mortgage purchase pilot program was permissible because it was consistent with the structure and purpose of the Bank Act. In particular, the court noted that under the pilot program, the Banks used their access to low-cost funds in capital markets in an effort to improve the level of housing finance. The basic structure and requirements for the mortgage purchase pilot program reviewed by the court later formed the basis for the specific provisions of the current AMA regulation, including the core three-part test.

The proposed rule provided a comment period of 120 days, which closed on April 15, 2016. FHFA received 65 comment letters on the proposed rule, two of which were not responsive to issues raised by the proposed rule. FHFA reviewed every comment letter and considered all of the comments in developing the final rule.

Approximately three-quarters of the commenter letters came from Bank System members, most of whom filed a substantively similar letter. The eleven Banks filed a joint letter. Eight of the nine Banks that offer the Mortgage Partnership Finance (MPF) program to their members also filed a separate joint letter, which addressed issues beyond those addressed by the joint letter from the eleven Banks. FHFA also received letters from trade associations, including the American Bankers Association, five state banking associations, an association of mortgage insurers, and one mortgage insurance company.

Taken as a whole, the comments requested changes to the proposed rule that would be at odds with the existing policy and legal principles underlying the three-part test. Some commenters suggested that Banks be permitted to purchase loans from institutions that are not Bank System members, which would effectively extend the benefits of membership to institutions that cannot become members and thus cannot receive advances from the Banks. Further, some commenters suggested Banks be permitted to create their own risk-sharing structures under which members would not necessarily be required to retain a meaningful exposure to the credit risk associated with the mortgage loans they sold to the Banks under AMA programs. None of these comments provided a reasoned analysis addressing how their proposed revisions to the proposed rule would be consistent with the legal and policy determinations on which the current regulation is predicated. After considering these comments, FHFA has determined not to alter the basic three-part test for AMA, as set forth in the proposed rule, which remains the most appropriate means of ensuring that the AMA programs operate consistently with the Banks' legal authority and with the policy and safety and soundness goals established by the Finance Board. These goals include limiting the benefits of GSE funding to those institutions that Congress has authorized for membership or for housing associate status, which is consistent with the cooperative nature of the Bank System, and that members maintain a degree of financial “skin-in-the game” with regard to AMA assets, which helps to ensure that loans are well underwritten, protects the Banks against the expected credit risk associated with the purchased assets, and is consistent with the sharing of financial risks that are present when Banks make advances to their members.

The comments also generally opposed FHFA's proposal to remove the option of allowing SMI or pool insurance as part of the credit enhancement structure, even though no AMA products currently use that option. They further opposed the imposition of any requirements on a Bank's ability to buy loans on which any director, officer, employee, attorney, or agent of a Bank, or of the selling member institution, was the borrower. Several commenters advocated allowing the Banks to buy AMA loans with principal balances that exceed the conforming loan limits applicable to Fannie Mae and Freddie Mac, while others made a number of specific technical suggestions for changes to language of proposed rule provisions.

The primary comments regarding each of the substantive aspects of the proposed rule, as well as FHFA's responses to some of those comments, are discussed below. Comments addressing specific rule provisions are discussed in part II of SUPPLEMENTARY INFORMATION, which describes the final rule in detail and the ways in which it differs from the proposed rule.

Commenters recommended that FHFA make a number of technical suggestions to several of the definitions in the proposed rule. Some commenters suggested that FHFA revise the proposed definition of “AMA product” to exclude loans that the Banks acquire and hold temporarily until they aggregate a sufficient number of loans to transfer the loans to another entity, such as is done under certain off-balance sheet programs.

Other comments suggested that FHFA revise the proposed definition of “investment quality” to capture the unique characteristics of the mortgage loans acquired for the AMA program. These Banks pointed out that they acquire AMA loans over time with the expectation that a certain number of such loans will become delinquent or go into default. Thus, even if credit enhancements were to allow a Bank to recoup full repayment of principal for a particular loan, the payments received on such a loan may not be “timely” as required by the proposed definition. Moreover, the commenters noted that the models used by the Banks to calculate the credit enhancement and pricing for a particular AMA loan already take into account the expected delinquencies and defaults for the loan pool as a whole.

Commenters also suggested that FHFA revise the proposed definition of “participating financial institution” to reflect that an institution may participate in an AMA program in more than one way, i.e., as a seller, servicer, or credit enhancer of the AMA assets, but not necessarily all of these activities. The proposed definition would have included only those members that the Bank had approved to sell loans into an AMA program and, therefore, would not have captured the full set of potential participating financial institutions.

Commenters further suggested that FHFA change the proposed definition of “pool” to reflect that FHFA has allowed Banks to offer AMA products for which they aggregate loans that have been purchased from different sellers into a single pool. The proposed definition had implied that a pool would include only those loans sold by a single seller under a single master commitment.

Section 1268.2 of the proposed rule would have authorized the Banks to invest in assets that qualify as AMA under the terms of the proposed rule, but also would have added a provision regarding “grandfathered transactions,” meaning those authorized under the current AMA regulation.

Commenters suggested that FHFA expand the proposed grandfather provision to include any purchase of mortgage loans pursuant to any AMA purchase commitment agreements that remained open as of the effective date of any final rule. They suggested that FHFA make this change to address the possibility that any of the previously approved AMA products might not comply with the requirements of the final rule. The commenters, however, did not identify any specific category of current AMA loans or products to which these requested changes could apply, and did not identify which of FHFA's proposed changes to the rule might conceivably cause any active AMA products or structures to fail to comply with the final rule.

A number of commenters urged FHFA to include within the final rule a provision allowing the Banks to sell AMA loans, or participation interests therein, to other Banks and to Bank members, including members of other Bank districts. They also asked FHFA to allow the sale of AMA loans and pools or interests in such loans or pools to any party—not just members. The commenters noted that any such sales would reduce a Bank's exposure to market risk and free up resources for additional purchases. Commenters also asked that FHFA allow the Banks the flexibility to design other means to transfer risk associated with AMA purchase to third parties, apart from sales of the loans or interests in the loans. None of these comments provided specific requirements or suggestions for structuring such sales or any analyses of compliance issues that may arise under other regulatory requirements that could apply to such sales, including issues that could arise under federal securities laws or the risk retention rule for asset securitizations.14 Given the lack of specifics provided, FHFA has not altered the proposed rule in response to any of these comments, but notes that nothing in the current or proposed rule would prevent a Bank from selling AMA loans or developing a program to transfer risk on those loans to third parties. Any such transactions, however, would likely require that the Banks obtain FHFA approval under the new business activity regulation, which would also require that the Banks demonstrate that they have the legal authority under the Bank Act to undertake the proposed activity. Given that an assessment of the legal authority and risks associated with any such proposed transactions is apt to depend significantly on the particular facts of each proposal, FHFA does not believe that it would be appropriate to provide a general authorization for such as part of this rulemaking. Instead, FHFA expects that it would be more appropriate to identify and assess any legal, regulatory, or policy issues associated with such proposals after a Bank has devoted the time and resources to develop a specific structure and identify the market for such transactions.

The proposed rule at § 1268.3(a)(1) retained the current prohibition on the Banks acquiring AMA loans that exceed the conforming loan limits. In proposing the rule, FHFA expressly asked for comments regarding loan size, including any issues related to a Bank's purchase of loans in designated high-cost areas, as well as whether FHFA should continue to limit the size of AMA loans to those that meet the conforming loan limits.15 A few commenters supported allowing the Banks to acquire loans that exceed the conforming loan limits, while one commenter opposed that change, and others supported the change, provided that the nonconforming loans were limited to those that are guaranteed or insured by a department or agency of the U.S. government.

The proposed rule would have added new provisions at §§ 1268.3(a)(3) and (b) to restrict the Banks from acquiring as AMA any mortgage loans that had been made to a director, officer, employee, attorney, or agent of the Bank or of the selling institution unless the Bank's board of directors specifically approved such a purchase and FHFA endorsed the Bank's resolution. The Bank Act generally prohibits the Banks from accepting such mortgage loans as collateral for advances.16 FHFA had proposed extending the substance of that provision to the AMA programs, reasoning that a statutory prohibition on taking a security interest in such loans logically should apply as well to the purchase of those same loans because ownership of the loan confers on the Bank a greater interest in the loan, along with the attendant risks, than does the acquisition of a security interest in the same loan. Nearly every comment letter FHFA received requested that FHFA remove the proposed provision from the final rule. Generally, commenters noted that participating financial institutions underwrite loans to such persons to the same standards as all other AMA loans, and, therefore, there is little likelihood that persons employed by the Bank or its members will obtain mortgage loans on favorable terms that might expose the Bank to increased credit risk. Accordingly, those commenters urged FHFA to permit the Banks to purchase the loans without restriction.

The proposed rule at § 1268.3(b) would have continued to authorize the Banks to purchase as AMA manufactured housing loans regardless of whether such housing qualifies as real property under state law, which would include as AMA chattel loans on manufactured housing. FHFA requested specific comments on this provision.17 A couple of commenters urged FHFA to retain this provision in the final rule, contending that manufactured housing fulfills a need for affordable housing and that Banks should be able to continue to support their members' determinations about how to meet those needs in their market areas. No commenters opposed the provision.

The proposed rule at § 1268.3(a), which is substantively unchanged from the existing regulation, would have allowed the Banks to acquire as AMA any whole mortgage loans that are eligible to secure advances under FHFA's advances collateral regulation.18 One commenter contended that the Banks should be able to buy as AMA mortgage loans on multifamily properties, as well as residential land acquisition, development and construction loans, given that these loans also qualify as collateral for advances. FHFA notes that the existing AMA regulation already allows the Banks to buy those types of loans as AMA, given that they may qualify as other real estate-related collateral under the advance collateral regulation. The proposed amendments would not change that authority. Before commencing a program to buy such loans as AMA, however, a Bank likely would have to obtain FHFA approval under the new business activity regulation, and would have to demonstrate that the new AMA product otherwise satisfied all of the requirements of the AMA rule.

Section 1268.4 of the proposed rule would have retained the member nexus requirement, which requires that AMA assets must have been originated or held for a valid business purpose by a member or housing associate, and must be acquired from a member or housing associate of the acquiring Bank, or from another Bank. As previously discussed, the Finance Board originally adopted this requirement to ensure that the benefits of Bank System membership are not extended to nonmembers. Commenters suggested that FHFA amend the AMA regulation to authorize the Banks to acquire mortgage loans directly from affiliates of their members, which would include nonmember institutions.

The Finance Board originally established the credit risk-sharing requirement to ensure that members have a material exposure to the credit risk associated with the AMA assets that they sell to their Banks, which was consistent with the risks undertaken by members when funding loans for their own portfolios with Bank advances. FHFA received many comments on different aspects of the credit risk-sharing requirement, nearly all of which generally supported loosening the requirement in some fashion. The comments on the individual credit risk-sharing sections, taken together, would have the effect of permitting the Banks to create what they characterized as their own risk-sharing structures, but would not necessarily have required that the Banks structure their AMA products such that the participating financial institution actually continued to have a material exposure to the credit risk associated with the mortgages they sell to the Banks. For example, some commenters asked that the Banks be allowed to transfer the credit enhancement obligation to nonmember institutions, which would have the effect of eliminating the current structure under which members bear the expected losses on the AMA products. Other commenters requested that FHFA permit arrangements under which an affiliate of a member, rather than a member itself, could satisfy any portion of the credit enhancement obligation or that FHFA allow a member to transfer its credit enhancement obligation to any other institution that is willing to assume that obligation.

Some commenters requested that FHFA allow Banks to create an AMA structure that would permit participating financial institutions to accept a price adjustment for the mortgage loans, in lieu of providing a credit enhancement for those loans. Under such an arrangement, the participating financial institution would receive a lesser price from the Bank in return for the Bank agreeing to bear the credit risk, and the price adjustment would vary in proportion to the amount of credit risk the Bank would bear. Other commenters requested that a participating financial institution meet part, or all, of its credit enhancement obligation simply by pledging collateral. Those commenters, however, did not explain how such an arrangement would work or how it would differ from the current enhancement approach used under the Mortgage Partnership Finance (MPF) program, in which a participating financial institution pledges collateral to secure its obligation to absorb a specified amount of the credit losses on mortgage loans sold to the Bank.

The proposed rule also would have carried over the timing requirements of the current regulation regarding the date by which a Bank must calculate a member's total credit enhancement obligation. Thus, the proposal would have required that a Bank make that determination at the earlier of 270 days from the time a Bank acquires a loan from the member for a particular pool or when the pool reaches $100 million. Commenters asked that the final rule allow the timing of determining the final credit enhancement vary based on the structure of the particular product. For example, commenters noted that under products where the member pre-funds the credit obligation the Banks should be able to calculate the required credit enhancement at the time the pool closes.

The proposed rule would have added several model-related requirements at § 1268.5(e). Specifically, the proposed rule would have required a Bank to: (1) Validate its model and methodology at least annually and make the results available to FHFA upon request; (2) institute and maintain a process for monitoring model performance that would include tracking, back-testing, benchmarking, and stress testing the model and methodology; (3) inform FHFA prior to making any material changes to the model and methodology, and (4) promptly change its model and methodology as directed by FHFA. Commenters generally requested that the final rule provide general guidance regarding models and methodologies, rather than the specific provisions proposed in the rule, described above.

The proposed rule would have eliminated the option of allowing members to use SMI and/or pool insurance to meet a part of their credit enhancement for AMA assets. The current AMA regulation allows the use of SMI as part of the credit enhancement if the insurance provider has obtained a rating from an NRSRO of no lower than the second highest investment grade. The regulation also allowed pool insurance if the insurance were used to enhance against geographic concentration or pool size risk.

FHFA proposed to remove the option of using SMI and pool insurance in the credit enhancement structure in part based on the experience during the financial crisis, when no private mortgage insurance company was able to maintain an NRSRO credit rating at the minimum level required by the current AMA regulation, and on concerns that other private mono-line insurers could face similar problems in the future. Further, FHFA considered that the Banks have in place alternate AMA structures and products that do not rely on SMI and that eliminating the use of SMI from authorized credit enhancement structures would remain consistent with the intent of the AMA regulation to require participating financial institutions to bear the direct economic consequences of the credit risk associated with AMA assets and not transfer such risk to third parties.19 Finally, because the current AMA regulation relies on an NRSRO rating to define eligible insurers, FHFA must change or delete that provision in order to comply with section 939A of the Dodd-Frank Act, which bars federal regulatory agencies from incorporating NRSRO ratings requirements into their regulations.

In the preamble to the proposed rule, FHFA specifically requested comments regarding the use and importance of SMI or pool insurance as part of an allowable credit enhancement structure.20 In particular, FHFA solicited comments on what type of requirements could replace the specific credit rating requirement for insurance providers if it were to retain these insurance options as part of the credit enhancement structure. Further, FHFA requested comments on how a Bank might evaluate the claims-paying ability of an insurer in the absence of a specific credit rating requirement. Finally, FHFA requested comments on whether, if it were to adopt in the AMA regulation specific minimum requirements of SMI and pool insurance, such requirements also should apply to PMI providers.

No commenters responded to the specific questions FHFA posed in the proposed rule regarding these topics, but many comments opposed the elimination of a provision that would authorize the use of SMI and pool insurance as part of the credit enhancement structure, and no commenters supported the removal of this option. Commenters generally argued that FHFA did not articulate a sound reason for removing the insurance option from the rule and that FHFA's focus on credit ratings for mortgage insurers ignored the actual claims paying abilities of these firms. They also pointed out that mortgage insurance providers, including those in run-off, have paid all “valid” claims, with 96 percent of claims paid in cash and the remainder due over time.21 Commenters also noted that mortgage insurers and their regulators have taken steps to enhance the financial strength of the insurers, improve regulatory oversight, and increase clarity and reduce ambiguity in master insurance policies. At least one commenter noted that using insurance in the credit enhancement structure did not undermine the incentive to sell quality loans under the AMA regulation because lower insurance premiums would be associated with lower-risk mortgages.

Commenters also noted that use of SMI and pool insurance provided important economic benefits to members that sell AMA loans to the Banks, by reducing capital charges on the retained credit enhancement and transferring risk associated with the enhancement to third parties. A number of commenters stated that the Banks could develop internal ratings for SMI and pool insurance providers and pointed to the Enterprises' Private Mortgage Insurer Eligibility Requirements (PMIERS) recently adopted by Fannie Mae and Freddie Mac as an example of acceptable standards, although some commenters said that PMIERS should not be the only standard used for qualifying insurance providers. These commenters suggested that FHFA could condition use of such internal standards on a Bank demonstrating the effectiveness of its approach prior to introducing products that use SMI or pool insurance. Some comments also suggested that the rule not restrict insurance providers to mono-line mortgage insurers, although the current AMA regulation only requires that insurance be provided by an insurer. Thus, the AMA regulation already allows multiline insurers to provide SMI or pool insurance if they meet the other requirements in the regulation.

A number of commenters stated that FHFA should not impose specific requirements in the regulation on providers of borrower-financed PMI and instead should continue current practice of letting the Banks identify acceptable providers. Other commenters said that if FHFA wished to add such a requirement, it should require the PMI provider to meet PMIERS. Still other commenters urged FHFA to consider a broader range of insurance products as part of the credit enhancement structure and allow a member to rely on insurance to cover the entire credit enhancement obligation rather than just the amount in excess of the member required direct enhancement, as under the current regulation.

No commenter objected to FHFA's proposal to allow a participating financial institution to transfer servicing rights on AMA loans to any institution approved by the Bank, regardless of whether it was a member. Some commenters objected to a related change that would have relieved a participating financial institution of the responsibility for paying the unreimbursed servicing expenses on loans guaranteed or insured by a federal department or agency as a means of meeting its credit enhancement obligation for such loans. FHFA had proposed that change in order to facilitate the transfer of mortgage servicing rights on federally insured or guaranteed AMA loans to a nonmember institution, because for such loans the responsibility for unreimbursed servicing expenses transfers with servicing rights. The commenters disagreed with FHFA's statement that requiring a member to retain exposure to unreimbursed servicing expenses on loans guaranteed or insured by a department or agency of the U.S. government was unlikely to substantially affect the underwriting for such loans, given the requirements and standards already imposed by the provider of the federal guarantee or insurance. They believed that the proposed change would alter the underlying premise for AMA in the case of such federally guaranteed or insured loans—namely that members needed to have “skin in the game” for loans sold to the Banks. The commenters did not address why continuing to allow SMI or pool insurance would not similarly be contrary to this aspect of the AMA program.

Section 1268.8 of the proposed rule addressed the delegation of administrative AMA program duties (i.e., back-office operations) and the ability to terminate AMA agreements between Banks. FHFA made no substantive changes to this section of the rule when it proposed the amendment. Commenters asked FHFA to make two changes to this section. First, commenters asked to add regulatory language to the delegation of administrative duties provisions to allow a Bank to contract with other parties (including other Banks) to provide services related to administration of its own or its delegated AMA program without having to disclose such delegation to participating financial institutions. Second, commenters asked to add regulatory language to the delegation of pricing provision to allow Banks to specify that a Bank that has delegated its AMA pricing function to another Bank may retain its right to refuse to acquire AMA at certain prices pursuant to contractual provisions among the parties.

FHFA received comments requesting that it consider two other regulations—those pertaining to Bank housing goals and new business activities—as part of its review of the AMA rule, even though FHFA had not proposed to address either of those matters as part of this rulemaking. FHFA believes that the issues raised by commenters pertain to matters that are beyond the scope of this rulemaking and are best considered as part of FHFA rulemakings related to the other regulations.

As to the matter of Bank housing goals, these commenters called on FHFA to align the AMA regulation and the new housing goals regulation. Without providing specific examples, the commenters suggested that the AMA regulation should provide flexibility for the Banks to offer AMA products and purchase AMA loans as one means to satisfy the housing goals regulation requirements. FHFA also received many comments asking it to address FHFA's current new business activity regulation, as it may be applied to the Banks' AMA programs. The majority of commenters believed that the new business activity filings were burdensome and resulted in significant delays to the Banks' ability to improve their programs. More specifically, they sought to exclude from the new business activity review process certain types of modifications or expansions to existing AMA programs and products. These suggestions are much the same as those received in response to a separate rulemaking in which FHFA had proposed certain amendments to the existing new business activity regulation, and which FHFA will consider as part of that rulemaking.

The proposed rule included definitions for four new terms to be used in the AMA regulation, which are: “AMA product,” “AMA program,” “participating financial institution,” and “pool.” FHFA intended for these terms to help simplify and clarify other provisions in the regulation and, with the exception of revisions made in response to certain comments, as discussed below, is adopting those definitions as proposed. FHFA has expanded the proposed definition of “participating financial institution” to reflect the fact that a participating financial institution may be approved to sell AMA loans to a Bank, but also could be approved (either in conjunction with or apart from its role as a seller of loans) to service those loans, or provide a credit enhancement for them. FHFA has also clarified the wording for the definition of “pool” to reflect the fact that FHFA has authorized some Banks to aggregate AMA pools, which requires that the definition make clear that a pool may contain loans sold by more than one member or other source.

FHFA has also modified somewhat the proposed definition of “AMA product” to make clear that while each Bank may develop and establish different AMA products and structures, all such products and structures must comply with the provisions of the AMA regulation. This change was based on language suggested by the comments. FHFA did not, however, alter the definition to specifically exclude loans held by a Bank on its balance sheet for a short time prior to transferring them to another entity, as some commenters requested. Generally speaking, mortgage loans purchased under the Banks' off-balance sheet programs are not intended to qualify as AMA, and thus do not have all of the features that are necessary for a mortgage loan to qualify as AMA. Therefore, such loans would not come within the new definition of “AMA product”, which specifically includes only those loans that comply with all of the requirements of the AMA regulation.22 In light of that fact, there is no need to specifically exclude these loans from the definition.

In response to issues raised by the commenters, FHFA is also adding new definitions in the final rule for the terms “AMA investment grade” and “qualified insurer.” The term “AMA investment grade” modifies and replaces the proposed definition of “investment quality.” FHFA developed the definition of “AMA investment grade” based on comments received on the proposed definition of “investment quality.” The term “qualified insurer” is used in provisions that FHFA is adding back to § 1268.5, which will allow Banks to use pool and loan-level insurance as part of an eligible credit enhancement structure for AMA products. FHFA addresses these new definitions in more detail below, in its discussion of § 1268.5 of the final rule. FHFA is also adopting, without further change, its proposed amendments to the definitions of “expected losses” and “acquired member assets” in 12 CFR part 1201.23

FHFA is adopting § 1268.2 as proposed.24 This section generally authorizes the Banks to invest in AMA, subject to the requirements of FHFA's AMA and new business activity regulations. This section also includes a “grandfather” provision that authorizes a Bank to continue to hold as AMA any loans that FHFA or the Finance Board previously authorized for purchase, even if the loan would not meet one or more of the requirements of the final rule. The grandfather provision covers all loans that were previously authorized for purchase by any regulation, order, or other agency action, such as waiver of particular requirements that allowed a Bank to purchase the loan.25 The grandfather provision at § 1268.2(b), however, does not allow a Bank to continue to purchase new loans that do not meet the requirements of the final rule after the rule becomes effective.

One commenter requested that FHFA expand the grandfather provision to include any purchase of mortgage loans pursuant to any open commitment as of the effective date of the final rule. The commenter stated that this would assure the Banks could fulfill any existing commitments to purchase loans if any of the existing Bank AMA products did not meet the requirements of the final rule. FHFA noted in proposing the rule, however, that it believed that all currently active AMA products would meet the requirements of the proposed rule.26 The commenter did not provide an example of an active AMA product that would not meet the requirements of the proposed rule. As a consequence, FHFA has not revised the proposed grandfather provision in response to the comment. In the unlikely event that a Bank determines that an existing AMA product would not meet all of the requirements under this final rule, FHFA would allow the Bank to continue to honor any contractual obligations it had entered into under a commitment that had been entered into prior to the effective date of this rule and that complied in all respects with the requirements of the existing AMA regulation.

Section 1268.3 of the final rule sets forth the four categories of asset types that are eligible for purchase as AMA. As adopted, it closely follows current 12 CFR 955.2(a), although the final rule also incorporates specific authority for Banks to acquire as AMA certain certificates representing interests in AMA-qualified whole loans, which is based on a Finance Board approval of a similar transaction in 2002. The first of these categories allows a Bank to acquire as AMA any whole loans that are eligible to secure advances to members under FHFA's advances regulation, at 12 CFR 1266.7. These assets include: (1) Fully disbursed, whole first mortgage loans on improved residential real property not more than 90 days delinquent; (2) mortgages or other loans, regardless of delinquency status, to the extent that they are insured or guaranteed by the United States or any agency thereof, and such insurance or guarantee is for the direct benefit of the holder of the mortgage or loan; (3) loans that qualify as “other real estate-related collateral,” which requires that such loans also have a readily ascertainable value, can be reliably discounted to account for liquidation and other risks, can be liquidated in due course, and in which the Bank can perfect a security interest; and (4) loans acquired from community financial institution (CFI) members or their affiliates, for small business, small farm, small agri-business, or community development purposes, and which are fully secured by collateral other than real estate, or securities representing a whole interest in such secured loans. Such CFI collateral also must have a readily ascertainable value, be able to be reliably discounted to account for liquidation and other risks, and be able to be liquidated in due course.

As under current 12 CFR 955.2(a), § 1268.3 of the final rule authorizes a Bank to purchase as AMA manufactured housing loans regardless of whether such housing constitutes real property under state law. FHFA specifically requested comment on whether it should continue to authorize the purchase of manufactured housing loans as AMA if relevant state law considers the loans to be chattel loans. FHFA received only a few comments in response to this request, which supported retaining the current regulatory text, citing, among other things, the importance of manufactured housing in meeting affordable housing needs in certain markets. As a result, FHFA has determined not to change the scope of existing authority and the final rule will continue to allow Banks to purchase as AMA manufactured housing loans regardless of whether state law considers them to be real property or chattel loans. The third category of asset types is state and local housing finance agency bonds, which is unchanged from the corresponding provision of the current regulation. FHFA received no comments advocating for changes to this provision.

The fourth category of asset types pertains to certain certificates that represent interests in loans that qualify as AMA. This category of assets is not addressed by the current regulation, but the Finance Board had previously approved a Bank's request to acquire such assets as AMA. The effect of including this provision in the final rule is to codify the previous Finance Board determination that such assets may qualify as AMA. When the Finance Board adopted the current AMA regulation, it noted, in response to comments, that the rule would allow the Banks to buy structured products as AMA, provided the products met certain identified conditions.27 Section 1268.3(d) incorporates these conditions, which require that any such certificate must: (i) Be backed by loans that themselves qualify as AMA and that meet the member nexus requirement; (ii) Meet the requirement that the certificate is enhanced to AMA investment grade; (iii) Be issued pursuant to an agreement between the Bank and the participating financial institution under which the participating financial institution shares credit risk as required by the regulation; and (iv) Are acquired substantially by the initiating Bank or Banks.

By incorporating the substance of the Finance Board's earlier approval into the regulatory text, FHFA would clarify that such programs are possible under the amended regulation and would bring all relevant authority into a single provision within the regulatory text. FHFA would interpret the provisions of § 1268.3(d) of the final rule to permit the use of a third party to securitize the whole loans, as that arrangement would merely represent the use of a vehicle to invest in certain types of AMA under more favorable terms. However, if any such certificates were to have been created as a security that initially was available to investors generally, they would not qualify as AMA under this provision.28

Although, as discussed above, whole loans eligible to secure advances may qualify as AMA, both the current regulation and the proposed rule explicitly excluded from AMA any single-family home mortgage loans that exceed the conforming loan limits and any loans made to an entity, or secured by property, that is not located in a state. The final rule carries over without change the existing exclusion for loans not located in a state, and modifies the conforming loan provision, as described below. In proposing the rule, FHFA specifically requested comments on whether the final rule should continue to limit AMA loans to those that meet the conforming loan limits more generally.29 Some commenters suggested that FHFA remove the limits for all loans, while other commenters suggested loans that are guaranteed or insured by a department or agency of the U.S. government be allowed to exceed the conforming loan limits.

After considering the comments, FHFA has decided that it would be appropriate to allow the Banks to acquire as AMA loans guaranteed or insured by a department or agency of the U.S. government without regard to the conforming loan limit, while continuing to apply the limit to other types of loans. FHFA considers the conforming loan limit, which is a statutory requirement, to be an appropriate public policy guide in determining how the GSE subsidy that accrues to the Banks should be used to support the housing finance efforts of their members when making loans without any federal guarantee or insurance. Because other federal statutes separately authorize certain agencies or departments of the U.S. government to insure or guarantee mortgage loans that exceed the conforming loan limit, FHFA views those provisions as evidence that public policy would favor allowing the Banks to also support those market segments, and to do so in a manner that is consistent with the limits of those programs. Accordingly, § 1268.3(a)(1) of the final rule will carry forward the existing AMA rule provision that excludes from AMA those single-family mortgages where the loan amount exceeds the conforming loan limits established pursuant to 12 U.S.C. 1717(b)(2), but will also exempt from that prohibition loans that are insured or guaranteed by a department or agency of the U.S. government.30

As discussed earlier, the proposed rule would have barred a Bank from purchasing as AMA any home mortgage loans on which a director, officer, employee, attorney, or agent of a Bank or of the selling member institution was the borrower, unless the board of directors of the Bank specifically approved such purchase.31 As commenters point out, in the current mortgage market any loans made to such “insiders” should meet the same AMA underwriting standards that the member or other originator would apply to all of AMA-eligible loans and thus would not have a different risk profile from those other loans. Commenters also contended that such a requirement would present significant operational difficulties. For example, because of the breadth of the proposal, it would effectively require the Banks to screen out of their AMA pools not only those loans that had been made to a member's executives, but also to any of its rank and file employees. FHFA is persuaded that the costs to the Banks of implementing this provision would likely outweigh whatever benefits might accrue from it. FHFA also recognizes that the statutory language to which FHFA looked in proposing this provision was likely intended to address the risks associated with particular practices that are less of a concern in today's mortgage marketplace. The original statutory provision, which pertains only to the acceptance of such loans as collateral and dates to the original Bank Act, likely was intended to prevent the Banks from accepting as collateral mortgage loans that savings and loan association members had made to their “insiders” and which may not have been underwritten as rigorously as their other loans. Given that today's mortgage markets are much more uniform, in terms of underwriting practices, than was the case in the 1930s, it is unlikely that removing the prohibition would create any significant risks for the Banks.

While the final rule adopts or retains specific restrictions on certain loans, it does not limit the total amount of AMA assets a Bank may acquire. Nevertheless, FHFA expects each Bank's board of directors to establish a prudential limit on its maximum holdings of AMA, which should be governed by the Bank's ability to manage the risks inherent in funding and holding such mortgage loans.

Section 1268.4 of the proposed rule would have carried forward without substantive change the member nexus requirement of the current AMA regulation, found at 12 CFR 955.2(b). After considering the issues raised by the commenters, described below, FHFA has decided to adopt this provision of the final rule without any substantive differences from the proposed rule. Under this “member nexus” provision, an asset may be eligible for purchase as AMA only if the participating financial institution has originated or issued the assets or has held it for a valid business purpose. The “valid business purpose” provision was intended to recognize the fact that some members may conduct their mortgage lending operations through both the origination and purchase of mortgage loans, which may include the acquisition of loans from nonmember institutions as part of the normal course of business, and may then wish to sell both categories of loans to their Bank. The Finance Board and FHFA have interpreted this provision as excluding any loans that merely pass from a nonmember through a member to a Bank, because such arrangements would have the effect of extending the benefits of membership to the nonmember.32

Commenters suggested that FHFA amend the AMA rule to allow Banks to acquire loans directly from the affiliates of a Bank member, which they contend would streamline the process of acquiring loans. The Banks believe that the current requirement is inefficient because it requires the use of a two-step process whereby a nonmember affiliate that originates a mortgage loan must first assign the loan to its affiliated member prior to the member is able to sell the loan to the Bank. FHFA acknowledges that the current process may be inefficient for such members, but believes that the Finance Board struck an appropriate balance when it first adopted the AMA rule between the need for operational efficiency and the need to ensure that the benefits of Bank membership are made available only to institutions that are eligible for membership. Accordingly, FHFA decided to adopt the provision generally as proposed.

The reference in § 1268.4(a) of the final rule to assets issued “through, or on behalf of the participating financial institution” carries over from the current regulation, and is intended to address the terms under which HFA bonds may qualify as AMA. As under the current regulation, this provision allows HFA bonds issued by an underwriter for the participating financial institution, i.e., a housing finance agency that has become a housing associate of the Bank, to qualify as AMA.33 In § 1268.4(b), FHFA is also carrying over without substantive change the provisions of the current regulations that address the process through which a Bank may purchase HFA bonds as AMA from a housing associate of another Bank. Under this provision, a Bank may acquire initial-offering taxable HFA bonds from out-of-district associates, provided the Bank in whose district the HFA is located (local Bank) has a right of first refusal to purchase, or negotiate the terms of, a particular bond issue. If the local Bank refuses, or does not respond within three business days, the HFA may then offer the bonds to an out-of-district Bank.

FHFA proposed to reorganize the current credit risk-sharing requirements from two provisions of the Finance Board regulations, 12 CFR 955.2(c) and 955.3, into a single provision of the final rule, § 1268.5. The proposed rule would have carried over several of the credit risk-sharing provisions without substantive changes, including the requirement that all AMA loans carry a credit enhancement and the design requirement for the credit enhancement structure to ensure that the participating financial institution retained a material economic incentive to reduce actual losses on any AMA loans.34 To comply with Dodd-Frank Act mandates that generally bar regulatory agencies from incorporating NRSRO credit rating requirements into their regulations, FHFA also proposed to amend those provisions of the current AMA regulation that were based on or referenced NRSRO ratings, including allowing the Banks flexibility to use a non-NRSRO methodology and model for calculating the credit enhancement obligation. Finally, FHFA had proposed to delete existing provisions that authorize the use of private SMI or pool insurance as part of the credit enhancement structure and, as a consequence, also remove provisions from the current regulation requiring eligible SMI providers to maintain specific NRSRO ratings.

FHFA has made several changes to the credit enhancement provisions of the proposed rule in response to comments, including restoring to the rule provisions allowing the use of SMI or pool insurance as part of the credit enhancement structure. Related to that provision, and as addressed in more detail below, FHFA is also adding to the final rule a requirement that a Bank must develop and maintain written financial and operational standards under which it will review and approve insurers as eligible to provide mortgage insurance on AMA loans. This requirement replaces the provisions of the current regulation, which had required the Banks to use NRSRO ratings for evaluating mortgage insurers. The final rule will carry over from the current rule the requirements that all AMA loans be covered by a member-provided credit enhancement, and that such credit enhancement on loans other than those loans covered by a federal guarantee or insurance bear the direct economic consequences of losses from the first dollar up to expected losses, or immediately following expected losses but in an amount that is equal to or exceeding the expected losses.35

Section 1268.5(b)(1) of the final rule sets forth the general requirements for how a Bank is to determine the total credit enhancement that a participating financial institution must provide for an asset or pool to qualify as AMA. Unlike under the current rule, the final rule does not require that Banks calculate the credit enhancement for AMA using NRSRO models and methodologies, or that the credit enhancement raises the credit quality of an asset or pool to a level that is equivalent to a specific NRSRO-determined rating. Instead, the final rule requires the Banks to determine and document that AMA assets are enhanced at least to “AMA investment grade.” The rule defines “AMA investment grade” as:

The term “AMA investment grade,” as well as its definition, represents a change from the proposed rule that FHFA made in response to comments received on the proposal. The proposed rule would have required that the enhancement on AMA assets raise them to at least “investment quality,” which would have been defined by reference to the definition of that term that is used in the Bank investment regulation, at 12 CFR 1267.1. Commenters pointed out, however, that the term “investment quality” as used in the investment regulation generally applies to debt securities and that, unlike when Banks purchase debt securities, Banks buy AMA assets with the knowledge and expectation that some of those assets will default, and become delinquent.36 Thus, as commenters further noted, the fact that the definition of “investment quality” in the Bank investment rule references expectations of “full and timely payment of principal and interest” means the definition cannot be readily applied to individual mortgages or mortgage pools purchased as AMA.

FHFA agrees with the comments and has revised the proposed definition to address those commenters' concerns. In particular, the definition of “AMA investment grade” that is adopted in the final rule replaces the references to expectations that a Bank will receive “full and timely payment of principal and interest” with language suggested by commenters, i.e., that a Bank has a high degree of confidence that “it will be paid principal and interest in all material respects.” The change recognizes that Banks will, upon purchase of the AMA asset, expect certain levels of payment defaults and delinquencies. The final definition continues to require that the Bank's analysis of the possibility for repayment take account of adverse stress to future expected economic conditions and that the Bank should consider such adverse stresses in their analysis, to the extent that such adverse changes could reasonably occur given current economic conditions and outlooks.

While the proposed rule would not have changed the existing requirement that a Bank determine the necessary credit enhancement on a pool at the earlier of 270 days from the date of the Bank's acquisition of the first loan in a pool or the date at which the pool reaches $100 million in assets, § 1268.5(b)(1) of the final rule has revised those provisions such that a Bank now must determine the total credit enhancement obligation no later than 30 calendar days after a pool closes or the Bank completes the purchase of an AMA asset.37 FHFA made this change based on comments that the rule should allow a Bank to calculate the credit enhancement in a manner that is consistent with the terms of specific loan funding commitments. Commenters provided as an example the Mortgage Partnership Program (MPP) for which calculating the credit enhancement at the time the pool closes would bring more certainty to participating financial institutions as to their ongoing financial obligations. FHFA believes that the change in the final rule will provide Banks sufficient flexibility to meet the concerns raised by commenters while still ensuring that all AMA pools are enhanced to levels consistent with the terms and conditions of the specific AMA product.

Under § 1268.5(b)(1), the Bank could continue to specify, as part of the terms and conditions for a particular AMA product, that a participating financial institution must provide a credit enhancement greater than that needed to enhance the asset or pool to AMA investment grade. The final rule further provides that a Bank must make its credit enhancement determinations using a model and methodology of the Bank's choosing, subject to the requirements of § 1268.5(f), which requires the Banks to provide information about their model and methodology to FHFA upon request, and which reserves FHFA's right to require changes to a Bank's model or methodology. As FHFA noted in the proposed rule, a Bank may continue to use the same NRSRO model it currently uses for making credit enhancement determinations under the final rule, and in such a case, would not need to alter the credit enhancement levels it currently requires, unless FHFA directs it to do so or its estimated enhancement levels otherwise do not comply with the rule.38 For example, a Bank would need to increase credit enhancement levels if it determined that the credit enhancement currently estimated by its NRSRO model was not sufficient for an asset or pool to be AMA investment grade under the definition of that term.

FHFA is adopting as proposed the requirement that a Bank document the basis for its conclusion that the contractual credit enhancement required for a particular pool is sufficient to meet the required credit enhancement obligation for a particular AMA product, given the Bank's chosen model's relevant stress scenarios.39 This provision is located at § 1268.5(b)(2) of the final rule, and that information will help FHFA monitor the Banks' use of their models and the adequacy of the specific credit enhancement structures used in each AMA product.

Section 1268.5(c) of the final rule addresses the credit risk-sharing structure for AMA products. As is the case under existing regulations, this provision generally requires that the participating financial institution providing the credit enhancement bear the direct economic consequences of actual credit losses on the assets from the first dollar of loss up to expected losses, or immediately following expected losses in an amount equal to or exceeding expected losses.40 This requirement would not apply to federally insured or guaranteed mortgage loans.41

As noted previously by the Finance Board, this requirement helps ensure that a participating financial institution bears the direct consequences of the credit quality of the asset or pool, and thereby has the incentive to maintain high underwriting standards for any AMA loans sold to a Bank.42 The participating financial institution cannot transfer this responsibility to an affiliate or nonmember entity.

While the current regulation defines “expected losses” as the base loss scenario in the methodology of an NRSRO applicable to a particular AMA asset, the final rule amends this definition to refer to the loss on the particular AMA asset or pool given the expected future economic and market conditions in the model or methodology used by the Bank to calculate the credit enhancement for an AMA product. This change results from the fact that the final rule no longer requires a Bank to use an NRSRO model, and also accommodates the potential for a Bank to adopt a model that applies a methodology that differs from that used in the Banks' current models. Otherwise, FHFA believes that this change does not alter the substance of what is currently required by the AMA rule; nor is it intended to alter how a Bank would calculate “expected losses” if the Bank continues to use its current model.

Section 1268.5(c) also continues to require that the credit enhancement remain in place at all times, i.e., for the life of the asset or pool.43 This requirement effectively prohibits the Banks from using structures, for example, that comply with the credit rating requirement during in the first year, but that then scale back the amount of the member's credit enhancement in subsequent years so that the pool would no longer be credit enhanced to a level that is consistent with the terms and conditions of the AMA product.44

Section 1268.5(c)(1)(ii) of the final rule also will retain the existing requirement that a participating financial institution must secure fully its credit enhancement obligation, and that it do so in the same manner that a member must secure its obligation to repay an advance under part 1266 of the FHFA advances regulations. This provision is intended to prevent a Bank from being exposed to any additional credit risk as a result of a member's failure to comply with its contractual obligation to absorb a specified portion of the credit losses on its AMA loans. While some commenters asked FHFA to delete this requirement so that the Banks could have added flexibility in designing different types of credit enhancement structures, FHFA believes that the collateral requirement provides a necessary level of protection for the Banks should a participating financial institution be unable to fulfill its credit enhancement obligation, and also is consistent with the legal rationale for the AMA programs, which views the acquisition of AMA loans as being functionally equivalent to the extension of credit via an advance, which members must fully secure with eligible collateral.

The final rule will carry over, with some modifications, the provisions of the existing regulations that establish alternative means by which a member may provide the credit enhancement for its AMA loans, including a transfer of the enhancement obligation to certain parties, subject to certain limitations. The revised provision would be located at § 1268.5(c)(2) of the final rule. The use of these structures requires the approval of the Bank, which could do so either by establishing the required form of credit enhancement in the terms of a particular AMA product, or by providing specific approval for the transfer.

Specifically, § 1268.5(c)(2)(i) authorizes a participating financial institution to transfer its credit enhancement obligation to its insurance affiliate, but only where the insurance provided by the affiliate is positioned after the participating financial institution bears the financial losses on the AMA loan in an amount at least equal to the expected losses. Similarly, the final rule carries over the substance of two provisions of the current regulations, which allow a participating financial institution to transfer its credit enhancement obligation to another participating financial institution, which may be either a member of the same Bank or, subject to certain conditions, a member of another Bank. Those provisions are located at § 1268.5(c)(2)(iv) and (v) of the final rule. These provisions remain consistent with the existing regulations, as well as with current Bank practice with regard to AMA product structures and permissible transfers of the credit enhancement obligations.

As already discussed, FHFA had proposed eliminating provisions of the existing regulation that allow a participating financial institution to meet part of its credit enhancement obligation through the purchase of loan-level SMI or pool insurance. After considering the comments on this issue, however, FHFA has determined to retain those provisions, which are located at § 1268.5(c)(2)(ii) and (iii) of the final rule. Thus, a participating financial institution can continue to provide part of its credit enhancement obligation by purchasing loan-level SMI, but only if the SMI is positioned in the credit enhancement structure to cover losses remaining after the participating financial institution has borne the direct economic consequences of the actual credit losses, as required by § 1268.5(c)(1)(i). Similarly, the participating financial institution can continue to purchase pool insurance, but only where such insurance covers that portion of the credit enhancement obligation attributable to the geographic concentration or size of the pool and is positioned last in the credit enhancement structure.

The provisions pertaining to the use of SMI or pool insurance generally carry over the substance of the existing regulations, with one significant exception related to the rating requirement for insurance providers. The existing AMA regulations require that insurance be maintained at all times with an insurer that has been assigned a rating from an NRSRO that is at least equal to the second highest investment grade NRSRO rating. Because the Dodd-Frank Act requires that FHFA remove such ratings-based provisions from its regulations, FHFA is replacing this requirement with a requirement that the participating financial institution may obtain its SMI or pool insurance only from an institution that at all times is a “qualified insurer,” as defined by the final rule.45 To implement this “qualified insurer” requirement, FHFA is adopting as part of the final rule a new provision, to be located at § 1268.5(e)(1), which directs a Bank to develop and maintain a written financial and operational standards that it will apply in approving an entity as a “qualified insurer.” That provision also makes clear that a Bank can rely on another provision of the final rule, § 1268.8, to delegate to another Bank or group of Banks the responsibility for developing and applying these standards. The provision will allow a group of Banks to develop a common policy and common list of qualified insurers for AMA programs if they choose.

The rule allows a Bank one year to develop these new insurance provider standards. The FHFA expects that Banks will develop the new standards and qualify under these standards any mortgage insurers with which the Banks intend to do business under their AMA programs within this one-year timeframe. Until the end of this one-year grace period, Banks can continue to do business with the insurance counterparties that it currently allows to provide insurance on AMA assets or can add new insurance counterparties based on existing standards that the Banks may have in place.46 Once the new standards are in place, § 1268.5(e)(1) also requires that a Bank review qualified insurers at least once every two years and verify that they continue to meet the Bank's standards.47

FHFA expects that any standards a Bank adopts under § 1268.5(e)(1) will be rigorous and will set minimum financial and operating standards that an insurer must meet to help ensure that the insurer will have the financial resources to fulfill its obligations under insurance policies on AMA assets. While the rule does not provide specific requirements that the Banks must meet in developing these standards, FHFA notes that the PMIERS recently implemented by the Enterprises represent a good model of the type of analytical approach that FHFA would expect of the Banks' standards under this provision. FHFA expects to review a Bank's qualified insurer standards as part of its regular supervisory examination and off-site monitoring of Bank activities. FHFA also expects Banks periodically to review their qualified insurer standards, and to revise them as appropriate.

In order to ensure a degree of uniformity with respect to the financial condition of entities that may provide insurance in connection with the AMA programs, FHFA is also adopting new § 1268.5(e)(2), which will allow only those entities that are “qualified insurers” to provide either the loan-level or pool insurance policies allowed as part of the credit enhancement structure under § 1268.5(c)(2)(ii) and (iii) or the private mortgage insurance on loans purchased as AMA. In proposing this rule, FHFA specifically requested comments on whether any eligibility requirements for providers of SMI or pool insurance should also apply to PMI providers.48 Few commenters responded to this request, but the commenters generally expressed the view that FHFA should not impose specific requirements on PMI providers and, instead, should continue to allow Banks to adopt their own standards for those providers. One of the commenters noted, however, that if the FHFA did impose requirements, PMI providers should be required to meet PMIERS. After consideration of these comments, FHFA has determined to apply the “qualified insurer” requirements of § 1268.5(e)(1) to providers of PMI, SMI and pool insurance. By requiring that providers of all types of mortgage insurance used in AMA products meet rigorous financial and operational standards, this provision helps assure that Banks engage in sound counterparty risk management and maintain strong safety and soundness measures for their AMA programs. Moreover, given that § 1268.5(e) provides the Banks with latitude to develop their own standards for what constitutes a “qualified insurer,” the application of this provision to PMI providers should not represent a significant change from the existing approach.

Section 1268.5(d) of the final rule addresses the purchase of federally insured or guaranteed mortgage loans as AMA. The existing regulatory text allows a portion of the credit enhancement to be provided through the purchase of loan-level insurance, including insurance provided by a federal mortgage insurance or guarantee program. Although the federal insurance or guarantee generally eliminates the credit risk to the member selling mortgage loans to its Bank, the Finance Board had determined that the member's potential liability to bear the unreimbursed servicing expenses on such loans served the same purpose of providing an economic incentive for the member to sell only well-underwritten loans to the Bank. The final rule carries over much of the substance of current agency policy, and simply states that a participating financial institution may provide the required credit enhancement by purchasing loan-level guarantees or insurance from departments or agencies of the U.S. government, provided that the guarantee or insurance remains in effect for however long the Bank owns the loan. The requirement that the guarantee or insurance remain in effect does not require that the Bank member be the party that maintains the guarantee or insurance for that period, which would allow any other entity servicing the loan to maintain the guarantee or insurance. The final rule differs from the existing regulations, however, in that it does not require loans guaranteed or insured by a department or agency of the U.S. government to meet the specific credit enhancement structure requirements, i.e., wherein the member must bear the first dollar of losses for a loan or pool up to the amount of expected losses or must bear losses immediately following the expected losses in an amount that equals or exceeds expected losses.49 Even under this new provision, however, the federal guarantee or insurance must be sufficient so that the underlying asset or pool meets the required credit enhancement specified as part of the terms and conditions that the Bank has established for the relevant AMA product.

As already noted, the Finance Board has described the purpose of the AMA credit enhancement structure requirement as being to ensure that participating financial institutions, “when responsible for such losses, [had] incentive to seek ways to achieve better than expected performance [for the loans sold as AMA].” 50 As the Finance Board explained, for a participating financial institution to meet this structure requirement with respect to federally guaranteed or insured loans, given that losses eventually would be covered by the guarantee or insurance, the participating financial institution would have to bear the economic responsibility of all unreimbursed servicing expenses associated with those loans, up to the amount of the expected losses.51 As a result, under the current regulation the member's credit enhancement obligation for AMA government loans is tied closely to its servicing obligations. An unintended consequence of tying the credit enhancement obligation to the servicing obligation is that such a requirement effectively limits a participating financial institution's ability to transfer the mortgage-servicing rights for any AMA government loans to non-participating financial institutions. In addition, as FHFA noted in proposing the rule, after having had the opportunity to review the Banks' AMA programs since 2000, FHFA has come to the conclusion that requiring a member to retain an obligation to cover unreimbursed servicing expenses for AMA government loans provides no meaningful additional incentive to improve underwriting to achieve better than expected loan performance.52

A small number of commenters objected to this proposed revision. These comments noted that the proposed change would have altered one of the key underlying premises for AMA with regard to government loans, namely that the members need to have “skin in the game” to assure high quality underwriting. After considering these comments in light of its own experience in monitoring the Banks' AMA programs, FHFA has concluded that, with regard to federally guaranteed or insured loans, the underwriting standards imposed by the relevant government department or agency address the same policy objective of the credit enhancement requirements, which is to encourage the members to underwrite the loans to a high level. Therefore, FHFA finds that requiring the participating financial institution to also remain responsible for unreimbursed servicing expenses would add little, if any, incentive to underwrite its mortgage loans to a materially different level above the already high level required by the federal guarantor or insurer. At the same time, FHFA believes that the ability to transfer the servicing rights on federally insured or guaranteed loans is important in the current marketplace. Thus by carrying over to the final rule a provision that would prevent participating financial institutions from transferring servicing rights on such loans FHFA could negatively affect members' ability to use the AMA program to obtain liquidity to support this segment of the mortgage market.53 FHFA, therefore, is adopting § 1268.5(d), as proposed.

Section 1268.5(f) of the final rule addresses the model and methodology that a Bank uses to estimate the required credit enhancement, and has been simplified in response to certain recommendations from the commenters. The final rule requires a Bank to establish a model and methodology for estimating the required member credit enhancements for AMA loans that a participating financial institution sells to a Bank.54 The new provision, consistent with the Dodd-Frank Act requirements, no longer requires a Bank to use an NRSRO model.55 The final rule does require a Bank to provide to FHFA upon request any information about the Bank's model and methodology including results of any model runs and testing performed by the Bank. While the final rule does not require that FHFA approve the model and methodology that a Bank uses to estimate the required credit enhancement, it specifically reserves to FHFA the right to direct a Bank to make changes to its model and methodology and further requires that a Bank promptly implement any such changes once FHFA directs it to do so.

As noted above, FHFA has altered the final version of § 1268.5(f) from what it proposed based on the comments received, a number of which thought that the proposed provision was too prescriptive and would hinder the Banks' ability to adjust their models and methodologies in response to advances in technologies and methods. These commenters believed that it would be more appropriate for the final rule to provide only general guidance relating to the models and methodologies, and rely on advisory bulletins and other forms of supervisory guidance with regard to specific practices on evaluating and monitoring performance. The commenters also noted that FHFA generally follows their suggested approach with regard to Banks' use of models in other areas.

FHFA agrees with the comments, and has note included as part of the final rule the proposed requirements related to a Bank's validation and monitoring of its model, or that requiring a Bank to inform FHFA prior to making any material changes to its model and methodology. Instead, FHFA will address these items through its supervisory process, and will issue guidance to the Banks on these topics as the need arises. FHFA, however, continues to expect a Bank to have risk management policies and procedures commensurate with the complexity of the model and methodology. Effective model risk management should entail a comprehensive approach in identifying risk throughout the model lifecycle and should be consistent with any applicable FHFA guidance.

Section 1268.6 of the final rule addresses the servicing of AMA loans, which FHFA is adopting as proposed. This provision incorporates current FHFA positions, as set forth in a recent regulatory interpretation, on the rights of the Banks to allow for the transfer of mortgage servicing rights from the participating financial institution that originally sold the AMA loans to the Bank.56 FHFA received no comments on this provision.57

Thus, § 1268.6 allows for the transfer of servicing rights on AMA loans, including federally guaranteed or insured loans, to any institution, including a non-Bank System member. The provision specifically provides that any such transfer cannot result in the AMA loan failing to meet any other AMA requirement, including the credit enhancement requirement.58 Section 1268.6 also requires the approval of each Bank that has any ownership interest in the underlying loans, no matter how small that interest may be, prior to the transfer of the servicing obligation. Finally, § 1268.6 states that the Banks must have policies and procedures that ensure the transfer of servicing would not negatively affect the credit enhancement on the underlying loans or substantially increase the Bank's exposure to risk. As it noted when proposing the rule, FHFA expects such policies and procedures specifically to address transfers to non-Bank System member servicers and provide contingency plans to address a case in which a large servicer fails or is otherwise unable to continue to service a Bank's AMA portfolio.59

Proposed § 1268.8 would have carried over without substantive change the provisions of § 955.5 of the current regulation, which addresses administrative transactions and agreements between Banks involving AMA. This provision allows Banks to delegate to another Bank the administration of its AMA program, but requires the delegating Bank to disclose to a participating financial institution the existence of the delegation or the possibility of such delegation, in its AMA-related agreements with the participating financial institution.

Commenters requested technical changes to the proposed rule to clarify that Banks can contract with third parties, including another Bank, to provide services for their AMA programs separate and apart from the administrative delegation contemplated in this provision without triggering additional disclosure obligations. They also suggested a change in wording to make clear that a Bank may, by contract, define specific parameters on its delegation of pricing authority for its AMA program to another Bank. FHFA agrees that the suggested changes appropriately clarify the scope of the requirements in § 1268.8 and raise no safety and soundness or other concerns. Therefore, FHFA has incorporated the Banks' suggested language into the final rule. Otherwise, proposed § 1268.8 is adopted as final without further changes.

As proposed, FHFA is carrying over without change the current rule's data reporting requirements for AMA, which would be located at § 1268.7. FHFA received no comments on that provision. Also as proposed, FHFA is deleting from the AMA rule the provision that had established risk-based capital requirements for AMA, which has been superseded by the statutory risk-based capital requirement and thus has no continuing applicability.60 FHFA received no comments on its proposal to delete this provision.

When promulgating regulations relating to the Banks, section 1313(f) of the Federal Housing Enterprises Financial Safety and Soundness Act of 1992 requires the Director to consider the differences among the Federal National Mortgage Association and the Federal Home Loan Mortgage Corporation (together, the Enterprises) and the Banks with respect to the Banks' cooperative ownership structure; mission of providing liquidity to members; affordable housing and community development mission; capital structure; and joint and several liability.61 The amendments made by this rulemaking apply exclusively to the Banks. In preparing the proposed and final rules the Director considered the differences between the Banks and the Enterprises as they relate to the above factors, and the proposed rule requested public comments on the extent to which the rule might implicate any of the statutory factors. FHFA received a comment suggesting that the continued use of the conforming loan limit for Bank AMA purchases would not appropriately take into account the differences between the Banks and the Enterprises. As already discussed above, in connection with the section of the final rule relating to the conforming loan limits, the Director has considered this comment and has determined that it is appropriate to continue to refer to the conforming loan limit as a policy guide for establishing reasonable limits on the use of the Banks' GSE subsidy in connection with their purchase of non-federally insured or guaranteed mortgage loans.

The information collection, entitled “Federal Home Loan Bank Acquired Member Assets, Core Mission Activities, Investments and Advances” contained in current 12 CFR part 955 of the regulations that is transferred to 12 CFR part 1268 by this final rule has been assigned control number 2590-0008 by the Office of Management and Budget (OMB). The final rule does not substantively or materially modify the current, approved information collection.

The Regulatory Flexibility Act (5 U.S.C. 601 et seq.) requires that a regulation that has a significant economic impact on a substantial number of small entities, small businesses, or small organizations must include an initial regulatory flexibility analysis describing the regulation's impact on small entities. FHFA need not undertake such an analysis if the agency has certified the regulation will not have a significant economic impact on a substantial number of small entities. 5 U.S.C. 605(b). FHFA has considered the impact of the final rule under the Regulatory Flexibility Act.

FHFA certifies that the final rule will not have a significant economic impact on a substantial number of small entities because the regulation is applicable only to the Banks, which are not small entities for purposes of the Regulatory Flexibility Act.

For reasons stated in the SUPPLEMENTARY INFORMATION, and under the authority of 12 U.S.C. 1430, 1430b, 1431, 4511, 4513, 4526, FHFA is amending subchapter G of chapter IX and subchapters A, D, and E of chapter XII of title 12 of the Code of Federal Regulations as follows:

I. Background

On August 23, 2016, FHFA published a proposed rule that would have modified FHFA's regulation establishing the process for the submission, review, and agency approval of Bank NBA notices. The proposed rule would have narrowed the scope of activities requiring submission of an NBA notice to those that entail “material risks not previously managed by the Bank” and would have excluded from the definition of “new business activity” the acceptance of new types of advance collateral. The proposed rule would have streamlined the NBA notice content requirements, thereby providing the Banks with greater flexibility to tailor their notices to the nature of the particular activity in which they seek to engage. The proposed rule also would have established new 30 and 80 business-day review timelines, under which FHFA would approve or deny notices. Those time periods could be tolled while FHFA awaited responses from the Banks for additional information, or in the event that the FHFA Director (Director) determined that the notice raised significant policy, supervisory, or legal issues that require additional time to resolve. The proposed rule generally provided that if FHFA were to fail to respond to, approve, or deny the notice, as applicable, within the appropriate timeline, then the notice would be deemed to have been approved as of the end of the applicable time period. The proposed rule also included an exception to the deemed to be approved concept for those notices for which the Director has elected to extend the review timeline by an additional 60 business days. For such notices, FHFA's affirmative approval would be required before the requesting Bank could commence the proposed activity. The proposed rule also would have delegated to the Deputy Director for Federal Home Loan Bank Regulation (Deputy Director) the authority to approve NBA notices, which delegation is in substance identical to the similar delegations of authority set forth in FHFA's procedures regulations, under which the Deputy Director can grant approvals and issue non-objection letters on behalf of the Director.1

When promulgating regulations relating to the Banks, section 1313(f) of the Federal Housing Enterprises Financial Safety and Soundness Act of 1992 requires the Director to consider the differences among the Federal National Mortgage Association and the Federal Home Loan Mortgage Corporation (together, the Enterprises) and the Banks with respect to the Banks' cooperative ownership structure; mission of providing liquidity to members; affordable housing and community development mission; capital structure; and joint and several liability.2 The changes in this rulemaking apply exclusively to the Banks and generally affect the scope and timing of their NBA notifications. Apart from those changes, the substance of this final rule is substantially similar to that of the existing NBA regulation. In preparing the proposed and final rules the Director has considered the differences between the Banks and the Enterprises as they relate to the above factors and has determined that none of the statutory factors would be implicated by the final rule. The proposed rule requested public comments on the extent to which the rule would implicate any of the statutory factors, but none of the comment letters addressed this requirement.

In response to the proposed rule, FHFA received four substantive comment letters, a joint letter from the Banks and one letter each from the National Association of Home Builders (NAHB), the Independent Community Bankers of America, and a private citizen. Most of the letters generally supported the proposed rule, but also recommended different ways in which FHFA should revise certain aspects of the rule. In response to these recommendations, FHFA has incorporated two revisions into the final rule, which are discussed below. The following sections of this document describe the issues raised by the commenters, along with FHFA's responses, which are included as part of FHFA's descriptions of the particular provisions of the final rule for which the commenters had suggested revisions. For other provisions of the proposed rule about which the commenters raised no issues, FHFA has adopted them without change.

FHFA has made two revisions to the regulatory text of the final rule in response to comments received on the proposed rule, each of which is discussed below. Apart from those revisions, the regulatory text of the final rule is unchanged from that of the proposed rule. FHFA has declined to make certain revisions recommended by the commenters, which also are discussed below.

Section 1272.3 of the rule describes the types of information that a Bank must include as part of its NBA notice. The proposed rule had required that a Bank indicate in its NBA notice whether the contemplated activity had been previously approved by FHFA for any other Bank. FHFA had included this requirement in the proposed rule to help expedite its review of NBA notices in cases in which a Bank is seeking approval of an activity it knows to have been approved for another Bank, and thus should raise no new legal or policy issues. The Banks commented that this requirement should be limited to instances where the requesting Bank actually has knowledge that FHFA has approved the same activity for another Bank. The Banks explained that FHFA should have the most comprehensive information on which Banks have previously been approved for particular activities, and that because NBA notices, and any corresponding FHFA approvals, are not public documents, a Bank would not necessarily know whether FHFA has previously approved a given activity for another Bank. The Banks offered specific revisions to the regulatory text to address their concern. FHFA agrees with this recommendation and has revised the final rule by adding the language suggested by the Banks to limit the applicability of this provision to instances where the requesting Bank has actual knowledge that FHFA has previously approved the activity for another Bank.

Section 1272.4(e) of the proposed rule would have added a new, explicit standard under which FHFA would approve NBA notices. In substance, that standard would have provided that FHFA would approve an NBA notice only if it determined that the Bank could conduct the proposed activities in a safe and sound manner, and that the activity would be consistent with the housing finance and community investment mission of the Banks, and with the cooperative nature of the Federal Home Loan Bank System (Bank System). The Banks commented that the proposed approval standard failed to reference that portion of the Banks' statutory mission that requires them to be a source of liquidity for their members, and did not encompass certain other services that they are legally authorized to provide to their members. The Banks also objected to the use of the phrase “cooperative nature of the Bank System” as part of the approval standard, contending that it is vague and is not supported by statutory language. FHFA agrees that the Banks' overall mission includes serving as a source of liquidity for their members and has incorporated language into the final rule's approval standard reflecting the same.3 The final rule, however, retains the language referring to the “cooperative nature of the Bank System” as part of the approval standard. By statutory design, the Banks are cooperative institutions, meaning that they provide products and services to their member institutions, and only to their members, and those members collectively own the Bank. Moreover, the very provision of the statute that the Banks cited in support of their request to include a liquidity element as part of the approval standard also refers to the “cooperative ownership structure” of the Banks.4

FHFA's intent in including this language in the standard was to ensure that before approving a Bank's request to engage in any new type of activity FHFA would confirm that the proposed activity would in some manner benefit the members of the Bank. Examples of activities that would be consistent with the cooperative nature of the Bank System, and which have been the subject of prior NBA notice approvals, would include proposals to purchase mortgage loans from Bank members or otherwise facilitate the members' sale of such loans, as well as proposals to allow members to pledge new types of collateral to support their borrowing from the Banks, which would no longer require an NBA notice under the final rule. With respect to the Banks' comment that the proposed standard also should consider certain services the Banks are legally authorized to provide to their members, the intent of this provision of the rule is to articulate a general standard against which FHFA can assess a proposed activity in deciding whether to approve the notice. It is not intended to be a list of all products or services that a Bank may provide to its members or of all investments and activities in which the Banks now engage.

The proposed rule would have narrowed the scope of the NBA regulation in two ways: (1) By limiting it to activities that introduce new material risks to the Bank; and (2) By eliminating the need to file an NBA notice prior to accepting new types of collateral. The final rule retains both of those provisions. In explaining the rationale for excluding new collateral types from the NBA definition, the supplementary information for the proposed rule stated that “the remaining universe of new types of collateral that might potentially fall into the [other real estate related collateral] category is small.” 5 The Banks commented that this language could be interpreted either to limit the types of assets that qualify as other real estate related collateral to the specific items already approved by FHFA, or to limit the proposed exclusion from the NBA filing requirement to those types of collateral that FHFA has previously approved for other Banks. The Banks asked that FHFA confirm in the final rule that FHFA did not intend the statement in the proposed rule to have either of those effects. The intent of the statement in the proposed rule was simply to acknowledge that, as a practical matter, the Banks and their members likely have already identified most of the types of assets held by the members that could qualify as “other real estate related collateral,” and thus any new types of such collateral would likely not present any materially different risks beyond those that the Banks currently manage with their existing collateral. The language of the final rule is unqualified, meaning that all types of new collateral are excluded from the term “new business activity” and thus would not trigger the requirement to file an NBA notice.

The proposed rule did not specifically address the extent to which the NBA regulations would apply to the Banks' mortgage programs or products, including Acquired Member Asset (AMA) programs or products. Nonetheless, commenters requested that FHFA revise the definition of “new business activity” to exclude: (1) Any new AMA product involving federally-insured or guaranteed loans; (2) any modifications that a Bank proposed to make to its existing AMA programs or products, and; (3) any proposals by one Bank to begin offering a new AMA program or product that FHFA has previously approved for another Bank. The three areas commenters identified for exclusion would likely encompass all activities related to mortgage programs and products. The Banks had raised similar comments in response to a separate proposed rulemaking to amend and relocate the current AMA regulations.6 FHFA has not included any of these revisions in the final rule. As noted above, under the final rule any new activity will require the submission of an NBA notice if it entails new material risks to the Bank. To the extent that modifications to a Bank's existing mortgage program or product, or the establishment of new products involving federally-insured or guaranteed loans, would present new material risks to the requesting Bank, they would require the submission of an NBA notice. Similarly, while a request to offer a mortgage program or product that FHFA has already approved for another Bank would not raise new legal or policy issues, it could raise supervisory issues with respect to the requesting Bank, such as with respect to its ability to manage the particular risks associated with the program or product. FHFA believes that a Bank should apply the new material risk standard equally to all types of new activities in which it might engage. FHFA does not believe that it should grant a blanket exclusion from its review of any particular area of the Banks' business.

FHFA expects that there may be instances in which a Bank is unsure whether the risks associated with a particular new activity or modification to an existing activity are material, for purposes of the new business activity regulation. As is the case under the current regulation, FHFA is available to consult with the Banks regarding the need to file an NBA notice with respect to a proposed activity, and will make every effort to promptly advise a Bank whether a filing is required. With respect to new activities that the Banks commence after determining that they do not present new material risks, FHFA will assess those the risks associated with those activities as part of its regular supervisory process, including examinations.

The proposed rule had used “business days” for calculating the length of the FHFA review periods. The Banks recommended that replacing that term with “calendar days” would be more convenient and consistent with other regulations. Doing so, however, also would have the effect of reducing the period of time available for FHFA to review and act on an NBA notice. FHFA had proposed the 30 and 80 business-day review periods based on its experience in considering prior NBA notices, some of which are straightforward and others of which present significant policy or legal issues, which require more time to assess. Accordingly, FHFA has decided to retain these time periods in the final rule, and does not believe that either it or the Banks would face any undue difficulty in determining the length of the review period based on business days.

In the Supplementary Information to the proposed rule, FHFA stated that the 30 business-day review period established in § 1272.4(a) would be “generally intended for activities already approved for other Banks[.]” 7 The NAHB requested that the final rule explicitly provide that all NBA notices pertaining to activities that FHFA has previously approved for other Banks be required to be reviewed under the 30 business-day timeline. Although FHFA believes that in many cases it will in fact process such NBA notices within 30 business days, it declines to incorporate this request into the regulation because of the possibility that Bank-specific conditions could raise supervisory issues necessitating review under the 80 business-day timeline.

The proposed rule included provisions that would deem any NBA notice to be approved if FHFA did not respond within the applicable 30 or 80 business-day timeline. The proposed rule, however, did not include such an automatic approval provision for those notices for which the Director extended the review period for an additional 60 business days, beyond the 80 business-day period. For those notices, the Banks could commence the activities only upon affirmative approval from FHFA. The Banks requested that FHFA revise the final rule so that even those notices that were subject to the Director's 60 business-day extended review period would also be subject to a deemed approved provision if the Director did not act by the end of the extended period. The Banks commented that the 80-day review period offers sufficient time for FHFA to act on a notice without the Director's 60-day extension and that it is unclear what regulatory or public policy benefit would be served by extending the proposed time frame. FHFA declines to accept the Banks' suggestion, principally because notices for which the Director has extended the review period will most likely involve significant policy or legal issues, in which the Director will be directly involved. Such matters may present issues of first impression for the agency that require an extended period to fully vet, and thus do not lend themselves to being approved automatically by the passage of time. Moreover, such an automatic approval provision could inappropriately conflict with the Director's statutory oversight authority, which provides the Director with broad latitude to exercise such incidental powers necessary in the supervision and regulation of the Banks.8

The proposed rule included a provision delegating authority to the Deputy Director to approve NBA notices for the agency. That provision mirrored existing regulatory delegations of authority to the Deputy Director for determining whether to grant “approvals” and to issue “non-objection letters” under FHFA's procedures regulations.9 The delegation in the proposed rule, like those in the other regulations, included language to the effect that the Director reserved the right to modify, rescind, or supersede any approval granted by the Deputy Director under the delegation of authority. Commenters expressed concern that this reservation of authority to the Director would create uncertainty for Banks, which may have committed substantial resources to implement approved activities, as to the possibility that the Director might rescind the delegated approval well after the fact. To eliminate this uncertainty, commenters requested that the final rule require that the Director grant all NBA approvals. FHFA declines to accept the commenters' requests and has adopted the delegation of authority provision as proposed. FHFA included the delegation of authority provision within the proposed rule in large part to expedite the approval process for those NBA notices that do not raise significant policy, supervisory, or legal issues. This delegation of authority for the NBA notices is nearly identical to the existing delegations under which the Deputy Director has granted approvals for other transactions or issued non-objection letters to the Banks, and thus should create no greater uncertainty for the Banks than already exists with respect to approvals and non-objections letters. Further, as a matter of agency practice, the Deputy Director generally consults with the Director before granting any delegated authority approvals, particularly those raising significant supervisory, policy, or legal issues, and should continue to do so under the final rule.

The Paperwork Reduction Act (PRA) (44 U.S.C. 3501 et seq.) requires that regulations involving the collection of information receive clearance from the Office of Management and Budget (OMB). The final rule contains no such collection of information requiring OMB approval under the PRA. Consequently, no information has been submitted to OMB for review.

The final rule applies only to the Banks, which do not come within the meaning of small entities as defined in the Regulatory Flexibility Act (RFA). See 5 U.S.C. 601(6). Therefore, in accordance with section 605(b) of the RFA, FHFA certifies that this final rule is not likely to have a significant economic impact on a substantial number of small entities.

Discussion

We issued a notice of proposed rulemaking (NPRM) to amend 14 CFR part 39 to supersede AD 2011-17-05, Amendment 39-16769 (76 FR 63177, October 12, 2011) (“AD 2011-17-05”). AD 2011-17-05 applied to certain Airbus Model A300 B2-1C, A300 B2-203, A300 B2K-3C, A300-B4-103, A300 B4-203, and A300 B4-2C airplanes. The NPRM published in the Federal Register on July 7, 2016 (81 FR 44232). The NPRM was prompted by an evaluation done by the design approval holder indicating that certain sections of the longitudinal lap joints are subject to WFD. The NPRM proposed to continue to require repetitive inspections in sections 13 through 18 of the fuselage between rivets of the longitudinal lap joints between FRs 18 and 80 for cracking, and repair or modification if necessary. The NPRM also proposed to require a revised repetitive inspection program of all longitudinal lap joints and repairs between FRs 18 and 80 to address this WFD. We are issuing this AD to detect and correct fatigue cracking of the longitudinal lap joints of the fuselage, which could result in reduced structural integrity of the airplane.

The European Aviation Safety Agency (EASA), which is the Technical Agent for the Member States of the European Union, has issued EASA AD 2014-0265, dated December 9, 2014 (referred to after this as the Mandatory Continuing Airworthiness Information, or “the MCAI”), to correct an unsafe condition for the specified products.

The MCAI states:

Required actions include repetitive inspections of the bonded inner doublers of the longitudinal lap joints in sections 13 through 18 for disbonding or corrosion, and repairing any disbonding and corrosion; a follow-on rototest or ultrasonic inspection to verify cracking, and repair of any cracking. The repetitive inspection interval ranges from 3,000 flight cycles up to 8,000 flight cycles, depending on airplane configuration. You may examine the MCAI in the AD docket on the Internet at http://www.regulations.gov by searching for and locating it in Docket No. FAA-2016-7425.

We gave the public the opportunity to participate in developing this AD. We received no comments on the NPRM or on the determination of the cost to the public.

We reviewed the available data and determined that air safety and the public interest require adopting this AD as proposed, except for minor editorial changes. We have determined that these minor changes:

• Are consistent with the intent that was proposed in the NPRM for correcting the unsafe condition; and

• Do not add any additional burden upon the public than was already proposed in the NPRM.

We estimate that this AD affects 4 airplanes of U.S. registry.

We have received no definitive data that enables us to provide cost estimates for the on-condition actions specified in this AD.

Title 49 of the United States Code specifies the FAA's authority to issue rules on aviation safety. Subtitle I, section 106, describes the authority of the FAA Administrator. “Subtitle VII: Aviation Programs,” describes in more detail the scope of the Agency's authority.

We are issuing this rulemaking under the authority described in “Subtitle VII, Part A, Subpart III, Section 44701: General requirements.” Under that section, Congress charges the FAA with promoting safe flight of civil aircraft in air commerce by prescribing regulations for practices, methods, and procedures the Administrator finds necessary for safety in air commerce. This regulation is within the scope of that authority because it addresses an unsafe condition that is likely to exist or develop on products identified in this rulemaking action.

We determined that this AD will not have federalism implications under Executive Order 13132. This AD will not have a substantial direct effect on the States, on the relationship between the national government and the States, or on the distribution of power and responsibilities among the various levels of government.

For the reasons discussed above, I certify that this AD:

1. Is not a “significant regulatory action” under Executive Order 12866;

2. Is not a “significant rule” under the DOT Regulatory Policies and Procedures (44 FR 11034, February 26, 1979);

3. Will not affect intrastate aviation in Alaska; and

4. Will not have a significant economic impact, positive or negative, on a substantial number of small entities under the criteria of the Regulatory Flexibility Act.

Accordingly, under the authority delegated to me by the Administrator, the FAA amends 14 CFR part 39 as follows:

This rule amends Title 14 of the Code of Federal Regulations, Part 97 (14 CFR part 97), by establishing, amending, suspending, or removes SIAPS, Takeoff Minimums and/or ODPS. The complete regulatory description of each SIAP and its associated Takeoff Minimums or ODP for an identified airport is listed on FAA form documents which are incorporated by reference in this amendment under 5 U.S.C. 552(a), 1 CFR part 51, and 14 CFR part § 97.20. The applicable FAA forms are FAA Forms 8260-3, 8260-4, 8260-5, 8260-15A, and 8260-15B when required by an entry on 8260-15A.

The large number of SIAPs, Takeoff Minimums and ODPs, their complex nature, and the need for a special format make publication in the Federal Register expensive and impractical. Further, airmen do not use the regulatory text of the SIAPs, Takeoff Minimums or ODPs, but instead refer to their graphic depiction on charts printed by publishers of aeronautical materials. Thus, the advantages of incorporation by reference are realized and publication of the complete description of each SIAP, Takeoff Minimums and ODP listed on FAA form documents is unnecessary. This amendment provides the affected CFR sections and specifies the types of SIAPs, Takeoff Minimums and ODPs with their applicable effective dates. This amendment also identifies the airport and its location, the procedure, and the amendment number.

The material incorporated by reference is publicly available as listed in the ADDRESSES section.

The material incorporated by reference describes SIAPS, Takeoff Minimums and/or ODPS as identified in the amendatory language for part 97 of this final rule.

This amendment to 14 CFR part 97 is effective upon publication of each separate SIAP, Takeoff Minimums and ODP as Amended in the transmittal. Some SIAP and Takeoff Minimums and textual ODP amendments may have been issued previously by the FAA in a Flight Data Center (FDC) Notice to Airmen (NOTAM) as an emergency action of immediate flight safety relating directly to published aeronautical charts.

The circumstances that created the need for some SIAP and Takeoff Minimums and ODP amendments may require making them effective in less than 30 days. For the remaining SIAPs and Takeoff Minimums and ODPs, an effective date at least 30 days after publication is provided.

Further, the SIAPs and Takeoff Minimums and ODPs contained in this amendment are based on the criteria contained in the U.S. Standard for Terminal Instrument Procedures (TERPS). In developing these SIAPs and Takeoff Minimums and ODPs, the TERPS criteria were applied to the conditions existing or anticipated at the affected airports. Because of the close and immediate relationship between these SIAPs, Takeoff Minimums and ODPs, and safety in air commerce, I find that notice and public procedure under 5 U.S.C. 553(b) are impracticable and contrary to the public interest and, where applicable, under 5 U.S.C 553(d), good cause exists for making some SIAPs effective in less than 30 days.

The FAA has determined that this regulation only involves an established body of technical regulations for which frequent and routine amendments are necessary to keep them operationally current. It, therefore—(1) is not a “significant regulatory action” under Executive Order 12866; (2) is not a “significant rule” under DOT Regulatory Policies and Procedures (44 FR 11034; February 26,1979); and (3) does not warrant preparation of a regulatory evaluation as the anticipated impact is so minimal. For the same reason, the FAA certifies that this amendment will not have a significant economic impact on a substantial number of small entities under the criteria of the Regulatory Flexibility Act.

Accordingly, pursuant to the authority delegated to me, Title 14, Code of Federal Regulations, Part 97 (14 CFR part 97) is amended by establishing, amending, suspending, or removing Standard Instrument Approach Procedures and/or Takeoff Minimums and Obstacle Departure Procedures effective at 0901 UTC on the dates specified, as follows:

This rule amends Title 14 of the Code of Federal Regulations, Part 97 (14 CFR part 97), by establishing, amending, suspending, or removes SIAPS, Takeoff Minimums and/or ODPS. The complete regulatory description of each SIAP and its associated Takeoff Minimums or ODP for an identified airport is listed on FAA form documents which are incorporated by reference in this amendment under 5 U.S.C. 552(a), 1 CFR part 51, and 14 CFR part § 97.20. The applicable FAA forms are FAA Forms 8260-3, 8260-4, 8260-5, 8260-15A, and 8260-15B when required by an entry on 8260-15A.

The large number of SIAPs, Takeoff Minimums and ODPs, their complex nature, and the need for a special format make publication in the Federal Register expensive and impractical. Further, airmen do not use the regulatory text of the SIAPs, Takeoff Minimums or ODPs, but instead refer to their graphic depiction on charts printed by publishers of aeronautical materials. Thus, the advantages of incorporation by reference are realized and publication of the complete description of each SIAP, Takeoff Minimums and ODP listed on FAA form documents is unnecessary. This amendment provides the affected CFR sections and specifies the types of SIAPs, Takeoff Minimums and ODPs with their applicable effective dates. This amendment also identifies the airport and its location, the procedure, and the amendment number.

The material incorporated by reference is publicly available as listed in the ADDRESSES section.

The material incorporated by reference describes SIAPS, Takeoff Minimums and/or ODPS as identified in the amendatory language for part 97 of this final rule.

This amendment to 14 CFR part 97 is effective upon publication of each separate SIAP, Takeoff Minimums and ODP as Amended in the transmittal. Some SIAP and Takeoff Minimums and textual ODP amendments may have been issued previously by the FAA in a Flight Data Center (FDC) Notice to Airmen (NOTAM) as an emergency action of immediate flight safety relating directly to published aeronautical charts.

The circumstances that created the need for some SIAP and Takeoff Minimums and ODP amendments may require making them effective in less than 30 days. For the remaining SIAPs and Takeoff Minimums and ODPs, an effective date at least 30 days after publication is provided.

Further, the SIAPs and Takeoff Minimums and ODPs contained in this amendment are based on the criteria contained in the U.S. Standard for Terminal Instrument Procedures (TERPS). In developing these SIAPs and Takeoff Minimums and ODPs, the TERPS criteria were applied to the conditions existing or anticipated at the affected airports. Because of the close and immediate relationship between these SIAPs, Takeoff Minimums and ODPs, and safety in air commerce, I find that notice and public procedure under 5 U.S.C. 553(b) are impracticable and contrary to the public interest and, where applicable, under 5 U.S.C 553(d), good cause exists for making some SIAPs effective in less than 30 days.

The FAA has determined that this regulation only involves an established body of technical regulations for which frequent and routine amendments are necessary to keep them operationally current. It, therefore—(1) is not a “significant regulatory action” under Executive Order 12866; (2) is not a “significant rule” under DOT Regulatory Policies and Procedures (44 FR 11034; February 26, 1979); and (3) does not warrant preparation of a regulatory evaluation as the anticipated impact is so minimal. For the same reason, the FAA certifies that this amendment will not have a significant economic impact on a substantial number of small entities under the criteria of the Regulatory Flexibility Act.

Accordingly, pursuant to the authority delegated to me, Title 14, Code of Federal Regulations, Part 97 (14 CFR part 97) is amended by establishing, amending, suspending, or removing Standard Instrument Approach Procedures and/or Takeoff Minimums and Obstacle Departure Procedures effective at 0901 UTC on the dates specified, as follows:

Background

On May 5, 2016, we published a notice of proposed rulemaking (NPRM) in the Federal Register (81 FR 27059) in which we proposed adding part 421 to our regulations in order to implement our obligations under the NIAA. We proposed rules under which we would identify and report to the Attorney General, on a prospective basis, information about any title II or title XVI beneficiary whom we are required to report for inclusion in the NICS because that person is subject to the Federal mental health prohibitor as a result of our adjudication.1 Under our proposed rules, we would: (1) Identify relevant records and report pertinent information to the NICS, (2) provide oral and written notification to our title II and title XVI beneficiaries who meet the requisite criteria, and (3) permit our beneficiaries who meet the requisite criteria to apply to us for relief from the firearms prohibition imposed by 18 U.S.C. 922(d)(4) or (g)(4) by virtue of our adjudication. We provided additional information and discussion of the reasons we issued our proposed rules in the preamble to those rules at 81 FR 27059.

We adopt the proposed rules as final rules, with several changes outlined in the discussion of the public comments and our responses. The final rules allow a person to apply for relief any time after our adjudication that the person meets the requirements of the Federal mental health prohibitor has become final. The final rules also set out several circumstances in which we will notify the Attorney General to remove a person's name from the NICS. We also made minor changes to the definition of the term “affected individual” in section 421.105 and to section 421.110(b)(2). The changes in both of these sections are for clarity, and do not substantively change the rules.

In our NPRM, we provided a 62-day comment period, which ended July 5, 2016. As we stated in our proposed rules, the NIAA, the President's January 2013 Memorandum to Federal agencies, and the Department of Justice's (DOJ) March 2013 guidance require Federal agencies with any record demonstrating that a person falls within one of the categories in 18 U.S.C. 922(g) or (n) to provide the pertinent information contained in the record to the Attorney General, not less frequently than quarterly, for inclusion in the NICS.2 Because our proposed rules were limited to our process for satisfying our mandated reporting and relief requirements, comments about issues that do not pertain to our proposed rules are outside of the scope of our rulemaking authority. We have not responded here to comments outside of the scope of our proposed rules.

We received 91,243 timely submitted comments that addressed issues within the scope of our proposed rules. We carefully considered the concerns expressed in these comments. Due to the high volume of the comments submitted, we summarized and grouped them by main issue expressed. We present the views received, and address the relevant and significant issues raised by the commenters. Of the timely-submitted comments, 86,860 were identical letters from different members of one advocacy group, and 324 were signatures on one comment letter. These letters urged us to withdraw the proposed rules, which the commenters thought would adversely affect individuals' Second Amendment rights. We address that comment below.

Various advocacy groups and individuals submitted the remaining 4,059 comments. Many of these commenters questioned our legal authority to provide the names of Social Security beneficiaries to DOJ for inclusion in the NICS. The majority of these comments focused on how DOJ would use the information we provide—i.e., what the effect would be on the Second Amendment rights of individuals whose names would be included in the NICS. Other legal issues raised included due process and equal protection concerns. Many commenters questioned the criteria we proposed to use to identify names for inclusion in the NICS. Some of these comments were based on an incorrect understanding of the information we provided in the NPRM. We also address those misunderstandings below. Several commenters appeared to misunderstand the process we would need to follow to revise these criteria in the future.

Some commenters cautioned about the potential for stigmatization of those with mental health disorders, and questioned why we did not provide evidence demonstrating the correlation between mental health and gun-related violence. Commenters also expressed apprehension about the potential violation of privacy rights, including rights under the Health Insurance Portability and Accountability Act (HIPAA). Commenters also questioned our existing processes for determining the presence of a disability based on a mental impairment and our process for appointing representative payees. Multiple commenters asked about our process for seeking relief and the removal of names from the NICS. Several commenters expressed that the policy we proposed was an unnecessary expenditure of Federal Government funds.

We also received multiple comments in support of the rules. These individuals and advocacy group commenters spoke as appointed representatives of Social Security beneficiaries with mental illness or as proponents of greater gun control efforts.

We respond in greater detail below to the relevant comments submitted in response to the proposed rule. We organize the comments and our responses by category for ease of review.

Comment: Multiple individuals questioned our authority to report any information to the NICS database. Some commenters opined that NIAA section 101(c)(1)(C) prohibited us from reporting information to DOJ that is “based solely on a medical finding of disability. . . .” Another commenter suggested that we should not be able to submit any medical information to the NICS without a court order.

Response: Our authority to report the information we include in these final rules stems from section 101(a)(4) of the NIAA, which requires that we provide to the Attorney General for inclusion in the NICS pertinent information included in any record demonstrating that a person falls within one of the categories in 18 U.S.C. 922(g) or (n).3 NIAA section 101(c)(1)(C) does not prohibit us from reporting this information to the NICS. The commenters who relied on section 101(c)(1)(C) only cited part of the section in their comments. In its entirety, section 101(c)(1)(C) of the NIAA states: “No department or agency of the Federal Government may provide to the Attorney General any record of an adjudication related to the mental health of a person or any commitment of a person to a mental institution if . . . (C) the adjudication or commitment, respectively, is based solely on a medical finding of disability, without an opportunity for a hearing by a court, board, commission, or other lawful authority, and the person has not been adjudicated as a mental defective consistent with section 922(g)(4) of title 18, United States Code, except that nothing in this section or any other provision of law shall prevent a Federal department or agency from providing to the Attorney General any record demonstrating that a person was adjudicated to be not guilty by reason of insanity, or based on lack of mental responsibility, or found incompetent to stand trial, in any criminal case or under the Uniform Code of Military Justice.”

We are not reporting information in records based solely on a medical finding of disability without the person being adjudicated as subject to the Federal mental health prohibitor “consistent with 18 U.S.C. 922(g)(4).” The Bureau of Alcohol, Tobacco, Firearms and Explosives (ATF) has clarified through regulations that this prohibition covers individuals who have been determined by a court, board, commission or other lawful authority as a result of marked subnormal intelligence, or mental illness, incompetency, condition or disease to be a danger to himself or to others, or who lacks the mental capacity to contract or manage his or her own affairs.4

The DOJ Guidance specifically indicates that records relevant to the NICS include “agency records of adjudications of an individual's inability to manage his or her own affairs if such adjudication is based on marked subnormal intelligence or mental illness, incompetency, condition or disease.” The DOJ further indicated that this category of records “includes certain agency designations of representative or alternate payees for program beneficiaries.” 5

As we explained in the NPRM, our adjudication is an adjudication by a lawful authority, by virtue of the authority granted to the Commissioner of Social Security under the Social Security Act. We also are not basing our reporting of records to the NICS solely on a medical finding of disability. Rather, consistent with section 101(a)(4) of the NIAA and the ATF's implementing regulation, we are basing our report on the individual's inability to manage his or her affairs as a result of his or her mental impairment. However, we will not include medical information in our reports to the NICS—we will report only the beneficiary's name, full date of birth, sex, and Social Security number. In addition, we will only inform the FBI of the fact that the individual meets the criteria for inclusion in the NICS under the NIAA due to a mental health prohibitor, but we will not provide any details on the individual's specific diagnosis.

Comment: Multiple commenters questioned our authority to declare an individual to be subject to the Federal mental health prohibitor, and argued that only a court can make that decision.

Response: By these rules, we are complying with the requirements of the NIAA by identifying individuals in our records who meet the criteria of the mental health prohibitor in 18 U.S.C. 922(g). As we noted previously, our authority to do so derives from section 101(a)(4) of the NIAA. DOJ's guidance indicates that relevant records under the mental health prohibitor category include not only court adjudications but also agency records of adjudications of an individual's inability to manage his or her own affairs, including the agency's designation of a representative payee because of his or her mental impairment. As we noted above and in the proposed rules, the ATF's regulations require that the individual be found to be subject to the Federal mental health prohibitor “by a court, board, commission or other lawful authority. . . .” 6 Consequently, neither the NIAA nor the ATF's implementing regulations require an agency to report information to the NICS based only on a court order, as some of the commenters suggested.

Comment: One commenter asked if the determinations would be secret or open, and if there are safeguards in place to ensure that the people making the designations are free of bias or prejudice.

Response: We will use our regular program rules to determine whether an individual is disabled due to a mental impairment that is severe enough to meet the requirements of our mental disorder listings, and to determine if that person also requires a representative payee because of his or her mental impairment. We apply our program rules to all claimants equally, regardless of whether or not one meets the NICS criteria. We expect all of our adjudicators to fulfill their duties with fairness and impartiality, and we have existing procedures in place that allow us to address claims of bias or prejudice in our administrative process.

By “open” we assume that the commenter's concern was over the privacy of the information that we would report to the NICS. A determination regarding inclusion in the NICS would be open to the individual affected, and we will apply the safeguards set out in these rules, such as oral and written notification to the individual at the commencement of the adjudication, to ensure that the individual who may be subject to reporting has adequate information about the reporting process, the effect of our reporting, and options for relief.

In addition, we will apply the protections against unauthorized disclosure in the Privacy Act of 1974, 5 U.S.C. 552a; our regulations, 20 CFR part 401; and the Social Security Act, 42 U.S.C. 1306(a). Thus, we may only disclose information in accordance with these laws and regulations. We also provide claim information to individuals upon request of the claimant. Under the Privacy Act of 1974 and our regulations, an individual may request access to his or her records maintained in agency Privacy Act systems of records, including those under which we maintain diagnosis information.7

Comment: Many commenters expressed concern that these rules would violate the affected individuals' rights under the Second Amendment to the Constitution, and would also violate their equal protection rights under the Constitution. Most of these comments were provided in largely identical letters, and they asserted that our rules would take firearms away from elderly recipients of Social Security retirement benefits.

Response: With these rules, we are seeking to satisfy our obligations under the NIAA, which requires Federal agencies to provide relevant records to the Attorney General for inclusion in the NICS. While the rule addresses reporting requirements, it is the Federal Gun Control Act, not the Social Security Act, that governs when a person can possess a firearm. The criteria we will use under these rules do not focus on one age group, such as the elderly or recipients of Social Security retirement benefits, nor do they categorize and treat individuals who are similarly situated differently. Consequently, these final rules do not violate principles of equal protection. In addition, as we stated in the preamble to our NPRM and in the requirements listed in section 421.110(b)(4) of our rules, we will identify certain individuals who have attained age 18, but have not yet attained full retirement age. We do not intend under these rules to report to the NICS any individual for whom we appoint a representative payee based solely on the individual's application for and receipt of Social Security retirement benefits.

With regard to the broader point the commenters raised about the constitutionality of our actions under the Second Amendment, we note that the Supreme Court recognized in District of Columbia v. Heller, 554 U.S. 570, 595 (2008), “that the Second Amendment conferred an individual right to keep and bear arms.” The Court emphasized, however, that, “[l]ike most rights, the right secured by the Second Amendment is not unlimited,” id., at 626, and that “nothing in [the Court's] opinion should be taken to cast doubt on longstanding prohibitions on the possession of firearms by felons and the mentally ill.” Id. Our actions, taken in accordance with the Congress' directives in the NIAA, the President's January 2013 memorandum to Executive agencies, and DOJ's March 2013 guidance, are fully consistent with the Supreme Court's recognition in Heller of the validity “of longstanding prohibitions on the possession of firearms by . . . the mentally ill.” Nothing in the rules we are issuing today is inconsistent with the scope of the Second Amendment as interpreted in Heller. Accordingly, we have not made any changes to the rule in response to comments asserting that our actions were inconsistent with an individual's Second Amendment right.

Comment: Multiple commenters also stated that the rules as written would violate beneficiaries' right to due process, particularly because they do not allow affected individuals to appeal the inclusion of their names in the NICS before we submit them to the DOJ. One commenter suggested that we should obtain a beneficiary's written permission before submitting information to the DOJ.

Response: Affected individuals will have the opportunity to apply for relief from the Federal firearms prohibitions imposed by 18 U.S.C. 922(g)(4) at any time after our adjudication has become final. We have clarified our rules to make that point. We will follow the requirements of the NIAA and apply principles of due process in determining applicants' entitlement to relief from the burdens imposed by inclusion in the NICS. Under these rules, we will provide individuals with advance notice at the commencement of the adjudication that we may report their information to NICS if we find they meet the criteria for reporting when the adjudication is final. An individual can request relief any time after the adjudication is final but we cannot delay fulfilling our obligations under the NIAA to provide relevant records to the Attorney General while the person decides whether to request relief.

When an individual requests relief, we provide an opportunity for the individual to submit evidence in support of the request, which will be reviewed by an impartial decisionmaker who was not involved in making the finding that the applicant's benefit payments be made through a representative payee. We will notify the applicant in writing of our action regarding the request for relief and explain the reasons for our action. We will also inform the applicant that if he or she is dissatisfied with our action, he or she has 60 days from the date he or she receives the notice of our action to file a petition seeking judicial review in Federal district court. And, of course, judicial review of our action denying an applicant's request for relief is available in accordance with the standards prescribed in 18 U.S.C. 925(c). These procedures provide a beneficiary with ample due process protections. In response to the other commenter's concern, we note that nothing in the NIAA or any other provision of law requires us to obtain a beneficiary's written permission to disclose information to the DOJ for the NICS. We will publish a system of records notice (SORN) that will explain the purposes for which information will be maintained and disclosed, and the public will have an opportunity to comment on the SORN.

Comment: Several commenters questioned whether individuals who meet our criteria would receive adequate notice or be given the opportunity to appeal before we share their information with the DOJ. One commenter expressed concern that, “[m]any people will not be informed of the action.” Other commenters asked whether “an existing beneficiary with a representative payee [would] be notified and given the opportunity to appeal before they are reported to NICS” or if we would “allow the person a reasonable amount of time to appeal that action.”

Response: Consistent with the NIAA, we will provide oral and written notice to the beneficiary at the commencement of the adjudication, which we define as after we have determined that he or she meets the medical requirements for disability based on a finding that his or her impairment(s) meets or medically equals the requirements of the mental disorders listings, but before we find that he or she requires a representative payee. Under these final rules, we will provide individuals with the opportunity to apply for relief from the Federal firearms prohibitions once the adjudication becomes final and those prohibitions are imposed.

Because we will only identify individuals for reporting on a prospective basis, existing beneficiaries with representative payees will not be affected by these final rules. Individuals who currently receive benefits but who would not qualify for reporting to the NICS because they do not currently satisfy all five requirements will be reported should a continuing disability review or other disability review, such as an age-18 redetermination, demonstrate a change in status that would satisfy all five requirements. In that circumstance, we would provide the beneficiary oral and written notice of his or her potential reporting to the NICS under the regular notice requirements established by these rules before we take any action to determine capability. In addition, under our regulations, our determination to appoint a representative payee for a beneficiary is subject to our administrative review process and, ultimately, to judicial review after the individual receives our final decision.

Comment: Several commenters expressed the belief that pursuing relief would be a highly expensive process for beneficiaries, and thus beneficiaries who could not afford what might be prohibitively expensive activities, would effectively be denied due process.

Response: We will not impose a fee in connection with the filing of a request for relief. We anticipate that the cost for acquiring the evidence that we require and providing it to us directly will be reasonable. In addition to providing us with a completed relief application form, consistent with the requirements set forth in section 421.151(b) of this final rule, an applicant for relief will only be required to provide us with: (1) A current statement from his or her primary mental health provider that assesses the applicant's current mental health status and mental status for the 5 years preceding the date of the relief request; and (2) written statements and any other evidence regarding the applicant's reputation. We will obtain the applicant's criminal history report.

The requirement that the individual provide us with medical evidence, in the form of a current statement from the applicant's primary mental health provider assessing the applicant's current mental health status and mental health status for the 5 years preceding the date of the request for relief, stems from the requirements of the NIAA. Section 101(c)(2)(A)(iii) of the NIAA 8 provides that “[r]elief and judicial review with respect to” an agency's relief program “shall be available according to the standards prescribed in” 18 U.S.C. 925(c). Section 925(c), in turn, provides that relief may be granted “if it is established to [an agency's] satisfaction that the circumstances regarding the disability, and the applicant's record and reputation, are such that the applicant will not be likely to act in a manner dangerous to public safety and that the granting of the relief would not be contrary to the public interest.” In order for us to determine whether “the applicant will not be likely to act in a manner dangerous to public safety,” we must necessarily have evidence assessing the individual's mental status. The evidentiary requirements we are including in final section 421.151(c) will allow us to make the determination the NIAA and section 925(c) require us to make.

Comment: Multiple individuals commented on the criteria we proposed for identifying individuals whose names we would report to the DOJ. Many questioned how we selected these criteria for inclusion. One commenter suggested that, “there should be a more specific review of these criteria.” Another individual asked why we did not propose to send information on individuals who, among other things, are felons, domestic abusers, or unlawful users of controlled substances. Another commenter suggested that we conduct a criminal background history as an additional step prior to reporting an individual's information to the DOJ. One commenter suggested that we include an additional factor to consider an individual's propensity for violence, aggressive behavior, or self-destructive behavior.9

Response: As we explained in the NPRM, in choosing the criteria we sought to find the best fit between our adjudication regarding a claimant's entitlement to benefits and the decision to designate a representative payee and the regulatory definition of an individual who is subject to the Federal mental health prohibitor. For the reasons we discussed in the NPRM,10 we believe that there is a reasonable and appropriate fit between the criteria we use to decide whether some of our beneficiaries are disabled (e.g., a primary diagnosis of a mental impairment and meeting or equaling the requirements of one of the Mental Disorders Listing of Impairments (Listings) and requiring a representative payee because of that mental impairment) and the Federal mental health prohibitor.

We have not adopted the comment that we conduct a criminal background history in advance, because it does not comport with the criteria we are using to identify individuals for referral to NICS and, within that framework, a criminal background check is unnecessary. To reiterate, we will report an individual's record to the NICS based on his or her inability to manage his or her affairs due to a disabling mental impairment that meets or equals the criteria found in one of the Mental Disorders Listings. A criminal background check is not necessary for us to make a determination on that issue. However, we will obtain a criminal background check as part of the relief process. The relief inquiry focuses on whether the applicant will be likely to act in a manner dangerous to public safety, and whether the granting of the relief would be contrary to the public interest. The distinction we have made in these rules, under which we will obtain a criminal background check as part of the relief process, but not as part of the referral process, is consistent with the NIAA.

With respect to the commenters' questions about other categories of individuals, such as domestic abusers or unlawful users of controlled substances, we note that we do not have records regarding individuals who are domestic abusers. In addition, in adjudicating disability claims, we do not determine whether a claimant has “lost the power of self-control with reference to the use of a controlled substance,” as contemplated by the ATF regulation. 27 CFR 478.11. Rather, our focus is on whether the claimant is capable of engaging in substantial gainful activity despite his or her impairments. Even where our records identify a claim as involving either drugs only or both drugs and alcohol, our electronic records do not include structured data on the type of drug use, the extent of the use, or on how recently the controlled substance was used. Consequently, we have determined that we do not have records that meet DOJ's criteria for reporting individuals in this category to the NICS.

Regarding the suggestion that we consider an individual's propensity for violence, aggressive behavior or self-destructive behavior before we refer an individual's record to the NICS, the relevant Federal law and implementing regulation do not require us to find that a beneficiary has a propensity for violence, aggressive behavior, or self-destructive behavior before we report his or her name to the NICS. The governing ATF regulation defines the Federal mental health prohibitor as involving a determination by a court, board, commission or other lawful authority that a person, as a result of marked subnormal intelligence, or mental illness, incompetency, condition or disease, is a danger to himself or to others; or lacks the mental capacity to contract or manage his own affairs.11

The regulation distinguishes between (1) the requirements of being a danger to one's self or others; and (2) the lacking of mental capacity to contract or manage one's affairs. The DOJ Guidance specifically notes that records relevant to the Federal mental health prohibitor include agency adjudications of an individual's inability to manage his or her own affairs, if the adjudication is based on marked subnormal intelligence or mental illness, incompetency, condition or disease, and it includes certain agency designations of representative or alternate payees for program beneficiaries.12 Accordingly, in light of the ATF regulation and DOJ Guidance, we believe that we are required to find that an individual meets the requirements for the Federal mental health prohibitor if he or she meets either of the two factors set out in the ATF regulation.

Comment: Several commenters protested against what they thought would be our evaluation of all Social Security beneficiaries for potential inclusion in the NICS.

Response: The comment reflects a misunderstanding of our proposed rules. We will not evaluate all Social Security beneficiaries for potential inclusion in the NICS. As we indicate in section 421.110(b) of our rules, the beneficiaries whose names we would submit to the NICS must meet five well-defined criteria. The criteria are that the individual must have: (1) Filed a claim based on disability; (2) been determined by us to be disabled based on a finding at step three of our sequential evaluation process that the individual's impairment(s) meets or medically equals the requirements of one of the Mental Disorders Listings; (3) a primary diagnosis code in our records that is based on a mental impairment; (4) attained age 18, but have not yet attained full retirement age; and (5) benefit payments made through a representative payee because we have found him or her incapable of managing benefit payments. We will not include any beneficiary who does not meet all of those criteria in our reporting to the NICS.

Comment: We received a significant number of comments expressing the view that we should not report certain categories of people to the DOJ for inclusion in the NICS based solely on one qualifier. Commenters erroneously expressed the belief that we would report names to the NICS if they belonged to any one of the following categories: (1) Recipients of any type of Social Security benefits; (2) recipients of Supplemental Security Income (SSI) payments or Disability Insurance (DI) beneficiaries under the Social Security Act; (3) senior citizens; (4) DI beneficiaries for other physical, non-mental disabilities; (5) DI beneficiaries based on a mental impairment, but who do not have a representative payee; (6) have a representative payee for retirement benefits but do not receive DI benefits; (7) have a representative payee but do not receive DI benefits because of a listing-level mental impairment; or (8) no longer receive any type of Social Security benefits.

Response: As we noted in our response to the previous comment, this comment reflects a misunderstanding of our rules. As we indicate in section 421.110(b) of our rules, the beneficiaries whose names we would submit to the NICS must meet all five well-defined criteria. We will not report any beneficiary who does not satisfy all five criteria to the NICS.

Comment: One commenter stated that, because we do not make medical determinations about Social Security retirement beneficiaries' health, we do not have the right to make decisions concerning their mental status.

Response: We agree that we do not make a medical determination when an individual files a claim for Social Security retirement benefits. For that reason, our proposed rules and these final rules provide that in order for us to refer an individual's record to the NICS, he or she must, among other things, have filed a claim for disability insurance benefits under title II of the Act or supplemental security income payments based on disability under title XVI of the Act. We do not and will not review the medical records of individuals simply because they file a claim for retirement benefits. Our authority to make a determination regarding an individual's capacity and the appointment of a representative payee is in accordance with the authority granted to the Commissioner under the Act.13

When we appoint a representative payee, we base our determination on available medical or other evidence, such as statements from relatives, friends, or people in positions to observe the beneficiary.14 This process includes gathering medical evidence from the disability folder or a treating physician, obtaining information from family members or friends about the person's ability to manage finances, and asking the individual how he or she handles monthly expenses and financial decisions.15

Comment: Multiple commenters expressed the belief that we would report beneficiaries to the NICS solely based on their having a representative payee. Further, commenters opined that having an alternate payee, or requiring some help with financial arrangements such as receipt of Social Security benefits, does not demonstrate mental incompetence.

Response: As noted in our responses to previous comments, this comment reflects a misunderstanding of our rules. As we indicate in section 421.110(b) of our rules, the beneficiaries whose names we would submit to the NICS must meet all five well-defined criteria. We will not report to the NICS any beneficiary who does not satisfy all five of those criteria. We will not report a person to the NICS simply because the person has a representative payee if they do not meet all of the other criteria.

The DOJ Guidance, with which we are complying, specifically indicates that records relevant to the NICS include “agency records of adjudications of an individual's inability to manage his or her own affairs if such adjudication is based on marked subnormal intelligence or mental illness, incompetency, condition or disease.” The DOJ further indicated that this category of records includes certain agency designations of representative or alternate payees for program beneficiaries.16

Comment: Several individuals expressed concern that we would decide to expand the categories of names to submit to the NICS beyond the scope of the current rules without justification or prior notice.

Response: Prior to making any changes that would revise or otherwise substantively change the scope of the current rules, we would follow the Administrative Procedure Act's procedures of notice and comment rulemaking, similar to the process we followed in publishing these rules.

Comment: Commenters questioned the decision to add beneficiaries' names to the NICS based on mental illness, stating we had not provided data indicating that mental illness was a precursor for violence (particularly gun violence).

Response: We are not attempting to imply a connection between mental illness and a propensity for violence, particularly gun violence. Rather, we are complying with our obligations under the NIAA, which require us to provide information from our records when an individual falls within one of the categories identified in 18 U.S.C. 922(g). As we have noted previously, the ATF has clarified through regulation that the prohibitor referenced in 18 U.S.C. 922(g)(4) covers an individual determined by a court, board, commission or other lawful authority to be a danger to himself or others or to lack the mental capacity to contract or manage his or her own affairs as a result of marked subnormal intelligence, or mental illness, incompetency, condition or disease.17 A finding regarding an individual's ability to manage his or her own affairs does not require us to find that an individual has a propensity for violence before we report his or her name to the NICS. For that reason, the studies that the commenters cited regarding the relationship between mental illness and gun violence do not require us to make any changes to these rules.

Comment: Multiple commenters opined that these rules would unfairly stigmatize those with mental illness.

Response: We are committed to treating all beneficiaries with dignity and respect. To that end, we regularly collaborate and consult with mental health and other advocacy groups and organizations to stay informed and responsive to the needs of beneficiaries with mental health issues. Our collaboration with these organizations includes, among other activities, hosting regular meetings, soliciting input on agency initiatives, and participating in national and regional conferences. We are not attempting to stigmatize individuals who have a mental illness, but are simply following the requirements imposed by Congress in the NIAA.

We would also like to highlight that when we report a beneficiary for inclusion in the NICS, we will disclose directly to the FBI a beneficiary's name, full date of birth, sex, and Social Security number. We will not include specific medical information with our report. We will inform the FBI only of the fact that the individual meets the criteria for inclusion in the NICS due to a mental health prohibitor, but we will not provide any details on the individual's specific diagnosis. The information will not be made public, and will be used solely for the purposes of the NICS program. Moreover, a Federal Firearms Licensee (FFL) who submits a NICS request when an individual attempts to purchase a firearm from the FFL would not know the reason for the individual's inclusion, or even which Federal agency had reported the individual's name to NICS. FFLs only receive a transaction number and a status of Delay, Deny, or Proceed (for the firearm purchase), which will avoid embarrassment or stigmatization for Social Security beneficiaries whose names we refer for inclusion in NICS.

Comment: Some commenters expressed concern that individuals might choose not to seek mental health treatment or apply for Social Security benefits out of fear that we would submit their information to the DOJ for inclusion in the NICS. One commenter stated that, “[t]he end result of this will be many will be very reluctant to seek help, and will refuse the help of a payee, if that is to be automatically reported in this way.” Another commenter suggested that, “[o]ne unintended consequence of the proposed action will be to introduce a tremendous disincentive to those who would seek medical assistance.”

Response: It is not our intent to discourage individuals from seeking disability benefits or appropriate mental health services. While the outcome of our decision may mean that some beneficiaries will meet the criteria for inclusion in the NICS as detailed in section 421.110(b)(1)-(5) of our rules, our disability process will remain the same. It is also important to note that an FFL who submits a NICS request when an individual attempts to purchase a firearm from the FFL would not know the reason for the individual's inclusion, or even which Federal agency had reported the individual's name to NICS. FFLs only receive a transaction number and a status of Delay, Deny, or Proceed (for the firearm purchase), avoiding embarrassment or stigmatization for Social Security beneficiaries whose names we refer for inclusion in NICS.

Comment: We received several comments questioning how we determine whether individuals are disabled based on their diagnosed mental disorders. One commenter stated that, “[t]he parameters established within this rule are entirely too vague.” The commenter went on to opine that the proposed rules rely on factors that are “severely error-prone,” suggesting that our system “ ‘red flags’ too many claims based simply on the mentioning of certain terms (i.e. ‘red flagging’ claims as ‘suicidal’ based solely on the term ‘suicide’ within a person's records . . . even if the actual reference is `claimant states he does not have any suicidal ideations.' ”) Another commenter stated that we do not explain the severity required to satisfy a mental disability listing.

Response: The Act and our implementing regulations set out the rules we apply for deciding whether an individual is disabled. The Act defines “disability” as the inability to engage in any substantial gainful activity by reason of any medically determinable physical or mental impairment(s) which can be expected to result in death or which has lasted or can be expected to last for a continuous period of not less than 12 months. A medically determinable physical or mental impairment is an impairment that results from anatomical, physiological, or psychological abnormalities, which are demonstrated by medically acceptable clinical and laboratory diagnostic techniques. The medical evidence must establish a physical or mental impairment consisting of signs, symptoms, and laboratory findings. An individual's statement of symptoms is not sufficient basis for a determination of disability.

Our rules for evaluating mental disorders can be found in 20 CFR 404.1520a and 416.920a. We consider the medical severity of mental disorder(s) using the mental disorders listings in appendix 1 of 20 CFR part 404, subpart P. We describe the severity required to satisfy a mental disorders listing in sections 404.1525 and 416.925 of our rules. For adults, the Listings describe impairments that we consider severe enough to prevent an individual from doing any gainful activity, regardless of his or her age, education, or work experience. Most of the listed impairments are permanent or expected to result in death, or the listing includes a specific statement of duration. For all other listings, the evidence must show that the impairment has lasted or is expected to last for a continuous period of at least 12 months. Our criteria for deciding disability may differ from the criteria applied in other government and private disability programs.

When we make an initial determination whether an individual has a severe medical impairment or an impairment that meets or equals the severity of an impairment in the Listings, a team consisting of a doctor and disability examiner reviews the claimant's statements and the relevant evidence together. We base a determination on a thorough review and evaluation of an individual's record and not solely on the use of one term or “flag.” The criteria that we use to determine disability for individuals with mental impairments is well-known and is published in the Act, our regulations, and our sub-regulatory instructions, all of which are available to the public on our Internet site.

Comment: Multiple commenters stated that, because our adjudication of an individual as disabled under our mental disorders listings causes the individual's name to be included in the NICS, commenters' perceived flaws in the adjudication process could lead to unfair inclusion in the NICS. Concerns were raised about the ability of our employees to participate in what seems to be a medical decision. Commenters also discussed the possible lack of input by medical professionals during the determination process. Multiple commenters raised the idea that it is difficult to properly diagnose mental illness at all.

Response: Our disability determination process for adults includes making medical determinations and evaluating claimants' mental impairments based on medical and other evidence. We follow a required sequential evaluation process in order and stop as soon as we can make a determination or decision. The steps are:

1. Is the individual working, and is the work substantial gainful activity? If the answer is yes, we will find him or her not disabled. If the answer is no, we will move on to step 2.

2. Does the individual have a severe impairment? If the individual does not have an impairment or combination of impairments that significantly limits his or her physical or mental ability to do basic work activities, we will find him or her not disabled. If the individual does, we will go on to step 3.

3. Does the individual have an impairment(s) that meets or medically equals the severity of an impairment in the Listings? The Listings are examples of impairments that we consider severe enough to prevent an adult from doing any gainful activity. If the individual has an impairment(s) that meets or medically equals the severity of an impairment in the Listings, and the impairment(s) meets the duration requirement, we will find him or her disabled.18

When we evaluate whether an individual has a severe medical impairment or whether an impairment meets or equals the severity of an impairment in the Listings at the third step of our sequential evaluation, a team consisting of a doctor and disability examiner reviews the claimant's statements and the relevant evidence together. Our team will ask the claimant's doctors about the claimant's medical impairments, when the impairments began, how the impairments limit the claimant's activities, what the results of medical tests were, and what treatment the claimant received. They will also ask the claimant's doctors for information about the claimant's ability to perform work-related activities, such as walking, lifting, carrying, and remembering instructions.

Although mental impairments are qualitatively different from impairments that affect physical body systems, such as the cardiovascular or musculoskeletal body systems, mental impairments can and do prevent people from working. Our mental disorders listing criteria, which we recently updated effective January 17, 2017, accurately and reliably identify the mental impairments that prevent claimants from engaging in any gainful activity. Additionally, section 221(h)(1) of the Act requires us to make reasonable efforts to ensure that a qualified psychiatrist or psychologist completes the medical review of cases involving mental impairments before we make a determination on a claim for benefits.19

Comment: Multiple commenters focused on our classification and diagnosis of mental disorders in general. One commenter asked which mental disorders would be included in the criteria under section 421.110 of our rules. One commenter stated that the term “mental impairment” itself is unclear and asked “[h]ow and who will define this impairment and to what degree will be considered worthy to report? If I have a panic attack is that worthy?” Another wondered if, “[f]or purposes of this rule, anxiety, abnormal sleep/appetite, inflated self-esteem, or decreased energy, combined with alleged difficulty in managing money, are sufficiently disabling to disqualify a person from possessing firearms.” Hundreds of commenters asked if Post Traumatic Stress Disorder (PTSD) was an included impairment. Multiple commenters expressed concern that the disorders included in section 12.00 of the Listings are too broad, and equate “severe mental issues the same as other issues” such as “eating and anxiety disorders.”

Response: As we explained in the NPRM, we will report an individual's record only if we have determined the individual to be disabled based on a finding that his or her impairment(s) meets or medically equals the requirements of one of the mental disorder listings and if he or she meets all the other four criteria. If any of these criteria are not met, we will not submit the individual's name to the NICS.

For an impairment to meet or medically equal a listing, an individual's symptoms must establish that he or she has a medically determinable mental impairment. A medically determinable mental impairment results from anatomical, physiological, or psychological abnormalities demonstrated by medically acceptable clinical and laboratory diagnostic techniques. The impairment must be established by medical evidence consisting of signs, symptoms, and laboratory findings, not only by the claimant's statement of symptoms alone.20 Specific signs or symptoms of a mental impairment combined with an alleged difficulty in managing money, alone, will not meet or equal one of the mental disorders listings. The claimant's mental impairment must also result in limitations in the claimant's ability to function to the degree required by the listing criteria.

The Listings cover many categories of mental impairments to ensure that we can evaluate the types of impairments with which claimants are diagnosed. The Listings include criteria that, when satisfied, indicate that a person has a mental impairment that is disabling under our rules. PTSD is an example of an impairment that could meet or equal one of the Listings, if the claimant's signs, symptoms, and functional limitations rise to the level of severity required in the listing for PTSD.

On September 26, 2016, we published a comprehensive update to our mental disorders Listings, ensuring that the criteria we use to determine the presence of disability based on a mental impairment—and, by extension, the criteria that underlie our referrals to NICS—reflect the most modern medical standards in this area.21

Comment: Several commenters stated that our sending information to the NICS would violate beneficiaries' right to privacy, both generally and with regard to their medical information.

Response: We have stringent privacy and disclosure policies that protect our beneficiaries' right to privacy. We will not report any specific medical information when we report to the NICS. To meet the NIAA's requirement to report relevant records to the NICS, we will report only the name, full date of birth, sex, and Social Security number for each beneficiary who meets the criteria for inclusion in the NICS. The FBI will only be informed of the fact that the individual meets the criteria for inclusion in the NICS due to a mental health prohibitor, but we will not provide any details on the individual's specific diagnosis. Moreover, FFLs submitting a NICS request when an individual attempts to purchase a firearm from the FFL would not know the reason for the individual's inclusion, or even which Federal agency had reported the individual's name to NICS. FFLs only receive a transaction number and a status of Delay, Deny, or Proceed (for the firearm purchase), further protecting the privacy of Social Security beneficiaries whose names we refer for inclusion in NICS.

Our disclosure of individual information to the DOJ for the NICS complies with the Privacy Act of 1974, 5 U.S.C. 552a; our privacy regulations, 20 CFR part 401; and all other applicable Federal law. We are publishing a new Privacy Act systems of records notice and, as appropriate, we will amend existing systems of records notices to cover the maintenance and disclosure of information for reporting individuals to the NICS.22 The systems of records notices will describe how we will report data to the NICS and the permitted uses of the data. Any systems of records from which we disclose information to the DOJ for the NICS will contain routine uses authorizing the disclosure of the information, without the consent of the individuals to whom the information pertains.23

Comment: We received multiple comments from individuals stating that our proposed rules conflicted with HIPAA privacy rights or doctor-patient confidentiality.

Response: Our rules do not conflict with HIPAA because we will not share any specific medical information with the NICS. When we report an individual's record to the NICS, we will provide only his or her name, full date of birth, sex, and Social Security number. Moreover, HIPAA and any laws governing doctor-patient confidentiality do not apply to our disclosure of information from information maintained in agency systems of records to the DOJ for the NICS.

Comment: We received many comments expressing concern about the manner in which we appoint representative payees. Some comments expressed the belief that we may force the appointment of representative payees for certain beneficiaries who do not require their services. Other commenters conveyed that perceived flaws in the representative payee appointment process would result in the unnecessary appointment of a representative payee and, consequently, unfair inclusion of names in the NICS. Multiple commenters questioned the manner in which we appoint representative payees. One individual questioned the thoroughness of our representative payee evaluation process, while others suggested that we should require direct medical evidence to support the need for a representative payee.

Response: Congress first authorized us to direct the payment of an individual's benefits to a representative payee as part of the Social Security Act Amendments of 1939, so we have over 75 years of experience making capability findings and appointing payees for individuals. Under our policy, we presume that a legally competent adult beneficiary can manage or direct the management of his or her benefits unless there are indicators to the contrary. We will appoint a representative payee for a beneficiary who is under age 18 or a beneficiary who is age 18 or older and is legally incompetent or unable to manage or direct management of his or her benefits due to a physical or mental condition.24 When we appoint a representative payee because a beneficiary is legally incompetent, we base our determination to do so on a court order.25

We do not appoint a payee for an individual unless we determine this is necessary because the individual's interests would be better served by the appointment of a payee. We do not, and under these rules we will not, appoint a payee for any individual who does not need one. When we appoint a representative payee for reasons other than the beneficiary's legal incompetency, we base our determination on the available medical or other evidence, such as statements from relatives, friends, or people in positions to observe the beneficiary.26 This process includes gathering medical evidence from the disability folder or a treating medical source, obtaining information from family members or friends about the person's ability to manage finances, and asking the individual how they handle monthly expenses and financial decisions.27 We then identify an individual or organization to serve as representative payee.

When we propose to appoint a representative payee because of incapability, we provide the beneficiary with the right to protest and appeal the capability determination prior to the appointment. The beneficiary can also protest our choice of payee.28

We are committed to continuous improvement of the representative payee program. Our goal is to ensure that beneficiaries who cannot manage or direct the management of their benefits have representative payees who will serve their best interests. When selecting payees, we look for any factors that could disqualify a person from serving as a payee. For example, a person who has committed Social Security fraud may not be a payee. In addition, we conduct criminal background checks on certain representative payee applicants. We also bar representative payee applicants who have been convicted of serious felonies from serving as a representative payee.

The Social Security Protection Act of 2004 (SSPA) expanded our monitoring program by requiring us to conduct periodic reviews for any organizational payee that serves 50 or more beneficiaries, and individual payees serving 15 or more beneficiaries. In addition to these required reviews, we also conduct additional reviews of organizational and individual payees.

The SSPA provided us with additional methods to penalize representative payees found to have misused benefits, including: Making payees forfeit fee for service monies; enhancing our ability to hold payees liable for misused benefits; and granting us authority to impose civil monetary penalties when a payee misuses benefits.

In response to the SSPA, we developed an online misuse tracking system that we use to store and track all allegations of misuse of benefits. To help prevent misuse, we improved our training materials for individual and organizational representative payees. We also published revised instructions for our technicians, providing them with clarified and streamlined policies and procedures for processing misuse cases.

We also have sought recommendations for representative payee program improvement from external entities such as the National Academy of Sciences and National Academy of Medicine.

Comment: Several commenters questioned beneficiaries' ability to remove a representative payee once we appoint one. One commenter asked how we determine if an individual no longer needs a representative payee, and another opined that it is much more difficult to remove a representative payee than it is to obtain one.

Response: Our general policy starts with a presumption that every beneficiary has the right to direct payment.29 At any time, a beneficiary whom we have determined to be incapable may request a capability determination. We may also conduct a capability determination if we have reason to believe that an incapable beneficiary may have become capable of managing or directing management of his or her own benefits. We apply the same standards for the appointment or removal of a representative payee—ability or inability to manage or direct the management of benefits due to a physical or mental condition. If the beneficiary proves that he or she is capable, he or she will receive direct payment.30 However, in response to these comments, we have clarified in these final rules that we will notify the Attorney General, or his or her designate, that an individual's record should be removed from the NICS when we find that an individual whom we previously required to have benefit payments made through a representative payee is now capable of managing his or her benefit payments without the need for a representative payee. We also have clarified several other situations in which we will notify the Attorney General to remove an individual's name from the NICS.

Comment: One commenter stated, “Presumably, a current recipient who can manage his/her own financial affairs and is in fact receiving benefits directly (e.g., direct deposit to bank account) would not fall under the above-mentioned phrase, and would retain the right to own, possess, etc., firearms. If this is true, I would recommend making that clearer in the [final] Rule.” Another asked, “If disability benefits under Title II or Title XVI of the Social Security Act are NOT received through a representative payee (i.e., a third party), does the proposed rule to the NIAA still apply?” Many commenters expressed concern that an individual who assigns a representative payee for a temporary period or for convenience would be unfairly reported for inclusion in the NICS. A common scenario described by commenters was that of retired individuals who asked their children to pay their bills during an extended vacation. Another scenario described was that of a mentally capable individual with a physical disability who, due to an inability to write checks or drive, was assigned a representative payee.

Response: We clearly state in section 421.110(b) of our rules that the beneficiaries whose names we will submit to the NICS must meet all five well-defined criteria. We will not include any beneficiary who does not meet all of these criteria. We will not report a person to the NICS simply because the person has a representative payee if he or she does not meet all of the other criteria. Conversely, we will not report information regarding an individual who has a mental impairment if we have not appointed a representative payee for the individual, because that individual would not meet all of the criteria for NICS reporting in our rules.

Beneficiaries cannot appoint a representative payee, nor can we name a representative payee without evidence indicating that the individual is legally incompetent or unable to manage or direct management of his or her benefits due to a physical or mental condition.31 We presume that a legally competent adult beneficiary can manage or direct the management of his benefits unless there are indicators to the contrary. Therefore, we do not appoint a representative payee for beneficiaries solely because they require assistance with financial matters or as a matter of convenience for the beneficiary.

Comment: Multiple commenters asked for specific information about the relief process, including when and at what points in the NICS inclusion decision process a request for relief could be submitted and reviewed, what documentation and evidence would be required to request relief, and who would review the evidence and make relief decisions.

Response: As we explained in the NPRM, consistent with section 101(a)(2)(A) of the NIAA, we will allow a person who is subject to the Federal mental health prohibitor to apply for relief from the Federal firearms prohibitions as a result of our adjudication. In section 421.150(a) of our rules, we indicate that an individual may apply for relief once our adjudication has become final.

In addition to providing us with a completed relief application form, consistent with the requirements set forth in section 421.151(b) of this final rule, we require the individual who requests relief to provide us with evidence from his or her primary mental health provider regarding his or her current mental health status and mental health status for the past 5 years, including a statement addressing whether the applicant has ever been a danger to himself or others and whether the applicant would pose a danger to himself or others if we granted the applicant's request for relief and the applicant purchased and possessed a firearm and ammunition. We also require an applicant for relief to submit written statements and any other evidence regarding the applicant's reputation including a statement addressing whether the applicant would pose a danger to himself or others if we granted the applicant's request for relief and the applicant purchased and possessed a firearm and ammunition. We will obtain and consider a relief applicant's criminal history report as part of the relief process. We specify the details of the evidentiary requirements in section 421.151 of our rules.

We have not yet determined the details regarding who in our agency would review the evidence and issue relief decisions. We will publish this information in the Federal Register as part of the Paperwork Reduction Act process once we have finalized our business process, and the public will have an opportunity to review and respond to more relief details, including what information will be required and who will review the request.

Comment: Commenters suggested that we simplify the relief process for beneficiaries and representatives. Many expressed their disapproval that affected individuals would be required to request that their names be removed from the list and to provide evidence to our satisfaction to be removed from the list. Many highlighted the fact that the burden of proof for non-inclusion would lie with the individual. Other commenters found it problematic that our relief process does not make provision for a formal hearing before an adjudicative authority or allow the examination of witnesses. Several others suggested that we should provide legal counsel to those individuals whom we report to the DOJ.

Response: We have established a simple and direct process that satisfies the requirements of the NIAA. In addition to providing us with a completed relief application form, consistent with the requirements set forth in section 421.151(b) of this final rule, an applicant for relief will only be required to provide us with: (1) A current statement from his or her primary mental health provider assessing the applicant's current mental health status and mental status for the 5 years preceding the date of the relief request; and (2) written statements and any other evidence regarding the applicant's reputation. We will not impose a fee in connection with the filing of a request for relief. We anticipate that the cost for acquiring the evidence that we require and providing it to us directly will be reasonable. Moreover, the required evidence is more easily attained by the applicant directly. We will obtain the applicant's criminal history report on his or her behalf.

Section 101(a)(2)(A) of the NIAA provides that relief shall be available according to the standards prescribed in 18 U.S.C. 925(c). Section 925(c) states that relief may be granted if it is established that the circumstances regarding the disability, and the applicant's record and reputation, are such that the applicant will not be likely to act in a manner dangerous to public safety, and that the granting of the relief would not be contrary to the public interest. It is generally appropriate under the law to place the burden of production and proof on the proponent of an order. In this case, that means the person who applies for relief must demonstrate his or her entitlement to relief, and there is no indication in the NIAA or any other provision of law that Congress intended to alter that normal rule. Similarly, the NIAA does not provide for the appointment of legal counsel for those seeking relief, nor is the appointment of counsel generally required under civil law.

Finally, in addition to the successful pursuit of relief from the NICS prohibitions, in new section 421.130 of the final rules, we have added three additional bases for removal of an individual's information from the NICS database. These bases apply when: (1) We find that an individual whom we previously required to have benefit payments made through a representative payee is now capable of managing his or her benefit payments without the need for a representative payee; (2) We are notified that the individual has died; or (3) We receive information that we reported an individual's record to the NICS in error (e.g., we reported to the NICS the record of an individual who does not have a primary diagnosis code in our records that is based on a mental impairment, or we reported the record of an individual who does not have a representative payee).

Comment: Multiple commenters sought clarification about what evidence we would consider when we review a request for relief. One commenter specifically asked about issues relating to documents attesting to a person's character and 5 years of mental health records, such as the availability of these records and who would be required or allowed to provide them. The commenter questioned whether a “clean” criminal record or State background check would qualify as documentation attesting to a person's character. Another commenter questioned the specifics of how we would propose that relief “may” be granted if an individual could establish to our “satisfaction” that the applicant will not be likely to act in a manner dangerous to public safety.

Response: The relief process that we outlined in the NPRM is based on the NIAA, which indicates that relief and judicial review “shall be available according to the standards prescribed in section 925(c) of title 18, United States Code.” That section of the law states that relief may be granted “if it is established to [an agency's] satisfaction that the circumstances regarding the disability, and the applicant's record and reputation, are such that the applicant will not be likely to act in a manner dangerous to public safety and that the granting of the relief would not be contrary to the public interest.”

Section 421.151 of our rules specifies the evidence we will consider when we decide whether to grant an application for relief. It indicates that we will consider the applicant's record, which must include the applicant's mental health records and a criminal history report, and written statements regarding the applicant's character. We will obtain a criminal history report on the applicant's behalf. The rule states that the applicant must provide evidence from his or her primary mental health provider and written statements regarding the applicant's character. This evidence must include statements addressing (1) whether the applicant would pose a danger to himself or others if we granted the applicant's request for relief, and the applicant then purchased and possessed a firearm and ammunition, and (2) whether the applicant has a reputation for violence in the community.

We will provide other procedural details of our relief process in sub-regulatory guidance, as well as in the Federal Register as part of the Paperwork Reduction Act process, once we have finalized our business process. The public will have an opportunity to review and respond to additional details about the relief process, including what information will be required, in response to the Paperwork Reduction Act process.

Comment: One commenter questioned how beneficiaries could find out what their specific primary diagnosis was in order to best seek relief from inclusion in the NICS. The commenter also asked about the possibility of disputing the diagnosis, particularly when a secondary diagnosis is also involved in the adjudication of being disabled.

Response: We provide claim information to individuals upon their request. Under the Privacy Act of 1974 and our regulations, an individual may request access to his or her records maintained in agency Privacy Act systems of records, including those under which we maintain diagnosis information.32 Our regulations require individuals to verify their identity when making an access request.33 A beneficiary who proves his or her identity has the right to access his or her disability file in accordance with our rules.34 The medical records include information about the beneficiary's primary and secondary diagnosis, if applicable.

Criteria for inclusion in the NICS include that an individual is disabled based on a finding at step three of our sequential evaluation process that the individual's impairment(s) meets or medically equals the requirements of one of the mental disorders listings.35 These listings consist of medical conditions that we consider severe enough to prevent a person from doing any gainful activity, regardless of age, education, or work experience. Individuals whose impairments meet a listing are the most severely disabled individuals we serve. If we find an individual to be disabled based on a listing-level mental impairment, and he or she satisfies all of the remaining four requirements, we are required to report them to the NICS. If we do not find an individual to be disabled based on a mental impairment, he or she has not met the reporting requirements and we will not report them to the NICS.

Our administrative review process and the request for relief process are two different processes. If an individual wishes to appeal our disability determination or decision they may do so within the appeal period, which is generally 60 days after being notified of our determination or decision.

However, appealing a disability decision is not part of the NICS relief process. It is important to note that the qualifications for inclusion in the NICS are not the same as the qualifications for relief prescribed by 18 U.S.C. 925(c); that is, proof that he or she is not likely to act in a manner dangerous to public safety and that granting relief from the prohibitions will not be contrary to the public interest.

Comment: Several individuals expressed concern over the anticipated length of time for the processing of a request for relief, stating that 30 days was insufficient time to gather and submit all of the required information, particularly as it involved actions by other government agencies or individuals. One individual expressed concern about the 30-day deadline for the submission of evidence supporting a beneficiary's request for relief in contrast to our 365-day response time. Several other commenters also questioned our ability to respond within the 365-day period, given current delays in the NICS-related relief programs run by other Federal agencies.

Response: In response to the comments we received expressing concerns about the 30-day deadline, we have revised the rules to eliminate this timeframe. Under the final rules, an individual may request relief at any time after our adjudication that the individual is subject to the Federal mental health prohibitor has become final. We will accept an individual's request for relief once he or she has compiled all of the evidence that we require, as set forth in section 421.151 of this final rule. We believe that this revised process for requiring that the applicant submit his or her evidence along with a request for relief comports with due process and allows us to process the application for relief no later than 365 days after receipt of the complete application and all required supporting documentation and evidence, as required under the NIAA. We will work in good faith to respond to all requests for relief promptly and within the 365-day period. Finally, there is no limit to the number of times a person can apply for relief.

Comment: One commenter suggested that we should not report to the DOJ individuals awaiting a response to their petition for relief unless a judge deems it appropriate.

Response: This suggestion is contrary to the language of the NIAA, which permits a person to apply for relief from the firearms prohibitions imposed by 18 U.S.C. 922(g)(4) and does not require judicial review prior to reporting. Further, as noted under section 421.170 of our rules, if we deny the applicant's request for relief, he or she may then seek judicial review of our action.

Comment: Multiple commenters asked if we would develop a procedure other than seeking relief to request the removal of individuals' names from the NICS for individuals who no longer meet the criteria that were the cause of their original inclusion in the NICS.

Response: As we noted in response to a prior comment, in addition to the successful pursuit of relief from the NICS prohibitions, in section 421.130 to the final rules, we have added three additional bases for removal of an individual's information from the NICS database. Specifically, we will notify the Attorney General to remove an individual's name from the NICS when: (1) We find that an individual whom we previously required to have benefit payments made through a representative payee is now capable of managing his or her benefit payments without the need for a representative payee; (2) We are notified that the individual has died; or (3) We receive information that we reported an individual's record to the NICS in error (e.g., we reported to the NICS the record of an individual who does not have a primary diagnosis code in our records that is based on a mental impairment, or we reported the record of an individual who does not have a representative payee).

Comment: One commenter stated that, “there is no guarantee that the same prejudices that the rule creates in the first place won't reassert themselves” in the relief process.

Response: We use the same process to determine disability and to determine whether the individual needs a representative payee for each individual who applies for disability benefits. We determine whether a beneficiary is eligible for inclusion in the NICS after the disability process is complete. Therefore, there will be no opportunity for prejudice or bias concerning whether a beneficiary should be included in the NICS, because it is not a consideration during the disability determination process.

In addition, there will be no opportunity for bias or prejudice when we process a request for relief because, under 20 CFR 421.165, a different decision maker who was not involved in the beneficiary's disability or capability determinations, will review the evidence and act on the request for relief. We will follow the requirements of the NIAA and apply principles of due process in determining applicants' entitlement to relief from the Federal firearms prohibitions imposed as a result of our adjudication. Judicial review of our action denying an applicant's request for relief is available according to the standards set forth in 18 U.S.C. 925(c).

Comment: Several commenters expressed that this policy would be an unnecessary waste of the Government's time and resources. One commenter opined that implementing the proposed rules would add to the workload of SSI cases and risk additional backlogs, without any offsetting improvement to public safety.

Response: While we note the commenters' concerns, in issuing these rules we are satisfying our legal obligations under the NIAA that require Federal agencies to provide relevant records to the Attorney General for inclusion in the NICS.

Multiple commenters expressed support for the rule. Several individual commenters were in favor of our reporting certain individuals to the NICS database based on their expressed belief that some persons with mental illness should not be allowed to own firearms, because they could pose a danger to themselves or others. Some commenters spoke in their capacity as relatives and representative payees for Social Security beneficiaries with mental illness. One such commenter stated that if “someone does not have enough mental capacity to handle personal finances, he certainly does not have enough mental capacity to have access to guns.” Another commenter opined that medical professionals should support the rules, because clinicians would not want to authorize anyone to possess a firearm for legal liability reasons.

Several advocacy groups also articulated support for the rules. One group supported the rules as written. One group suggested we should expand the criteria used to identify names for inclusion in the NICS, stating that, “One issue not addressed by the proposed rule is the NICS status of future applicants for benefits who are dangerous due to severe mental illness, but who do not have third party representatives who receive payments on their behalf.” This commenter encouraged us to consider ways to expand the rule to include those beneficiaries who pose a danger to themselves or others, regardless of whether their payments are made to a representative payee.

We have consulted with the Office of Management and Budget (OMB) and determined that these final rules meet the requirements for a significant regulatory action under Executive Order 12866 and were subject to OMB review.

We certify that these final rules would not have a significant economic impact on a substantial number of small entities because they only affect individuals. Therefore, a regulatory flexibility analysis is not required under the Regulatory Flexibility Act, as amended.

These final rules contain new public reporting burdens in sections § 421.150(b), 421.151(b)(1) and (2), 421.151(c)(1), (2) and (3), 421.152, and 421.165(b) that require OMB approval under the Paperwork Reduction Act of 1995 (PRA). Since we will create new forms for these requirements, we will solicit public comment for them in a separate future notice in the Federal Register as part of the PRA process, and we will submit a separate information collection request to OMB. We will not collect the information referenced in these burden sections until we receive OMB approval.

For the reasons set out in the preamble, we add part 421 to chapter III of title 20 of the Code of Federal Regulations to read as follows:

This interim final rule amends the regulation authorizing a health claim on the relationship between dietary saturated fat and cholesterol and risk of coronary heart disease (CHD). The interim final rule permits raw fruits and vegetables that fail to comply with the “low fat” definition and/or the minimum nutrient content requirement to be eligible to bear the claim. Health claims, in general, must meet certain nutrient requirements that we establish to ensure that health claims are used on foods with nutritional value. For example, except where provided for in other regulations, foods bearing a health claim must contain one or more of vitamin A, vitamin C, iron, calcium, protein, or fiber at or above 10 percent of the Reference Daily Intake (RDI) or Daily Reference Value (DRV), before any nutrient addition (§ 101.14(e)(6) (21 CFR 101.14(e)(6)). Additionally, for foods bearing health claims related to CHD, the food often must be a “low fat” food (see e.g., §§ 101.75(c)(2)(ii) and 101.81(c)(2)(iii)(D)). An unintended consequence of these general requirements is that some foods that are generally considered to contribute to a healthy diet are ineligible to bear certain health claims. A small number of fruits and vegetables, for example, are ineligible to bear the dietary saturated fat and cholesterol and risk of CHD health claim because they do not meet the requirement to have 10 percent of the RDI or DRV of certain nutrients and/or they do not meet the definition of a “low fat” food. However, consumption of fruits and vegetables is encouraged by dietary recommendations, and low saturated fat and low cholesterol fruits and vegetables should not be excluded from bearing this health claim. To address this unintended consequence, this interim final rule includes provisions that exempt raw fruits and vegetables from:

(1) Needing to meet the 10 percent nutrient content requirement in § 101.14(e)(6).

(2) Needing to meet the definition for a “low fat” food in § 101.62.

The Nutrition Labeling and Education Act of 1990 (the 1990 amendments) (Pub. L. 101-535) amended the Federal Food, Drug, and Cosmetic Act (the FD&C Act) by clarifying, among other things, FDA's authority to regulate health claims on food labels and in food labeling. Using that authority, in 1993 we issued § 101.75, which authorizes a health claim about the relationship between diets low in saturated fat and cholesterol and a reduced risk of CHD (58 FR 2739, January 6, 1993).

Section 403(r)(4) of the FD&C Act (21 U.S.C. 343(r)(4)) establishes a mechanism for any person to petition us to issue a regulation relating to a claim that characterizes the level of any nutrient or the relationship of any nutrient to a disease or a health-related condition. We received a petition, under section 403(r)(4) of the FD&C Act, requesting that we amend the dietary saturated fat and cholesterol and risk of CHD health claim to permit raw fruits and vegetables, as well as single-ingredient or mixtures of frozen or canned fruits and vegetables that contain no added fat or sugars, which fail to comply with the “low fat” definition and/or the minimum nutrient content requirement, to be eligible to bear the claim. This interim final rule responds to that petition.

Under the interim final rule, raw fruits and vegetables are exempt from needing to meet the minimum nutrient content requirement of the general principles for health claims and from the requirement specifically included in the dietary saturated fat and cholesterol and risk of CHD health claim that a food meet the definition for “low fat” to be eligible to bear the claim. Current FDA regulations, at § 101.75(c)(1), state that all requirements set forth in § 101.14 must be met. The interim final rule revises § 101.75(c)(1) to provide an exemption for raw fruits or vegetables from meeting the minimum nutrient content requirement in § 101.14(e)(6).

Current FDA regulations, at § 101.75(c)(2)(ii), establish requirements regarding the nature of the food, except for fish and game meats; the food must meet all nutrient content requirements of § 101.62 for a “low saturated fat,” “low cholesterol,” and “low fat” food. We are amending § 101.75(c)(2)(ii) to provide an exemption from meeting the nutrient content requirements of § 101.62 for “low fat” if the food is a raw fruit or vegetable.

The 1990 amendments amended the FD&C Act in a number of important ways. Among other changes, the 1990 amendments clarified our authority to regulate health claims on food labels and in food labeling. Under this authority, we issued several regulations, including § 101.14, Health claims: General requirements (58 FR 2478 at 2533), which sets forth general principles for the authorization and use of health claims, and § 101.70, Petitions for health claims (58 FR 2478 at 2534), which sets forth a process for petitioning us to authorize health claims about substance-disease relationships, and sets out the types of information that any such petition must include. Among other provisions, the general principles for health claims include requirements for determining the eligibility of a food to bear a health claim. Examples include disqualifying nutrient levels (§ 101.14(a)(4)), which are specific nutrient thresholds not to be exceeded by a food bearing a health claim as required by § 101.14(e)(3), and also a minimum nutrient content requirement (§ 101.14(e)(6)) to ensure that a food bearing a health claim provide meaningful nutritive value as determined by meeting specific nutrient content levels.

When implementing the 1990 amendments, we also conducted a review of evidence for a relationship between dietary saturated fat and cholesterol and risk of CHD. Based on the totality of the publicly available scientific evidence, we concluded that there was significant scientific agreement among qualified experts that diets low in saturated fat and cholesterol may reduce the risk of CHD. Therefore, we authorized a health claim about the relationship between diets low in saturated fat and cholesterol and a reduced risk of CHD (§ 101.75; 58 FR 2739 at 2757, January 6, 1993). Among the specific requirements included in § 101.75 are requirements that, in addition to the general requirements set forth in § 101.14, foods must meet all of the nutrient content requirements in § 101.62 for a “low saturated fat,” “low cholesterol,” and “low fat” food in order to be eligible to bear the health claim, except that fish and game meats (i.e., deer, bison, rabbit, quail, wild turkey, geese, and ostrich) may meet the requirements for “extra lean” in § 101.62.

We received a petition from the American Heart Association (Docket No. FDA-2013-P-0047) on October 1, 2012, under section of 403(r)(4) of the FD&C Act. The petition requested that we amend the dietary saturated fat and cholesterol and risk of CHD health claim (§ 101.75) to permit raw fruits and vegetables, as well as single-ingredient or mixtures of frozen or canned fruits and vegetables that contain no added fat or sugars, which fail to comply with the “low fat” definition and/or the minimum nutrient content requirement, to be eligible to bear the claim. In addition, the petition requested that we issue an interim final rule by which fruits and vegetables that fail to comply with the “low fat” definition and/or the minimum nutrient content requirement could be eligible to bear the claim before publication of a final rule. Section 403(r)(4) of the FD&C Act establishes a mechanism for any person to petition us to issue a regulation relating to a claim that characterizes the level of any nutrient or the relationship of any nutrient to a disease or a health-related condition. On January 10, 2013, we notified the petitioner that we had completed our initial review of the petition, that the petition had been filed for further action in accordance with section 403(r)(4) of the FD&C Act, and that the filing date was January 9, 2013. Under the FD&C Act, if we do not act, by either denying the petition or issuing a proposed regulation to authorize the health claim, within 90 days of the date of filing for further action, the petition is deemed to be denied unless an extension is mutually agreed upon by us and the petitioner (21 U.S.C. 343(r)(4)(A)(i) and§ 101.70(j)(3)(iii)). On April 9, 2013, we mutually agreed with the petitioner to extend the deadline to October 7, 2013. Later, through subsequent agreements, we mutually agreed to extend the deadlines several times, with the last deadline being March 17, 2017.

The petitioner explained that some of our requirements for the dietary saturated fat and cholesterol and risk of CHD health claim prevent a number of fruits and vegetables from being eligible to bear the claim. The minimum nutrient content requirement for all health claims requires that, to be eligible to bear a health claim, a food contains 10 percent or more of the Reference Daily Intake or the Daily Reference Value for vitamin A, vitamin C, iron, calcium, protein, or fiber per reference amount customarily consumed (RACC) prior to any nutrient addition (see § 101.14(e)(6)). Although most fruits and vegetables meet this minimum requirement for one or more of the described nutrients, a small number of fruits and vegetables do not meet the minimum nutrient content requirement. For example, grapes, plums, beets, and cucumbers do not contain 10 percent of the RDI or DRV of vitamin A, vitamin C, iron, calcium, protein, or fiber per RACC. Additionally, the dietary saturated fat and cholesterol and risk of CHD health claim requires that a food bearing the claim meet all of the nutrient content requirements of § 101.62 for “low saturated fat,” “low cholesterol,” and “low fat” (§ 101.75(c)(2)(ii)). Again, most fruits and vegetables meet the requirement for “low fat,” but at least one fruit, avocados, does not meet the requirement and therefore is not eligible to bear the claim, even though the fruit meets the requirements for “low saturated fat” and “low cholesterol.”

The petition requested that fruits and vegetables, as a category of foods, be exempted from meeting the minimum nutrient content requirement and the “low fat” requirement for the dietary saturated fat and cholesterol and risk of CHD health claim. The petition asserted that, based on the scientific evidence, fruits and vegetables as a group contribute to reduced risk of CHD regardless of their inherent fat content or their ability to meet 10 percent of the RDI or DRV of vitamin A, vitamin C, iron, calcium, protein, or fiber per RACC. The petition described the scientific evidence relating consumption of fruits and vegetables and risk of CHD, including large observational studies (e.g., the Women's Health Study) (Ref. 1) and intervention studies on fruit and vegetable intake and surrogate endpoints for CHD risk (e.g., low-density lipoprotein concentration) (Ref. 2). Additionally, the petition detailed the numerous current public health recommendations, such as the Dietary Guidelines for Americans (DGA) 2010, published by the U.S. Department of Health and Human Services (HHS) and the U.S. Department of Agriculture (USDA) (Ref. 3) and the National Cholesterol Education Program (NCEP) of the National Heart Lung and Blood Institute (NHLBI) of the National Institutes of Health (NIH) (Ref. 4), which consistently encourage fruit and vegetable consumption as an integral part of a healthful diet, regardless of the specific nutrient contents of individual fruits and vegetables.

The petition requested the following specific changes in the regulation governing the dietary saturated fat and cholesterol and risk of CHD health claim:

• Modify § 101.75(c)(2)(ii) to create a new paragraph (A) and remove “low fat” food from the list of nutrient content requirements in § 101.62 a food must meet.

• Modify § 101.75(c)(2)(ii) to create a new paragraph (B) that provides an exemption to the nutrient content requirements of § 101.62 for a “low fat” food if it is a raw fruit or vegetable, or is a single-ingredient or mixture of frozen or canned fruits and vegetables that contains no fats or sugars in addition to the fats or sugars inherently present in the fruit or vegetable product.

• Modify § 101.75(c)(1) to exempt raw fruits and vegetables, or single-ingredient or mixtures of frozen or canned fruits and vegetables from meeting the requirement of § 101.14(e)(6).

In addition, the petition requested that we issue an interim final rule under section 403(r)(7)(A) of the FD&C Act, stating that the evidence is compelling and the potential to encourage fruit and vegetable consumption is important for public health and that issuing an interim final rule would allow affected fruit and vegetable products to become eligible to bear these health claims as expeditiously as possible.

The DGA, issued every 5 years by USDA and HHS, sets forth the Federal Government's official recommendations regarding healthy eating and construction of a healthful diet (Ref. 5). The 2015-2020 DGA is the most recent version. At the core of the 2015-2020 DGA, as stated in Chapter 1 (“Key Elements of Healthy Eating Patterns”), “is the importance of consuming overall healthy eating patterns, including vegetables, fruits, grains, dairy, protein foods, and oils—eaten within an appropriate calorie level and in forms with limited amounts of saturated fats, added sugars, and sodium.” Key recommendations of the 2015-2020 DGA are to “Shift to consume more vegetables” and “Shift to consume more fruits.” For example, Chapter 2 (“Shifts Needed to Align With Healthy Eating Patterns”) of the 2015-2020 DGA discusses intakes and states that “For most individuals, following a healthy eating pattern would include an increase in total vegetable intake from all vegetable subgroups, in nutrient-dense forms, and an increase in the variety of different vegetables consumed over time.” Chapter 2 likewise states that “To help support healthy eating patterns, most individuals in the United States would benefit from increasing their intake of fruits, mostly whole fruits, in nutrient-dense forms.”

We note that the recommendations in the 2015-2020 DGA regarding fruits and vegetables are directed at intakes of fruit and vegetables as a group. Particularly, in the discussions on fruit and vegetable intake throughout the report, the 2015-2020 DGA considers fruits and vegetables as a category of foods when discussing the associations between fruit and vegetable intake and reduced risk of cardiovascular disease or other chronic diseases (Ref. 5). Our reliance on dietary recommendations in this rulemaking and in previous health claim regulations is based on provisions of the 1990 amendments that direct us to issue health claim regulations that take into account the role of the nutrients in food in a way that will enhance the chances of consumers maintaining healthy dietary practices (see section 403(r)(3)(A) and (r)(3)(B) of the FD&C Act and previous health claim regulations for plant sterol/stanol esters and reduced risk of CHD (§ 101.83) and soluble fiber from certain foods and risk of CHD (§ 101.81)). Thus, general eligibility requirements that establish which types of foods are able to bear health claims have been typically determined based on the current dietary recommendations and guidelines at the time. The requirements are established to include foods and categories of foods that are encouraged to be consumed for their benefits to health, while restricting foods whose consumption is not encouraged from bearing health claims (see 58 FR 2478 at 2490).

Our regulations authorizing CHD-related health claims (§§ 101.75, 101.81, 101.82, and 101.83) require, with a few exceptions, that foods bearing such claims meet: (1) The “low fat” criterion defined by § 101.62(b)(2); (2) the “low saturated fat” criterion defined by § 101.62(c)(2); and (3) the “low cholesterol” criterion defined by § 101.62(d)(2).

The term “low fat” may be used on the label or in the labeling of food, except meal products as defined in § 101.13(l) and main dish products as defined in § 101.13(m), provided that the food has a reference amount customarily consumed greater than 30 grams (g) or greater than 2 tablespoons and contains 3 g or less of fat per reference amount customarily consumed; or the food has a reference amount customarily consumed of 30 g or less or 2 tablespoons or less and contains 3 g or less of fat per reference amount customarily consumed and per 50 g of food (for dehydrated foods that must be reconstituted before typical consumption with water or a diluent containing an insignificant amount, as defined in § 101.9(f)(1), of all nutrients per reference amount customarily consumed, the per 50-g criterion refers to the “as prepared” form) (§ 101.62(b)(2)).

The term “low saturated fat” may be used on the label or labeling of foods, except meal products as defined in § 101.13(1) and main dish products as defined in § 101.13(m), provided that the food contains 1 g or less of saturated fatty acids per reference amount customarily consumed and not more than 15 percent of calories from saturated fatty acids (§ 101.62(c)(2)).

The term “low cholesterol,” under § 101.62(d)(2), may be used on the label or in the labeling of foods, except meal products as defined in § 101.13(l) and main dish products as defined in § 101.13(m), provided that, for foods that have a reference amount customarily consumed greater than 30 g or greater than 2 tablespoons and contain 13 g or less of total fat per reference amount customarily consumed and per labeled serving, the food contains 20 milligrams or less of cholesterol per reference amount customarily consumed or the food contains 2 g or less of saturated fatty acids per reference amount customarily consumed.

The petition noted that a fruit such as an avocado exceeds the 3 g total fat per RACC criterion of the “low fat” definition and therefore would never be able to bear the health claim for diets low in saturated fat and cholesterol and reduced risk of CHD. According to our nutrient data on the 20 most frequently consumed fruits (§§ 101.42 through 101.45 and appendix C to part 101), avocados contain 4.5 g total fat per RACC and do, indeed, exceed 3 g total fat per RACC. Barring an exemption to the “low fat” requirement, avocados (and any other fruit or vegetable with a total fat content in excess of the criteria for “low fat”) are not eligible to bear the dietary saturated fat and cholesterol and risk of CHD health claim.

In the 1993 final rule authorizing the dietary saturated fat and cholesterol and risk of CHD health claim (58 FR 2739), we established “low fat” as a qualifying criterion for eligibility for the claim asserting that “while total fat is not as strongly or directly linked to increased risk of CHD . . . it may have significant indirect effects.” We discussed how “low fat foods generally help individuals in reducing their intake of saturated fat and cholesterol” and how excess calories, of which fat contributes more per gram than the other energy nutrients, is associated with two health-related conditions (obesity and diabetes) that are risk factors for heart disease (58 FR 2739 at 2742). In support of these determinations, we noted that, “Low fat diets are recommended in all Federal Government and National Academy of Sciences' dietary guidelines for reducing the risk of heart disease” (58 FR 2739 at 2742).

Since we published the final rule for the dietary saturated fat and cholesterol and risk of CHD health claim in 1993, the science related to intake of total fat has evolved, and the current dietary recommendations no longer contain a recommendation encouraging the consumption of diets low in total fat. Beginning with the 2000 DGA, recommendations for total fat intake shifted from recommending diets low in fat to diets moderate in total fat (Ref. 6). The recommendations reflected a shift in focus to types of fat consumed (i.e., saturated versus unsaturated fat) and their relation to effects on blood cholesterol concentrations. The recommendations for moderate fat intake continued through the 2005 DGA (Ref. 7) with even more discussion on types of fat in the diet (e.g., polyunsaturated and monounsaturated fats) and their influence on cardiovascular disease. The discussion on total fat intake in the 2010 DGA (Ref. 3) focused on the importance of staying within the Institute of Medicine (IOM) of the National Academies of Science Acceptable Macronutrient Distribution Range (AMDR) for total fat intake of 20 to 35 percent of energy for adults and an AMDR of 25 to 35 percent of energy for children age 4 to 18 years (Ref. 8). The AMDRs are associated with reduced risk of chronic diseases, such as cardiovascular disease, while providing for adequate intake of essential nutrients (Ref. 8).

The 2015-2020 DGA does not focus on total fat intake, but instead makes recommendations about types of fat. Chapter 1 (“Key Elements of Healthy Eating Patterns”) states that “[a] healthy eating pattern limits . . . [s]aturated fats and trans fats . . .” and contains a key recommendation to “[c]onsume less than 10 percent of calories per day from saturated fats. . . .” In this same chapter, the 2015-2020 DGA notes that “[t]he recommendation to limit intake of calories from saturated fats to less than 10 percent per day is a target based on evidence that replacing saturated fats with unsaturated fats is associated with reduced risk of cardiovascular disease” (Ref. 5, page 15).

As a result of the modifications in the dietary recommendations for total fat intake over the years, we have exempted certain foods at times from needing to meet the “low fat” requirement to be eligible to make a health claim related to CHD if those foods are consistent with dietary recommendations. For example, whole oats are exempt from meeting the “low fat” requirement to be eligible for “Soluble Fiber from Certain Foods and Risk of Coronary Heart Disease” health claim (§ 101.81). In providing the exemption, we discussed that consumption of whole oats was consistent with the recommendations regarding fat intake in the 2005 DGA and that consumption of foods such as whole oats was helpful in reducing the risk of CHD (73 FR 23947 at 23951, May 1, 2008).

We find that not imposing a “low fat” requirement for raw fruits and vegetables is consistent with the 2015-2020 DGA recommendations to increase intake of fruits and vegetables to help support healthy eating patterns (Ref. 5), as well as the 2015-2020 DGA emphasis on types of fat rather than total fat when discussing CHD risk (Refs. 5 and 7). We note that the fruits and vegetables that we are exempting from meeting the definition of “low fat” must still comply with general health claim requirements in order to be eligible to bear the claim, including, but not limited to, the requirement in § 101.14(e)(3) that the level of fat must not exceed the disqualifying nutrient level for total fat in § 101.14(a)(4).

In the 1993 final rule on the general requirements for health claims (58 FR 2478), we established the minimum nutrient content requirement for eligibility of foods to bear health claims. We stated that foods bearing health claims should be those consistent with dietary guidelines and that the value of health claims should not be trivialized or compromised by their use on foods of little or no nutritional value. We also stated that claims intended to promote the consumption of food that is incompatible with dietary guidelines would be misleading to consumers (58 FR 2478 at 2521). We developed an approach that would limit health claims to foods that contribute certain nutrients to the diet and, thus, are sources of more than calories (58 FR 2478 at 2521). We concluded that a food must contain one or more of vitamin A, vitamin C, iron, calcium, protein, or fiber at or above 10 percent of the RDI or DRV, prior to any nutrient addition, noting that most foods consistent with dietary guidelines met this criterion. Therefore, we added § 101.14(e)(6) to state that, except for dietary supplements that are not in conventional food form, the food must contain 10 percent or more of the Reference Daily Intake or the Daily Reference Value for vitamin A, vitamin C, iron, calcium, protein, or fiber per reference amount customarily consumed before any nutrients are added. We adopted this requirement in light of Congressional intent that health claims be used to help Americans maintain a balanced and healthful diet consistent with dietary guidelines (58 FR 2478 at 2521).

We later published technical amendments to the health claim regulations acknowledging that certain food products that had limited nutritional value may be determined to be appropriate foods to bear a health claim (58 FR 44036, August 18, 1993). We noted that we intended to address such situations in the regulations authorizing specific health claims, such as through an exception to the general requirements expressed in § 101.14(e)(6) (58 FR 44036).

Thus, we have recognized that exemptions to the minimum nutrient content requirement may be necessary in certain situations to help consumers construct overall daily diets that conform to current dietary guidelines and that otherwise promote good health. Multiple such exemptions have already been granted. For example, on August 23, 1996, we exempted noncariogenic carbohydrate sweeteners (carbohydrate sweeteners that do not promote the development of tooth decay) from the minimum nutrient content requirement to be eligible for the “dietary noncariogenic carbohydrate sweeteners and dental caries” health claim (§ 101.80) (61 FR 43433 at 43436). We reiterate that the minimum nutrient content requirements of § 101.14(e)(6) are important, but that an exemption from the minimum nutrient content requirements for fruits and vegetables as a group is warranted for these products to be eligible to bear the health claims authorized in § 101.75, given current dietary guideline recommendations. The value of these health claims will not be trivialized or compromised by their use on fruits and vegetables because current dietary guidelines emphasize that increased intake of fruits and vegetables is an integral part of creating healthful diets and reducing the risk of chronic disease.

We agree with the petitioner that some current requirements for the dietary saturated fat and cholesterol and risk of CHD health claim prevent a number of fruits and vegetables from being eligible to bear the claim. We also agree that fruits and vegetables as a group appear to contribute to a reduced risk of CHD regardless of their inherent fat content or their ability to meet 10 percent of the RDI or DRV of vitamin A, vitamin C, iron, calcium, protein, or fiber per RACC. We previously have exempted foods from needing to meet individual requirements for health claim eligibility when, as here, consumption of the foods is consistent with contemporary science-based dietary recommendations. We conclude that raw fruits and vegetables should be exempt from needing to meet the minimum nutrient content requirement of the general principles for health claims and from the requirement specifically included in the dietary saturated fat and cholesterol and risk of CHD health claim that a food meet the definition for “low fat” to be eligible to bear the claim.

Although the petition requested that a “single-ingredient or mixture of frozen or canned fruits and vegetables that contains no fats or sugars in addition to the fats or sugars inherently present in the fruit or vegetable product” also be exempt from the low fat and minimum nutrient content requirements, we are not including these types of products in the exemptions at this time. We are able to easily determine which foods fall into the category of raw fruits and vegetables. With single-ingredient or mixtures of canned or frozen fruit and vegetable products, however, the categories are very broadly described, and it is difficult to know all of the types of products that may become included in an exemption. There are many food products that could conceivably be considered “fruit or vegetable products,” including products with varying degrees of processing, with numerous possibilities of ingredients in a “mixture,” or with a number of packaging variations. We determine that providing an exemption for raw fruits and vegetables will affect the public health positively, but it is unclear if all single-ingredient and mixtures of frozen or canned fruits and vegetables that contain no fats or sugars in addition to the fats or sugars inherently present in the fruit or vegetable product would have similar effects. Therefore, we decline to extend any exemptions to this category of fruit and vegetable products at this time. However, we invite comments on this issue. If we receive information related to the possible iterations of canned and frozen fruit and vegetable products and also on their effects on health, we may consider expanding the foods included in the exemption in the future. Indeed, the petition encouraged FDA to proceed with exemptions solely for raw fruits and vegetables if the canned and frozen products required additional consideration.

We are revising § 101.75(c) to: (1) Provide an exemption at § 101.75(c)(1) for raw fruits or vegetables from meeting the minimum nutrient content requirement in § 101.14(e)(6), and (2) revise § 101.75(c)(2)(ii) to provide an exemption from meeting the nutrient content requirements of “low fat” if the food is a raw fruit or vegetable.

We have examined the impacts of the interim final rule under Executive Order 12866, Executive Order 13563, the Regulatory Flexibility Act (5 U.S.C. 601-612), and the Unfunded Mandates Reform Act of 1995 (Pub. L. 104-4). Executive Orders 12866 and 13563 direct us to assess all costs and benefits of available regulatory alternatives and, when regulation is necessary, to select regulatory approaches that maximize net benefits (including potential economic, environmental, public health and safety, and other advantages; distributive impacts; and equity). We have developed a comprehensive Economic Analysis of Impacts that assesses the impacts of the interim final rule. We believe that this interim final rule is not a significant regulatory action as defined by Executive Order 12866.

The Regulatory Flexibility Act requires us to analyze regulatory options that would minimize any significant impact of a rule on small entities. Because this interim final rule concerns voluntary claims, we certify that the interim final rule will not have a significant economic impact on a substantial number of small entities.

The Unfunded Mandates Reform Act of 1995 (section 202(a)) requires us to prepare a written statement, which includes an assessment of anticipated costs and benefits, before issuing “any rule that includes any Federal mandate that may result in the expenditure by State, local, and tribal governments, in the aggregate, or by the private sector, of $100,000,000 or more (adjusted annually for inflation) in any one year.” The current threshold after adjustment for inflation is $146 million, using the most current (2015) Implicit Price Deflator for the Gross Domestic Product. This interim final rule would not result in an expenditure in any year that meets or exceeds this amount.

This interim final rule amends the regulation authorizing a health claim on the relationship between dietary saturated fat and cholesterol and risk of CHD by expanding its use to raw fruits and vegetables that do not meet the “low fat” definition (§ 101.62(b)(2)) and/or the minimum nutrient content requirement (§ 101.14(e)(6)). We believe that a business will only incur the additional costs of analyzing the health claim requirements and relabeling a previously ineligible product if the additional revenue it anticipates to generate by attracting more customers to its products is greater than these additional costs. This implies zero net costs from this interim final rule to such businesses, as well as to any businesses that decide not to include new CHD health claims on previously ineligible and now eligible fruits and vegetables.

We have very little data on the current consumer usage of CHD claims on labels and labeling, how these practices would change in response to this interim final rule, or how the consumers will respond to new CHD claims on raw fruits and vegetables that were previously ineligible for such claims. Because of this data gap, we acknowledge that we do not have sufficient evidence at this point to quantify the benefits and the administrative and labeling costs of this interim final rule. Industry will only use a new CHD health claim on the label and labeling of a previously ineligible product if it believes consumers are willing to pay more for such product or buy more of it due to the new CHD claim. If consumers value such new CHD health information, we expect there to be changes in consumer behavior that would result in public health benefits from the reduced annual number of CHD cases. The benefits therefore will only be realized, and labels will only be changed, if the new CHD information on labels and labeling increases consumer demand for the previously ineligible and now eligible for a CHD health claim fruits and vegetables. Otherwise, the firms will not use the CHD health claim on their labels for these fruits and vegetables.

The full analysis of economic impacts is available in the docket for this interim final rule (Ref. 9) and at http://www.fda.gov/AboutFDA/ReportsManualsForms/Reports/EconomicAnalyses/default.htm.

This interim final rule contains no collection of information. Therefore, clearance by the Office of Management and Budget under the Paperwork Reduction Act of 1995 is not required.

We have determined under § 25.32(p) that this action is of a type that does not individually or cumulatively have a significant effect on the human environment. Therefore, neither an environmental assessment nor an environmental impact statement is required.

We analyzed this interim final rule in accordance with the principles set forth in Executive Order 13132. We have determined that the interim final rule will have a preemptive effect on State law. Section 4(a) of the Executive order requires Agencies to “construe . . . a Federal statute to preempt State law only where the statute contains an express preemption provision or there is some other clear evidence that the Congress intended preemption of State law, or where the exercise of State law conflicts with the exercise of Federal authority under the Federal statute.” Section 403A(a) of the FD&C Act provides that no State or political subdivision of a State may directly or indirectly establish under any authority or continue in effect as to any food in interstate commerce any requirement respecting any claim of the type described in section 403(r)(1) of the FD&C Act made in the label or labeling of food that is not identical to the requirement of section 403(r) of the FD&C Act.

This interim final rule amends the existing food labeling regulations on health claims for dietary saturated fat and cholesterol and risk of CHD (§ 101.75) in the label or labeling of food under section 403(r) of the FD&C Act. Although this interim final rule has a preemptive effect in that it precludes States from issuing any health claim labeling requirements for dietary saturated fat and cholesterol and the risk of CHD, this preemptive effect is consistent with what Congress set forth in section 403A(a) of the FD&C Act. Section 403A(a)(5) of the FD&C Act displaces both State legislative requirements and State common law duties.

We have complied with all of the applicable requirements under Executive Order 13132 and have determined that the preemptive effects of this interim final rule are consistent with Executive Order 13132.

We are issuing this rule as an interim final rule, effective immediately, with an opportunity for public comment. Section 403(r)(7) of the FD&C Act authorizes us to make proposed regulations issued under section 403(r) of the FD&C Act effective upon publication pending consideration of public comment and publication of a final regulation, if the Agency determines that such action is necessary for public health reasons. This authority enables us to act promptly on petitions that provide for information that is necessary to: (1) Enable consumers to develop and maintain healthy dietary practices; (2) enable consumers to be informed promptly and effectively of important new knowledge regarding nutritional and health benefits of food; or (3) ensure that scientifically sound nutritional and health information is provided to consumers as soon as possible. Proposed regulations made effective upon publication under this authority are deemed to be final Agency action for purposes of judicial review. The legislative history indicates that such regulations should be issued as interim final rules (H. Conf. Rept. No. 105-399, at 98 (1997)).

The petition requested that we issue an interim final rule amending § 101.75 to indicate that the evidence is compelling and the potential to encourage fruit and vegetable consumption is important for public health. It noted that we have used this authority to issue interim final rules for health claims a number of times (e.g., 65 FR 54685, September 8, 2000) and using an interim final rule would be consistent with our past practices.

We are satisfied that all three criteria in section 403(r)(7)(A) of the FD&C Act have been met for the amendment to the dietary saturated fat and cholesterol and risk of CHD health claim to permit raw fruits and vegetables that fail to comply with the “low fat” definition and/or the minimum nutrient content requirement, to be eligible to bear the claim. First, we conclude that these amendments for eligibility for foods to bear these health claims could help enable consumers to develop and maintain healthy dietary practices. Second, these amendments to this health claim will enable consumers to be informed promptly and effectively of important new knowledge regarding nutritional and health benefits of food. Third, these amendments to this health claim will ensure that scientifically sound nutritional and health information regarding the benefits of fruit and vegetable intake and reduction of CHD risk can be provided to consumers as soon as possible. The past few editions of the DGA have been moving away from a focus on total fat and have instead communicated to consumers the need to focus on type of fat consumed instead of total amount of fat. Recent editions of the DGA have also encouraged increased intake of fruits and vegetables for a healthful diet. Prompt issuance of an interim final rule that reflects the current recommendations is necessary for consumers to be able to have the most current information on nutrition and diet. Consumers will be better able to construct healthful diets if they have prompt access to information that is consistent with the current recommendations on fat content and on consumption of fruits and vegetables. Therefore, we are using the authority in section 403(r)(7)(A) of the FD&C Act to issue an interim final rule amending the general requirements for the health claim for dietary saturated fat and cholesterol and risk of CHD and to make the interim final rule effective immediately.

This regulation is effective upon publication in the Federal Register. We invite public comment on this interim final rule. We will consider modifications to this interim final rule based on comments made during the comment period. We will address comments and confirm or amend the interim final rule in a final rule.

The following references are on display in the Division of Dockets Management (see ADDRESSES) and are available for viewing by interested persons between 9 a.m. and 4 p.m., Monday through Friday; they are also available electronically at http://www.regulations.gov. FDA has verified the Web site addresses, as of the date this document publishes in the Federal Register, but Web sites are subject to change over time.

1. Liu, S., J.E. Manson, I.M. Lee, et al. “Fruit and Vegetable Intake and Risk of Cardiovascular Disease: The Women's Health Study.” The American Journal of Clinical Nutrition, 72: 922-928, 2000.

2. Appel, L.J., T.J. Moore, E. Obarzanek, et al. “A Clinical Trial of the Effects of Dietary Patterns on Blood Pressure.” DASH Collaborative Research Group. The New England Journal of Medicine, 336: 1117-1124, 1997.

3. U.S. Department of Health and Human Services and U.S. Department of Agriculture. “Dietary Guidelines for Americans, 2010. 7th Edition,” 2010. Available at http://health.gov/dietaryguidelines/2010/.

4. “Third Report of the National Cholesterol Education Program (NCEP) Expert Panel on Detection, Evaluation, and Treatment of High Blood Cholesterol in Adults (Adult Treatment Panel III) final report.” Circulation, 106: 3143-3421, 2002.

5. U.S. Department of Health and Human Services and U.S. Department of Agriculture. “2015-2020 Dietary Guidelines for Americans, 8th Edition,” December 2015. Available at http://health.gov/dietaryguidelines/2015/guidelines/.

6. U.S. Department of Health and Human Services and U.S. Department of Agriculture. “Nutrition and Your Health, Dietary Guidelines for Americans,” 2000. Available at http://health.gov/dietaryguidelines/2000.asp.

7. U.S. Department of Health and Human Services and U.S. Department of Agriculture. “Dietary Guidelines for Americans, 2005. 6th Edition,” 2005. Available at http://health.gov/dietaryguidelines/dga2005/document/default.htm.

8. Institute of Medicine (IOM) of the National Academies. “Dietary Reference Intakes for Energy, Carbohydrate, Fiber, Fat, Fatty Acids, Cholesterol, Protein, and Amino Acids (Macronutrients).” Chapter 8, “Dietary Fats: Total Fat and Fatty Acids,” 2002.

9. FDA/CFSAN, Food Labeling: Health Claims; Dietary Saturated Fat and Cholesterol and Risk of Coronary Heart Disease, Regulatory Impact Analysis, FDA-2013-P-0047.

Therefore, under the Federal Food, Drug, and Cosmetic Act and under authority delegated to the Commissioner of Food and Drugs, 21 CFR part 101 is amended as follows:

Table of Contents I. Executive Summary A. Purpose and Coverage of the Final Rule B. Summary of the Major Provisions of the Final Rule C. Legal Authority D. Costs and Benefits II. Background A. Need for the Regulation/History of This Rulemaking B. Summary of Comments to the Proposed Rule C. General Overview of Final Rule D. Clarifying Changes to the Rule III. Legal Authority IV. Comments on the Proposed Rule and FDA's Responses A. Introduction B. Description of General Comments and FDA Response C. Description of Comments That Oppose the Regulation and FDA Response D. Description of Comments on Scope of Ban and FDA Response E. Description of Other Specific Comments and FDA Response V. Effective Date VI. Economic Analysis of Impacts A. Introduction B. Summary of Costs and Benefits VII. Analysis of Environmental Impact VIII. Paperwork Reduction Act of 1995 IX. Federalism X. References I. Executive Summary A. Purpose and Coverage of the Final Rule

Medical gloves play a significant role in the protection of both patients and health care personnel in the United States. Health care personnel rely on medical gloves as barriers against transmission of infectious diseases and contaminants when conducting surgery, as well as when conducting more limited interactions with patients. Various types of powder have been used to lubricate gloves so that wearers could don the gloves more easily. However, the use of powder on medical gloves presents numerous risks to patients and health care workers, including inflammation, granulomas, and respiratory allergic reactions.

A thorough review of all currently available information supports FDA's conclusion that powdered surgeon's gloves, powdered patient examination gloves, and absorbable powder for lubricating a surgeon's glove should be banned. FDA has concluded that the risks posed by powdered gloves, including health care worker and patient sensitization to natural rubber latex (NRL) allergens, surgical complications related to peritoneal adhesions, and other adverse health events not necessarily related to surgery, such as inflammatory responses to glove powder, are important, material, and significant in relation to the benefit to public health from their continued marketing. FDA has carefully evaluated the risks and benefits of powdered gloves and the risks and benefits of the state of the art, which includes viable non-powdered alternatives that do not carry any of the risks associated with glove powder, and has determined that the risk of illness or injury posed by powdered gloves is unreasonable and substantial. Further, FDA believes that this ban would likely have minimal economic and shortage impact on the health care industry. Thus, a transition to alternatives in the marketplace should not result in any detriment to public health.

This rule applies to powdered patient examination gloves, powdered surgeon's gloves, and absorbable powder for lubricating a surgeon's glove. This includes all powdered medical gloves except powdered radiographic protection gloves. Because we are not aware of any powdered radiographic protection gloves that are currently on the market, FDA lacks the evidence to determine whether the banning standard would be met for this particular device. The ban does not apply to powder used in the manufacturing process (e.g., former-release powder) of non-powdered gloves, where that powder is not intended to be part of the final finished glove. Finished non-powdered gloves are expected to include no more than trace amounts of residual powder from these processes, and the Agency encourages manufacturers to ensure finished non-powdered gloves have as little powder as possible. In our 2008 Medical Glove Guidance Manual (Ref. 1), we recommended that non-powdered gloves have no more than 2 milligrams (mg) of residual powder and debris per glove, as determined by the Association for Testing and Materials (ASTM) D6124 test method (Ref. 2). The Agency continues to believe this amount is an appropriate maximum level of residual powder. The ban also does not apply to powder intended for use in or on other medical devices, such as condoms. FDA has not seen evidence that powder intended for use in or on other medical devices, such as condoms, presents the same public health risks as that on powdered medical gloves.

In this final rule, FDA is banning the following devices: (1) Powdered surgeon's gloves, (2) powdered patient examination gloves, and (3) absorbable powder for lubricating a surgeon's glove. Because the classification regulations for these device types do not distinguish between powdered and non-powdered versions, FDA is amending the descriptions of these devices in the regulations to specify that the regulations for patient examination and surgeon's gloves will apply only to non-powdered gloves while the powdered version of each type of glove will be added to the listing of banned devices in the regulations.

Many comments requested that FDA revise the scope of the ban to include all NRL gloves. Many comments from industry requested that the proposed effective date be extended beyond 30 days after the date of publication of the final rule. Of the comments that do not support the ban, commenters noted the need for powdered gloves to aid in donning gloves and tactile sense and the reduced risks associated with current powdered gloves that have less powder. The remaining comments are not clearly in support or opposition to the proposal.

Powdered surgeon's gloves, powdered patient examination gloves, and absorbable powder for lubricating a surgeon's glove are defined as devices under section 201(h) of the Federal Food, Drug, and Cosmetic Act (the FD&C Act) (21 U.S.C. 321(h)). Section 516 of the FD&C Act (21 U.S.C. 360f) authorizes FDA to ban a device if it finds, on the basis of all available data and information, that the device presents substantial deception or unreasonable and substantial risks of illness or injury, which cannot be corrected by labeling or a change in labeling. This rule amends 21 CFR 878.4460, 878.4480, 880.6250, 895.102, 895.103, and 895.104. FDA's legal authority to modify §§ 878.4460, 878.4480, 880.6250, 895.102, 895.103, and 895.104 arises from the device and general administrative provisions of the FD&C Act (21 U.S.C. 352, 360f, 360h, 360i, and 371).

The final rule is expected to provide a positive net benefit (estimated benefits minus estimated costs) to society. Banning powdered glove products is not expected to impose any costs to society, but is expected to reduce the number of adverse events associated with using powdered gloves. The primary public health benefit from adoption of the rule would be the value of the reduction in adverse events associated with using powdered gloves. The Agency estimates maximum total annual net benefits to range between $26.8 million and $31.8 million.

On March 22, 2016, FDA issued a proposed rule to ban powdered surgeon's gloves, powdered patient examination gloves, and absorbable powder for lubricating a surgeon's glove (81 FR 15173). Section 516(a)(1) of the FD&C Act authorizes FDA to ban a device intended for human use by regulation if it finds, on the basis of all available data and information, that such a device “presents substantial deception or an unreasonable and substantial risk of illness or injury.” For a more detailed discussion of the banning standard, we refer you to the preamble of the proposed rule. FDA issued the proposed regulation because it determined that powdered surgeon's gloves, powdered patient examination gloves, and absorbable powder for lubricating a surgeon's glove present an unreasonable and substantial risk of illness or injury and that the risk cannot be corrected or eliminated by labeling or a change in labeling.

The preamble to the proposed rule describes the history of powdered gloves and the citizen petitions received by the Agency that request a ban on powdered gloves. We refer readers to that preamble for information about the development of the proposed rule. The level and types of risk presented by powdered gloves varies depending on the composition and intended use of the glove. In aggregate, the risks of powdered gloves include severe airway inflammation, hypersensitivity reactions, allergic reactions (including asthma), allergic rhinitis, conjunctivitis, dyspnea, as well as granuloma and adhesion formation when exposed to internal tissue. We refer readers to the preamble of the proposed rule for details on the level and types of risks presented by powdered gloves. The benefits of powdered gloves appear to only include greater ease of donning and doffing, decreased tackiness, and a degree of added comfort, which FDA believes are nominal when compared to the risks posed by these devices.

The state of the art of both surgeon's and patient examination gloves includes non-powdered alternatives that provide similar performance as the various powdered glove types do. That is, there are many non-powdered gloves available that have the same level of protection, dexterity, and performance. Thus, based on a careful evaluation of the risks and benefits of powdered gloves and the risks and benefits of the current state of the art, which includes readily available alternatives that carry none of the risks posed by powdered gloves, FDA has determined that the standard to ban powdered gloves has been met, and that it is appropriate to issue this ban.

Finally, as discussed in the proposed rule, FDA also determined the ban should apply to devices already in commercial distribution and devices already sold to the ultimate user, as well as to devices that would be sold or distributed in the future (see 21 CFR 895.21(d)(7)). This means that powdered gloves currently being used in the marketplace would be subject to this ban and adulterated under section 501(g) of the FD&C Act (21 U.S.C. 351(g)), and thus subject to enforcement action.

The Agency requested public comments on the proposed rule, and the comment period closed on June 20, 2016. The Agency received approximately 100 comment letters on the proposed rule by the close of the comment period, each containing one or more comments on one or more issues. We received comments from a cross-section of patients and consumers, medical professionals, device manufacturers, and professional and trade associations. A majority of the comments supported the objectives of the rule in whole or in part, while a minority of the comments opposed the objectives of the rule. Some comments suggested changes to specific elements of the proposed rule or requested clarification of matters discussed in the proposed rule. See Section IV for the description of comments on the proposed rule and FDA's responses.

FDA published a proposed rule to ban powdered surgeon's gloves, powdered patient examination gloves, and absorbable powder for lubricating a surgeon's glove, because FDA determined that these devices present an unreasonable and substantial risk of illness or injury and that the risk cannot be corrected or eliminated by labeling or a change in labeling (81 FR 15173).

In this final rule, FDA is banning the following devices: (1) Powdered surgeon's gloves (21 CFR 878.4460), (2) powdered patient examination gloves (21 CFR 880.6250), and (3) absorbable powder for lubricating a surgeon's glove (21 CFR 878.4480). Because the classification regulations for these device types do not distinguish between powdered and non-powdered versions, FDA is amending the descriptions of these devices in the regulations to specify that the regulations for surgeon's gloves (21 CFR 878.4460) and patient examination gloves (21 CFR 880.6250) will apply only to non-powdered gloves while the powdered version of each type of glove will be added to 21 CFR part 895, subpart B—Listing of Banned Devices.

While FDA believes that the preamble to the proposed rule was clear that the proposed ban would apply to all powdered surgeon's gloves and all powdered patient examination gloves, in reviewing the terminology used in the proposed additions to 21 CFR part 895, FDA determined that term “synthetic latex” would not cover every type of non-NRL material that is used to manufacture powdered gloves. It was not FDA's intent to limit the ban to only powdered NRL and powdered synthetic latex gloves, and we believe that this intent was clear from the content of the preamble to the proposed rule, which stated that the ban “would apply to all powdered gloves except powdered radiographic protection gloves.” As such, FDA has now revised the identification in this final rule to clarify that the ban applies to all powdered surgeon's gloves and powdered patient examination gloves without reference to the type of material from which they are made. Additionally, the identification of non-powdered surgeon's gloves and non-powdered patient examination gloves is also being revised to remove reference to material.

Powdered surgeon's gloves, powdered patient examination gloves, and absorbable powder for lubricating a surgeon's glove are defined as medical devices under section 201(h) of the FD&C Act (21 U.S.C. 321). Section 516 of the FD&C Act (21 U.S.C. 360f) authorizes FDA to ban a device if it finds, on the basis of all available data and information, that the device presents substantial deception or unreasonable and substantial risks of illness or injury, which cannot be corrected by labeling or a change in labeling. This rule amends §§ 878.4460, 878.4480, 880.6250, 895.102, 895.103, and 895.104. FDA's legal authority to modify §§ 878.4460, 878.4480, 880.6250, 895.102, 895.103, and 895.104 arises from the device and general administrative provisions of the FD&C Act (21 U.S.C. 352, 360f, 360h, 360i, and 371).

We received approximately 100 comment letters on the proposed rule by the close of the comment period, each containing one or more comments on one or more issues. We received comments from a cross-section of patients and consumers, medical professionals, device manufacturers, and professional and trade associations. A majority of the comments supported the objectives of the rule in whole or in part, while a minority of the comments opposed the objectives of the rule. Some comments suggested changes to specific elements of the proposed rule or requested clarification of matters discussed in the proposed rule.

We describe and respond to the comments in section IV.B through E. We have numbered each comment to help distinguish between different comments. We have grouped similar comments together under the same number, and, in some cases, we have separated different issues discussed in the same comment and designated them as distinct comments for purposes of our responses. The number assigned to each comment or comment topic is purely for organizational purposes and does not signify the comment's value or importance or the order in which comments were received.

Many comments made general remarks supporting or opposing the proposed rule without focusing on a particular proposed provision. In the following paragraphs, we discuss and respond to such general comments.

(Comment 1) Many comments support the proposed ban on powdered patient examination gloves and powdered surgeon's gloves. These comments from individual consumers, health care professionals, academia, and industry highlight several risks of the continued use of powdered gloves, including, among others, allergic reactions, post-operative adhesions, and delayed wound healing.

(Response 1) FDA agrees with these comments. After further review of all available information and the comments submitted to the proposed rule, FDA has concluded that the public's exposure to the risks of powdered gloves is unreasonable and substantial in relation to the nominal public health benefit derived from the continued marketing of these devices, especially when considering the benefits and risks posed by readily available alternative devices. Therefore, FDA has determined that the standard for a ban on these devices has been met.

FDA received some comments that oppose the proposed ban on powdered patient examination gloves and powdered surgeon's gloves for various reasons. We address each of these reasons for opposition in this section. After reviewing these comments, FDA has determined that the standard to ban powdered gloves has been met, and that it is appropriate to issue this ban. We are finalizing the ban with only clarifying changes.

(Comment 2) Comments oppose the proposed ban on powdered patient examination gloves and powdered surgeon's gloves because of difficulty donning or doffing non-powdered gloves. Two commenters specifically discuss hyperhidrosis with claims that it can add to the difficulty donning and doffing non-powdered gloves. One commenter has asserted that double-gloving is more difficult when using non-powdered gloves.

(Response 2) As described in the preamble of the proposed rule, we have concluded that the benefit of ease of donning or doffing powdered gloves is generally nominal (Ref. 3) in comparison to the risks posed by the continued marketing of powdered gloves, which, among others, include severe airway inflammation, hypersensitivity reactions, and allergic reactions (including asthma). Also, as noted in the proposed rule, a study of various brands of powdered and non-powdered NRL gloves by Cote et al. found that there are non-powdered latex gloves that are easily donned with wet or dry hands with relatively low force compared to the forces required to don powdered latex examination gloves (Ref. 3). Thus, FDA has considered ease of donning and doffing as a benefit as it applies within the banning standard, and has determined that the standard is met.

(Comment 3) Comments oppose the proposed ban on powdered patient examination gloves and powdered surgeon's gloves because of difficulty donning non-powdered gloves, leading to greater propensity of non-powdered gloves to tear. Some of these comments express concern that the reduced ability to separate the opening of a non-powdered glove or the greater propensity of non-powdered gloves to tear could potentially lead to a higher degree of contamination and post-procedure infections.

(Response 3) FDA disagrees with the assertion that non-powdered gloves have a higher propensity to tear and thus disagrees that use of non-powdered gloves presents a greater risk of contamination, post-procedure infections, or exposure of the user to blood. FDA does not believe there is compelling evidence to support the assertion that non-powdered gloves have a higher propensity to tear. Korniewicz, et al., determined that the presence of powder did not affect the durability of gloves or enhance glove donning (Ref. 4). Although Kerr, et al., identified a statistically significant difference in the durability of non-powdered vinyl gloves compared to powdered vinyl gloves, this difference may be attributed to glove type, manufacturer, and the fingernail length of users rather than the presence or absence of powder (Ref. 5). This study also found that vinyl gloves in general are less durable and have a greater propensity to tear compared to nitrile, neoprene, and latex gloves. Furthermore, as discussed in the response to comment 4, several studies have found that alternatives to non-powdered NRL gloves, such as nitrile and neoprene gloves, offer the same level of protection against contamination and exposure to blood as powdered NRL gloves (Refs. 5, 6, 7, 8, 9, and 10). Therefore, FDA has determined that suitable alternatives to powdered gloves are readily available in the marketplace.

(Comment 4) Commenters oppose the proposed ban on powdered patient examination gloves and powdered surgeon's gloves because the fit of powdered gloves is more comfortable than non-powdered gloves. Some of these comments assert that the reduced fit of non-powdered gloves inhibits the tactile sensation necessary to perform medical procedures.

(Response 4) FDA disagrees with the assertion that non-powdered gloves inhibit the tactile sensation necessary to perform medical procedures. The ban does not include non-powdered NRL gloves, which offer the same performance characteristics of powdered NRL gloves, and several studies have found that alternatives, such as nitrile and neoprene gloves, offer the same level of protection, dexterity, and performance as NRL gloves (Refs. 5, 6, 7, 8, 9, and 10). Furthermore, the numerous risks posed by the continued marketing of powdered gloves outweigh the benefit of whatever additional level of comfort is provided from using powdered gloves instead of the non-powdered alternatives that carry none of these risks.

(Comment 5) Some comments oppose the proposed ban on powdered patient examination gloves and powdered surgeon's gloves, citing a lack of scientific evidence that gloves with reduced powder content, as those in use today, have the same risks as previously used gloves that had higher powder content.

(Response 5) FDA agrees that the maximum residual level of powder on powdered gloves is less than earlier types of powdered gloves. Historically, powdered medical gloves contained powder levels ranging from 50 to over 400 mg of powder per glove. Effective in 2002, the ASTM International recommended limits on powder levels is 15 mg per square decimeter for surgical gloves (ASTM D3577-2001) (Ref. 11) and 10 mg per square decimeter for patient examination gloves (ASTM D3578) (Ref. 12). As a result, FDA believes that gloves in use after 2002 follow these recommended limits and generally have lower powder content than earlier types of powdered gloves. Even so, several studies indicate that gloves with reduced powder levels continue to present unreasonable and substantial risks to patients and health care workers. For instance, a study conducted on the incidence of skin reactions for Greek endodontists from 2006 to 2012 found that glove powder accounted for the majority of skin reactions, and the replacement of powdered NRL gloves with non-powdered gloves resolved the majority of the adverse reactions (Ref. 13). Similarly, the risks of powdered gloves persist in non-clinical studies using gloves with reduced powder content, as demonstrated by the 2013 finding that surgeries performed with powdered gloves increased the number, density, and fibrotic properties of peritoneal adhesions in rats compared with surgeries performed with non-powdered gloves (Ref. 14). Also, the reduction in cases of NRL-induced occupational contact urticaria coincided with French hospitals transitioning to non-powdered gloves after 2004-2005 (Ref. 13). Finally, FDA is not aware of any report in the literature that supports the assertion that currently marketed powdered gloves with lower powder content reduce the risks presented by powdered gloves (Ref. 15). In summary, FDA concludes that the risks of powder continue to be unreasonable and substantial for currently marketed powdered gloves despite lower powder content than previous generations of powdered gloves.

(Comment 6) Two comments oppose the proposed ban on powdered patient examination gloves and powdered surgeon's gloves, because the commenters believe a warning on the risks of powdered gloves is sufficient to mitigate the risks posed by these devices.

(Response 6) As described in Section IV of the proposed rule, FDA has determined that no change in labeling could correct the risk of illness or injury presented by the continued use of these devices. Powdered gloves have additional or increased risks to health compared to non-powdered gloves related to the spread of powder, and the fact that powder-transported contaminants such as NRL allergens can become aerosolized. Exposure to powder or latex allergens presents significant risks to health care workers and patients when inhaled or when exposed to internal tissue during oral, vaginal, gynecological, and rectal exams. Although labeling can raise awareness of these risks, we conclude that labeling cannot effectively mitigate these risks because it cannot prohibit the spread of glove powder or powder-transported contaminants. In addition, an important aspect of these devices is their ability to affect persons other than the individual who decides to wear or use them. For example, patients often do not know the type of gloves being worn by the health care professional treating them, but are still exposed to the potential dangers. Similarly, glove powder's ability to aerosolize and carry NRL proteins exposes individuals to harm via inhalation or surface contact. Thus, some of the risks posed by glove powder can impact persons completely unaware or unassociated with its employment and without the opportunity to consider the devices' labeling. Because of this inherent quality, adequate directions for use or warnings cannot be written that would provide reasonable assurance of the safe and effective use of these devices for all persons that might come in contact with them.

Due to the ability of powder to affect people who would not have an opportunity to read warning labels, and because potential warning labels would raise awareness of the risks, but would not eliminate the risks posed by glove powder, FDA has determined no label or warning can correct the risks posed by these devices.

(Comment 7) One comment opposes the proposed ban on powdered patient examination gloves and powdered surgeon's gloves, because the solvent used to remove powder during the manufacture of non-powdered gloves may cause adverse reactions to the glove user.

(Response 7) FDA is not aware of any report in the literature that supports the assertion of widespread adverse reactions to solvent used in the manufacturing process. Non-powdered patient examination and surgeon's gloves require premarket notification (510(k)) submissions prior to marketing. During the review of these submissions, FDA evaluates the final finished glove, including manufacturing solvents that are present on the final glove. FDA recommends that manufacturers conduct and submit skin irritation and dermal sensitization studies in these submissions to evaluate potential issues with components, including manufacturing solvents (Ref. 1). Although individual hypersensitivity reactions to different materials may occur, FDA has been unable to find evidence in the literature of hypersensitivity to typical glove manufacturing materials other than glove powder or NRL. However, Palosuo, et al., reports that the use of hand sanitizers containing isopropyl alcohol prior to donning gloves could cause dermatitis reaction if the gloves are donned before the alcohol dries (Ref. 16). The occurrence of this reaction is unrelated to the manufacture of non-powdered gloves and unrelated to the use of non-powdered gloves as an alternative to powdered gloves. Given the lack of evidence of adverse reactions to solvents used in the manufacturing of non-powdered gloves, and the established evidence demonstrating the risks of powdered glove use, FDA continues to believe that powdered gloves and glove powder meet the banning standard.

(Comment 8) Several comments oppose the proposed ban on powdered patient examination gloves and powdered surgeon's gloves due to the expectation that users will ultimately have to pay more for medical gloves once the ban is finalized, because the cost of non-powdered gloves is currently higher than the cost of powdered gloves.

(Response 8) We do not find any evidence to support the claims that current prices of non-powdered gloves are significantly higher than powdered gloves. As we stated in the preliminary regulatory impact analysis (PRIA), extensive searches of glove distributor pricing indicate that non-powdered gloves have become as affordable as powdered gloves. Our searches also revealed that the market is saturated with alternatives to powdered gloves, resulting in downward pressure on the prices of non-powdered gloves. In addition, the share of powdered medical gloves sales has been declining since at least 2000 while total sales of all disposable medical gloves have increased (Ref. 17). We would not expect this trend to be occurring without regulatory action if users of disposable medical gloves faced significantly higher prices for switching to non-powdered gloves. We therefore do not find it necessary to update our analysis based on these comments.

(Comment 9) We received one comment that disagrees with our determination that the availability of examination and surgical gloves would not be reduced.

(Response 9) We do not find any evidence to support these claims. As we stated in the PRIA, research shows only 7 percent of total sales of examination and surgical gloves to medical workers were projected to be from powdered gloves in 2010 (Ref. 17). Global Industry Analysts (GIA) projected the share of powdered disposable medical gloves sales to decrease to 2 percent in 2015, while total sales of all disposable medical gloves continue to increase (Ref. 17). We would not expect this trend to be occurring without regulatory action if there were a reduction in the availability of disposable examination and surgical gloves. We therefore do not find it necessary to update our analysis based on these comments.

(Comment 10) Commenters suggest there would be a loss in consumer utility due to the preference some medical workers may have for powdered gloves due to comfort and ease of use.

(Response 10) We stated in the PRIA that the remaining 7 percent continuing to use these powdered gloves may experience utility loss from the removal of powdered gloves from the market (Ref. 17). The potential loss in consumer utility would be due to the perceived loss in comfort from powdered gloves users switching to non-powdered gloves. However, as the GIA report shows, there has been a downward trend in total sales of powdered gloves since at least the year 2000 while total sales of all disposable medical gloves has increased (Ref. 17). We would not expect this trend to be occurring without regulatory action if the loss in consumer utility to current medical workers were substantial. Korniewicz et al. reported no loss in consumer satisfaction in a sample of operating room staff switching to non-powdered surgical gloves (Ref. 4). We have not estimated this potential burden, but the evidence described here suggests that any burden would not be substantial. Further, even having considered that some degree of consumer comfort may be lost by banning powdered gloves, FDA continues to believe that this benefit is considerably outweighed by the numerous risks posed by powdered gloves.

(Comment 11) One comment opposes the proposed ban on powdered patient examination gloves and powdered surgeon's gloves, because the risks identified for powdered gloves are due to contaminants, such as pesticides and herbicides, in the powder that would not be present if the powder were manufactured in the United States.

(Response 11) FDA disagrees with the assertion that contaminated powder is the source of the risks identified for powdered gloves. FDA's proposal to ban powdered gloves and glove powder is based on various studies on the risks of powdered gloves due to the properties of the powder itself. Powdered gloves have additional or increased risks to health compared to non-powdered gloves. For example, powder on NRL gloves can aerosolize latex allergens, resulting in sensitization to latex and allergic reactions. Latex sensitization and allergic reactions are unrelated to any potential presence of manufacturing contaminants, such as pesticides and herbicides. Additional risks of powdered gloves include severe airway inflammation, conjunctivitis, dyspnea, as well as granuloma and adhesion formation when exposed to internal tissue. FDA's assessment of the available literature and information indicates that these risks are attributable to the powder itself, as opposed to any potential presence of manufacturing contaminants, such as pesticides and herbicides.

In addition, the powder used on powdered gloves is required to comply with FDA's Quality System regulation, which includes requirements for quality and inspection for the final finished gloves that protect against the introduction of contaminated devices into commerce. Among other requirements, device manufacturers must establish and maintain procedures to prevent contamination of equipment or product by substances that could reasonably be expected to have an adverse effect on product quality (21 CFR 820.70(e)). FDA's Quality System regulation applies to gloves and glove powder sold in the United States, regardless of the manufacturing location.

FDA received several comments requesting revision of the scope of the ban. The scope of the proposed ban includes powdered surgeon's gloves, powdered patient examination gloves, and absorbable powder for lubricating a surgeon's glove. The glove types include all powdered patient examination and surgeon's gloves, including NRL and synthetic latex gloves. In the following paragraphs, we discuss and respond to comments requesting revision of the scope of the ban. We are finalizing the ban without change to the scope, but clarifying that all powdered patient examination gloves and powder surgical gloves are banned, regardless of the material from which they are made.

(Comment 12) Several comments identify risks that result from the use of powdered and non-powdered NRL gloves. These comments request FDA to extend the ban to all NRL gloves, both powdered and non-powdered.

(Response 12) Unlike with powdered latex gloves, which have the ability to aerosolize glove powder and carry allergenic proteins, FDA believes the risk of allergic reaction to non-powdered NRL gloves, which affects the user and patients in direct contact with the glove, is adequately mitigated through already-required labeling that alerts users to this risk. NRL gloves must include a statement to alert users to the risk of allergic reactions caused by NRL (21 CFR 801.437). Further, several studies have indicated that the use of non-powdered NRL gloves reduces the risk of sensitization to allergenic NRL proteins and the number of allergic reactions experienced by those who are already sensitized (Refs. 18, 19, and 20). FDA believes that these study results, when considered alongside the risk mitigation that follows from FDA's required labeling for NRL products, demonstrates that non-powdered latex gloves can be safely used with appropriate caution for latex-sensitive patients and health care workers. Therefore, FDA has determined not to ban the use of all NRL gloves.

(Comment 13) Several comments raise the issue of life threatening latex allergy events that result from various uses of NRL gloves including food preparation and food service. Several of these comments assert that the Agency should broaden the scope of the ban to cover all NRL gloves for all uses including food preparation and food service.

(Response 13) We have concluded that it is not appropriate to address a proposal to ban gloves used for food preparation because these gloves do not meet the definition of a device under section 201(h) of the FD&C Act and are thus not subject to section 516 of the FD&C Act (21 U.S.C. 360f), which provides the statutory authority to ban devices within FDA's authority to regulate such products.

(Comment 14) One comment asserts that the ban on powdered gloves should not apply to dental practice, because the risks are not applicable to dental practice.

(Response 14) FDA disagrees with the assertion that the risks of powdered gloves are not applicable to dental practice. Dentists and dental patients face the same risks as other medical practices in terms of the potential for powder exposure to open cavities or open wounds, and for powder, if used with NRL gloves, to carry protein allergens. Several studies documenting the risks of powdered gloves in dental practices have been conducted, including Saary, et al., which identified that changing to low-protein and non-powdered NRL gloves reduced NRL allergy in dental students (Ref. 18). In addition, Charous et al., reported in 2000 that a dental office was able to reduce airborne NRL antigen levels to undetectable levels with the exclusive use of non-powdered NRL gloves, permitting a highly sensitized staff member to continue to work there (Ref. 21). These studies, among others (Refs. 13 and 22), indicate that the risks of powdered medical gloves apply to dental practice. Therefore, FDA has determined that the scope of the ban on powdered medical gloves should continue to include powdered gloves used in dental practice.

Many comments made specific remarks requesting clarification or revision to the proposed rule. In the following paragraphs, we discuss and respond to such specific comments.

(Comment 15) A number of comments request extension of the effective date of the ban. The proposed rule included a proposed effective date of 30 days after publication of the final rule for all devices, including those already in commercial distribution. The comments suggest a range of effective dates of 90 days to 18 months after publication of the final rule and assert that a longer transition period is necessary to allow existing inventory to flow through the supply chain to providers and patients.

(Response 15) FDA is not extending the effective date of the ban for devices already in commercial distribution. We have concluded that powdered surgeon's gloves, powdered patient examination gloves, and absorbable powder for lubricating a surgeon's glove present an unreasonable and substantial risk of illness or injury and that the risk cannot be corrected or eliminated by labeling or a change in labeling. The continued marketing of these devices beyond the 30 day effective date would allow for the continued sale and purchase of devices that FDA has determined present an unreasonable and substantial risk to patients and health care workers. Therefore, FDA does not believe that it is in the best interest of the public health to extend the effective date for devices already in commercial distribution. In order to minimize the risk of continued exposure of health care workers and patients to these devices, the effective date for devices remains 30 days after the date of publication of this final rule.

(Comment 16) One comment requests that FDA not extend the effective date of the ban to allow companies to deplete their inventory of the devices.

(Response 16) As described in the response to comment 15, FDA agrees that it is in the best interest of the public health to not extend the effective date of the ban for devices already in commercial distribution. Therefore, the effective date of the ban for devices already in commercial distribution remains at 30 days after the date of publication of the final rule.

(Comment 17) A few comments request recommendations on the means of disposal or recycling of powdered gloves.

(Response 17) FDA recommends that unused inventories of powdered medical gloves remaining at domestic manufacturing and distribution locations be disposed of in accordance with standard industry practices. Unused supplies at hospitals, outpatient centers, clinics, medical and dental offices, other service delivery points (nursing homes, etc.), and in the possession of end users, will need to be disposed of according to established procedures of the local community's solid waste management system. Established procedures for these materials typically involve disposal in landfills or incineration. FDA has concluded that this final rule will not have a significant impact on the human environment. (See Section VII. Analysis of Environmental Impact.)

(Comment 18) One comment requests clarification on whether after the effective date of the ban the Agency will permit a manufacturer to export powdered medical gloves that are already physically located at distribution centers in the United States.

(Response 18) After the effective date of this final rule, manufacturers will not be allowed to import powdered medical gloves. However, while powdered medical gloves will be banned in the United States on the effective date of this final rule, manufacturers may export existing inventory of powdered gloves to a foreign country if the device complies with the laws of that country and has valid marketing authorization by the appropriate authority, as described in section 802 of the FD&C Act (21 U.S.C. 382)). If eligible for export under section 802 of the FD&C Act, a device intended for export will not be deemed adulterated or misbranded if it

(A) accords to the specifications of the foreign purchaser,

(B) is not in conflict with the laws of the country to which it is intended for export,

(C) is labeled on the outside of the shipping package that it is intended for export, and

(D) is not sold or offered for sale in domestic commerce.

This rule is effective January 18, 2017. The effective date of this rule applies to devices already in commercial distribution and those already sold to the ultimate user, as well as to devices that would be sold or distributed in the future. All powdered surgeon's gloves, powdered patient examination gloves, and absorbable powder for lubricating a surgeon's gloves must be removed from the market upon the effective date of this final rule. Section 501(g) of the FD&C Act (21 U.S.C. 351(g)) deems a device to be adulterated if it is a banned device.

We have examined the impacts of the final rule under Executive Order 12866, Executive Order 13563, the Regulatory Flexibility Act (5 U.S.C. 601-612), and the Unfunded Mandates Reform Act of 1995 (Pub. L. 104-4). Executive Orders 12866 and 13563 direct us to assess all costs and benefits of available regulatory alternatives and, when regulation is necessary, to select regulatory approaches that maximize net benefits (including potential economic, environmental, public health and safety, and other advantages; distributive impacts; and equity). We have developed a comprehensive Economic Analysis of Impacts that assesses the impacts of the final rule. We believe that this final rule is not a significant regulatory action as defined by Executive Order 12866.

The Regulatory Flexibility Act requires us to analyze regulatory options that would minimize any significant impact of a rule on small entities. Because this rule imposes no new burdens, we certify that the final rule will not have a significant economic impact on a substantial number of small entities.

The Unfunded Mandates Reform Act of 1995 (section 202(a)) requires us to prepare a written statement, which includes an assessment of anticipated costs and benefits, before issuing “any rule that includes any Federal mandate that may result in the expenditure by State, local, and tribal governments, in the aggregate, or by the private sector, of $100,000,000 or more (adjusted annually for inflation) in any one year.” The current threshold after adjustment for inflation is $146 million, using the most current (2015) Implicit Price Deflator for the Gross Domestic Product. This final rule would not result in an expenditure in any year that meets or exceeds this amount.

The final rule prohibits marketing of powdered surgeon's gloves, powdered patient examination gloves, and absorbable powder for lubricating surgeon's gloves. The rule does not cover or include powdered radiographic gloves.

The final rule is expected to provide a positive net benefit (estimated benefits minus estimated costs) to society. Banning powdered glove products is not expected to impose any costs to society. Extensive searches of glove distributor pricing indicate that improvements to non-powdered gloves have made these products as affordable as powdered gloves. The ban is expected to reduce the adverse events associated with using powdered gloves. The Agency estimates maximum total annual net benefits to range between $26.8 million and $31.8 million. The present discounted value of the estimated benefits over 10 years ranges from $228.9 million to $270.8 million at a 3 percent discount rate and from $188.5 million to $223 million at a 7 percent discount rate.

FDA has examined the economic implications of the rule as required by the Regulatory Flexibility Act. If a rule will have a significant economic impact on a substantial number of small entities, the Regulatory Flexibility Act requires us to analyze regulatory options that would lessen the economic effect of the rule on small entities. This rule will not impose any new burdens on small entities, and thus will not impose a significant economic impact on a substantial number of small entities.

The full discussion of the economic impacts of the rule, which includes a list of changes made in the final regulatory impact analysis, in accordance with Executive Order 12866, Executive Order 13563, the Regulatory Flexibility Act, and the Unfunded Mandates Reform Act is available at https://www.regulations.gov under the docket number (FDA-2015-N-5017) for this rule and at http://www.fda.gov/AboutFDA/ReportsManualsForms/Reports/EconomicAnalyses/default.htm# (Ref. 23).

FDA has carefully considered the potential environmental effects of this final rule and of possible alternative actions. In doing so, the Agency focused on the environmental impacts of its action as a result of disposal of unused powdered surgeon's gloves, powdered patient examination gloves, and absorbable powder for lubricating a surgeon's glove that will need to be handled after the rule is finalized.

The environmental assessment (EA) considered each of the alternatives in terms of the need to provide maximum reasonable protection of human health without resulting in a significant impact on the environment. The EA considered environmental impacts related to landfill and incineration of solid waste at municipal solid waste (MSW) facilities nationwide. The selected action, if finalized, will result in an initial batch disposal of unused powdered surgeon's gloves, powdered patient examination gloves, and absorbable powder for lubricating a surgeon's glove from user facilities to MSW facilities nationwide, followed by a rapid decrease in the rate of disposal of these devices, as supplies are depleted. The selected action does not change the ultimate disposition of these devices but expedites their rate of disposal and ceases future production. Overall, given the limited number of powdered surgeon's gloves, powdered patient examination gloves, and absorbable powder for lubricating a surgeon's glove, currently in commercial distribution, the selected action is expected to have no significant impact on MSW and landfill facilities and the environment in affected communities.

The Agency has carefully considered the potential environmental effects of this action. FDA has concluded that the action will not have a significant impact on the human environment, and that an environmental impact statement is not required. The Agency's finding of no significant impact and the evidence supporting that finding, contained in an EA, may be seen in the Division of Dockets Management (see ADDRESSES) between 9 a.m. and 4 p.m., Monday through Friday (Ref. 24).

This final rule contains no collection of information. Therefore, FDA is not required to seek clearance by Office of Management and Budget under the Paperwork Reduction Act of 1995.

We have analyzed this final rule in accordance with the principles set forth in Executive Order 13132. FDA has determined that the rule does not contain policies that have substantial direct effects on the States, on the relationship between the National Government and the States, or on the distribution of power and responsibilities among the various levels of government. Accordingly, we conclude that the rule does not contain policies that have federalism implications as defined in the Executive order and, consequently, a federalism summary impact statement is not required.

The following references are on display in the Division of Dockets Management (see ADDRESSES) and are available for viewing by interested persons between 9 a.m. and 4 p.m., Monday through Friday; they are also available electronically at https://www.regulations.gov. FDA has verified the Web site addresses, as of the date this document publishes in the Federal Register, but Web sites are subject to change over time.

Therefore, under the Federal Food, Drug, and Cosmetic Act and under authority delegated to the Commissioner of Food and Drugs, 21 CFR parts 878, 880, and 895 are amended as follows:

Table of Contents I. Executive Summary A. Purpose and Coverage of the Final Rule B. Summary of the Major Provisions of the Final Rule C. Legal Authority D. Costs and Benefits II. Background A. Need for the Regulation/History of This Rulemaking B. Summary of Comments to the Proposed Rule C. General Overview of Final Rule III. Legal Authority IV. Comments on the Proposed Rule and FDA Response A. Introduction B. Specific Comments and FDA Response C. Clarifying Changes to the Rule V. Effective/Compliance Dates VI. Economic Analysis of Impacts VII. Analysis of Environmental Impact VIII. Paperwork Reduction Act of 1995 IX. Federalism X. References I. Executive Summary A. Purpose and Coverage of the Final Rule

Pediatric medical cribs that meet the definition of a device in section 201(h) of the Federal Food, Drug, and Cosmetic Act (the FD&C Act) (21 U.S.C. 321(h)) (referred to as pediatric medical cribs or cribs intended for medical purposes) (product code FMS) are regulated by FDA and will have to comply with the special controls identified in this rule for pediatric medical cribs. Cribs that do not meet the device definition (referred to as cribs for non-medical purposes) must meet the Consumer Product Safety Commission's (CPSC's) regulations and guidelines.

In the Federal Register of December 28, 2010 (75 FR 81766), the CPSC issued a final rule prohibiting the use of the drop-side rail design for non-medical cribs in consumer households as of June 28, 2011. CPSC's rule established new standards for full-size and non-full-size cribs intended for non-medical purposes, which effectively prohibited the manufacture or sale of cribs intended for non-medical purposes with a drop-side rail design in households, child care facilities, family child care homes, and places of public accommodation. This rule did not affect pediatric medical cribs regulated by FDA, which typically contain a drop-side rail design that includes movable and latchable side and end rails. Although drop-side cribs intended for non-medical purposes are now prohibited, there is still a need for pediatric medical cribs with drop-side rails inside and outside of traditional health care settings. Pediatric medical cribs with drop-side rails are extremely helpful for patient care in hospital settings and even outside of traditional health care settings, such as day care centers caring for infants and children with disabilities, because they allow parents and care givers easy access to children to perform routine and emergency medical procedures, including, but not limited to, cardiopulmonary resuscitation (CPR), blood collection, intravenous (IV) insertion, respiratory care, and skin care. These drop-side rail cribs also make it easier for hospital staff to facilitate safe patient transport and reduce the chance of care giver injury.

Over the last 5 years, FDA has received over 500 adverse event reports, or Medical Device Reports (MDRs), associated with open pediatric medical cribs, through the Agency's Manufacturer and User Facility Device Experience (MAUDE) database. There were adverse event reports of serious injuries, including reports of entrapment, which were predominantly entrapments of extremities (legs or arms). The majority of MDRs for medical cribs were for malfunctions such as drop-side rails not latching or lowering, brakes not holding, wheels or casters breaking, and where applicable, scales not reading correct weights. As a result of the risks to health and need for continued use of pediatric medical cribs in traditional health care settings and non-traditional settings, FDA is revising the identification for § 880.5140 (21 CFR 880.5140) to include only pediatric medical cribs, establishing special controls for these devices, and changing the name of the classification regulation.

In addition, FDA has received adverse event reports from hospitals regarding incidents of medical bassinet tipping and improper cleaning of the basket or bed component that caused cracks and crazing, which have resulted in patient injury. Historically, medical bassinets have been regulated as pediatric hospital beds (§ 880.5140, product code NZG). As a result, this rule creates a separate regulation for medical bassinets and establishes special controls for this device type to provide a reasonable assurance of safety and effectiveness.

In this final rule, FDA is amending the classification “pediatric hospital bed” in § 880.5140 to change the name of the classification regulation from “pediatric hospital bed” to “pediatric medical crib” and imposing special controls for pediatric medical cribs to provide a reasonable assurance of safety and effectiveness for these devices. This rule also creates a separate regulation, under § 880.5145, for medical bassinets and imposes special controls for this device type to provide a reasonable assurance of safety and effectiveness. In addition, use of pediatric medical cribs and medical bassinets outside of traditional health care settings will be limited to prescription use in accordance with § 801.109 (21 CFR 801.109). The Agency believes that the applicable special controls established and imposed by this final rule, together with the general controls, will provide reasonable assurance of the safety and effectiveness of these devices. Also, once this rule is effective, the Agency will move the following medical devices listed under § 880.5140 to classification regulations of other class II devices with similar intended uses and premarket notification requirements: Pediatric cribs with integrated air mattresses; youth beds; pediatric stretchers; and crib enclosure beds as identified in section II.C of this final rule.

Pediatric medical cribs and medical bassinets are medical devices under section 201(h) of the FD&C Act. For devices, FDA has the authority under section 513(a)(1)(B) of the FD&C Act (21 U.S.C. 360c(a)(1)(B)) to issue a regulation to establish special controls for class II devices for which general controls by themselves are insufficient to provide reasonable assurance of safety and effectiveness, but there is sufficient information to establish special controls to provide such assurance. Under this authority, FDA is establishing special controls for the class II pediatric medical cribs and medical bassinets (§§ 880.5140 and 880.5145).

This rule establishes special controls for medical bassinets and pediatric medical cribs, and permits use of these devices outside of traditional health care settings for prescription use only. This regulation will also change the name of the classification regulation for “pediatric hospital beds” to “pediatric medical cribs” and establish a separate classification regulation for medical bassinets as a class II device. The special control requirements set forth in this rule will clarify safety standards and minimize the risk of injury to pediatric patients, providing reasonable assurance of safety and effectiveness. The special control requirements that are definitely not currently practiced are the warning labeling requirements for both devices. The special controls will clarify for manufacturers the safety standards and help minimize the risk of injury to pediatric patients. The benefits of the new warning label are not readily quantifiable, but it is expected to reduce the risk of the bassinet from tipping or other user error and thus, reduce potential injury to pediatric patients. Additionally, the provision permitting prescription use of medical bassinets and pediatric medical cribs outside of traditional health care settings will benefit pediatric patients who require the specialized care provided by these devices. Costs estimated in this analysis include costs related to the new warning labeling requirements, the prescription use and performance testing for medical bassinets and pediatric medical cribs, as well as physical modification of pediatric cribs. The annual costs are $2,379,400, and include the costs of the warning labels and prescription provision. The cost of performance testing is $3,360 per unit and the cost of modifying a pediatric crib is $1,125 per unit.

The FD&C Act (21 U.S.C. 301 et seq.), as amended, establishes a comprehensive system for the regulation of medical devices intended for human use. Section 513 of the FD&C Act establishes three categories (classes) of devices, based on the regulatory controls needed to provide reasonable assurance of their safety and effectiveness. The three categories of devices are class I (general controls), class II (special controls), and class III (premarket approval).

Most generic types of devices that were on the market before May 28, 1976, the date of the 1976 amendments (generally referred to as preamendments devices), have been classified by FDA through the issuance of regulations in accordance with the procedures set forth in section 513(c) and (d) of the FD&C Act into one of these three regulatory classes. Devices introduced into interstate commerce for the first time on or after May 28, 1976 (generally referred to as post-amendments devices), are automatically classified by section 513(f) of the FD&C Act into class III without any FDA rulemaking process. These devices remain in class III and require premarket approval, unless FDA initiates one of the following procedures: (1) FDA reclassifies the device into class I or II; (2) FDA issues an order classifying the device into class I or II in accordance with section 513(f)(2) of the FD&C Act; or (3) FDA issues an order finding the device to be substantially equivalent, under section 513(i) of the FD&C Act, to a predicate device that is already legally marketed. The Agency determines whether new devices are substantially equivalent to predicate devices through review of premarket notifications under section 510(k) of the FD&C Act (21 U.S.C. 360(k)). Section 510(k) of the FD&C Act and its implementing regulations, codified in title 21 of the Code of Federal Regulations (21 CFR) part 807, subpart E, require persons who intend to market a new device that does not require a premarket approval application under section 515 of the FD&C Act (21 U.S.C. 360e) to submit a premarket notification (510(k)) containing information that allows FDA to determine whether the new device is “substantially equivalent” within the meaning of section 513(i) of the FD&C Act to a legally marketed device that does not require premarket approval.

Section 513(a)(1)(B) of the FD&C Act defines class II devices as those devices for which the general controls in section 513(a)(1)(A) by themselves are insufficient to provide reasonable assurance of safety and effectiveness, but for which there is sufficient information to establish special controls to provide such assurance, including the issuance of performance standards, postmarket surveillance, patient registries, development and dissemination of guidelines, recommendations, and any other appropriate actions the Agency deems necessary to provide such assurance (see also 21 CFR 860.3(c)(2)).

Section 510(m)(2) of the FD&C Act provides that FDA may exempt a class II device from the premarket notification requirements on its own initiative or upon petition of an interested person, if FDA determines that a 510(k) is not necessary to provide reasonable assurance of the safety and effectiveness of the device. Devices under the pediatric hospital bed classification regulation, including pediatric cribs and medical bassinets, were made exempt from premarket notification, subject to certain limitations, in accordance with section 510(m) of the FD&C Act (63 FR 59222 at 59229, November 3, 1998).

Pediatric medical cribs are medical devices intended for the treatment, cure, or mitigation of diseases or illnesses of pediatric patients. Prior to the issuance of this final rule, a pediatric hospital bed is was defined as “a device intended for medical purposes that consists of a bed or crib designed for the use of a pediatric patient, with fixed end rails and movable and latchable side rails. The contour of the bed surface may be adjustable.” FDA classified pediatric medical cribs in 1980 as pediatric hospital beds (§ 880.5140, product code FMS), class II devices (45 FR 69678 at 69695, October 21, 1980), and exempted them in 1998 from premarket notification (510(k)) under section 510(m) of the FD&C Act in the final rule (63 FR 59222 at 59229). Pediatric medical cribs with drop-side rails are extremely helpful for patient care in hospital settings and even outside of traditional health care settings, such as day care centers caring for infants and children with disabilities, because they allow parents and care givers easy access to children in order to perform routine and emergency medical procedures, including, but not limited to, CPR, blood collection, IV insertion, respiratory care, and skin care.

FDA published a proposed rule in the Federal Register of October 8, 2015 (80 FR 60809), proposing to (1) change the identification and name of § 880.5140, Pediatric hospital bed to Pediatric medical crib, and remove references to “beds” within the regulation, as appropriate, (2) establish special controls for pediatric medical cribs, (3) rearrange the devices within § 880.5140 so that it includes only pediatric medical cribs and move other devices that were within the prior hospital bed regulation to more appropriate classification regulations, and (4) create a separate regulation for medical bassinets with special controls. This rule finalizes those proposals.

Pediatric medical cribs that meet the definition of a device in section 201(h) of the FD&C Act are regulated by FDA. Cribs that do not meet the definition of device must meet the CPSC's regulations and guidelines. Because drop-side rail cribs for non-medical purposes and pediatric medical cribs are regulated by different agencies, CPSC consulted with FDA about the impact their final rule (75 FR 81766) could have on settings, such as nursery schools and day care centers, where pediatric medical cribs with drop-side rails are often used for pediatric patients after they have been discharged from a health care facility. In comparison to CPSC's experience with drop-side rail cribs for non-medical purposes, FDA received fewer and less severe adverse event reports for pediatric medical cribs with the drop-side design. In addition, FDA determined that there is a need for continued access to pediatric medical cribs with drop-side rails inside and outside of traditional health care settings because of the utility of the drop-side design (Ref. 1). Based on the consultation with CPSC, FDA determined that it should establish special controls to provide reasonable assurance of the safety and effectiveness of pediatric medical cribs and permit continued use of these devices outside of traditional health care settings.

This rule also creates a separate classification regulation for medical bassinets, § 880.5145. Historically, medical bassinets have also been regulated as pediatric hospital beds (§ 880.5140, product code NZG). A medical bassinet is a non-powered device that consists of two components: (1) A basket, the sleep or bed component, which is typically made of plastic and (2) a frame with wheels, which holds the basket or bed component (FDA refers to this component as a “basket or bed component” interchangeably in this rule). The basket or bed component is a box-like structure, generally made of a clear, high-impact resistant plastic material, with an open top and four walls to keep the infant in place. Medical bassinets are typically used in hospital settings for infants up to 5 months in age. The beneficial features of medical bassinets are portability, ease of cleaning, and, when it is made of a clear material, the ability to see the infant from all sides.

Based on the risks to health identified in FDA's proposed rule for pediatric medical cribs and bassinets, along with MDRs the Agency received from January 2005 to September 2015, FDA determined that general controls alone are insufficient to provide a reasonable assurance of safety and effectiveness for these devices for their intended use. Thus, with this rule, FDA is imposing special controls on these devices, which along with general controls, will provide reasonable assurance of safety and effectives of these devices and will permit their continued use in traditional health care settings. FDA will also permit the use of pediatric medical cribs with drop-side rail designs and bassinets outside of traditional health care settings through prescription use only. The special controls are designed to address the adverse event reports for pediatric medical cribs and bassinets. For pediatric medical cribs, there were adverse event reports of serious injuries including reports of entrapment, which were predominantly extremity entrapments of legs or arms. The majority of these reports were for malfunctions such as drop-side rails not latching or lowering, brakes not holding, wheels or casters breaking, and where applicable, scales not reading correct weights. For medical bassinets, hospitals have reported to FDA incidents of tipping and improper cleaning of the basket or bed component that caused cracks and crazing, which have resulted in patient injury.

FDA requested comments on the proposed rule (80 FR 60809), and the comment period closed on December 7, 2015. The Agency received 11 comments on the proposed rule by the close of the comment period; some of the comments contained comments on more than one issue. We received comments from a cross-section of consumers, device manufacturers, and professional and trade associations. All of the comments supported the changes identified in the proposed rule in whole or in part; however, some comments suggested changes to the proposed special controls or requested clarification of matters discussed in the proposed rule. See section IV for the description of comments on the proposed rule and FDA's responses.

FDA is amending the classification pediatric hospital bed in § 880.5140 to change the name of the classification regulation from “pediatric hospital bed” to “pediatric medical crib” and to establish special controls for pediatric medical cribs to provide a reasonable assurance of safety and effectiveness. This rule also creates a separate regulation, under § 880.5145, for medical bassinets and establishes special controls for this device type to provide a reasonable assurance of safety and effectiveness. In addition, use of pediatric medical cribs and medical bassinets outside of traditional health care settings will be limited to prescription use in accordance with § 801.109. The Agency believes that the applicable special controls, together with the general controls, will provide reasonable assurance of the safety and effectiveness of these devices.

Devices that do not meet the final identification under § 880.5140 for “pediatric medical crib” will be administratively moved to more appropriate class II regulations for devices with more similar intended uses that are also class II, 510(k) exempt, and will not be located under the final pediatric medical crib classification regulation. Shortly after the effective date of this final rule, FDA will send manufacturers of the remaining pediatric hospital beds notices identifying the new classification regulation and product code under which the device will be classified. These devices include: Open pediatric medical cribs, medical bassinets, pediatric cribs with integrated air mattresses, youth beds, pediatric stretchers, and crib enclosure beds. A more complete list of the devices from§ 880.5140 and to where they are being moved is provided in table 1.

This action will not have any substantive effect on the current marketing status of the devices. However, manufacturers of these devices will need to refer to the new regulation classification and product code provided by the Agency in future interactions with FDA.

Pediatric medical cribs and medical bassinets are defined as medical devices under section 201(h) of the FD&C Act. For devices, FDA has the authority under section 513(a)(1)(B) of the FD&C Act to issue a regulation to establish special controls for class II devices for which general controls by themselves are insufficient to provide reasonable assurance of safety and effectiveness, but there is sufficient information to establish special controls to provide such assurance. Under this authority, FDA is establishing special controls for the class II pediatric medical cribs and bassinets (§§ 880.5140 and 880.5145).

In response to the proposed rule (80 FR 60809) to revise § 880.5140 to specify that it will only be for regulation of pediatric medical cribs, with proposed special controls and to create a separate regulation for medical bassinets, also with proposed special controls, FDA received 11 comments to Docket No. FDA-2015-N-0701. The comments and FDA's responses to the comments are summarized in this document. Certain comments are grouped together under a single number because the subject matter of the comments is similar. The number assigned to each comment is purely for organizational purposes and does not signify the comment's value or importance or the order in which it was submitted.

(Comment 1) Multiple comments made recommendations that we revise the requirements for medical bassinet warning labels. One comment suggested that the warning label be affixed in a prominent location; another comment recommended that the warning label be required to be permanently affixed on all sides of the bassinet. One comment also recommended that the special control require 9 point font for visibility.

(Response 1) FDA believes that a warning label for medical bassinets should be readable, prominent, and in the same location on each device. While the proposed rule required the warning label to be placed on the bassinet cabinet, FDA has determined that some medical bassinets do not include a “cabinet,” but all of the devices do have a plastic basket or bed component. As a result, FDA has revised the special control requiring a warning label to specify that the label will need to be affixed to at least two sides of the plastic basket or bed component of the bassinet with the language in text of at least 9 millimeters in height.

(Comment 2) FDA received a comment requesting that FDA require warning labels for pediatric medical cribs.

(Response 2) Based on the adverse event reports received on pediatric medical cribs, FDA agrees that a warning label is warranted for pediatric medical cribs. These devices have a number of moving parts that can present a risk of head and limb entrapment, crushing, pinching, and lacerations to a pediatric patient. FDA has therefore revised the special controls for pediatric medical cribs to include a labeling requirement that mandates that a warning label be affixed to the medical crib that states that pediatric patients must be attended at all times whenever a movable side of the crib is in its lowest, or most open, position when accessing the child. This will serve as a mitigation for the risks of physical harm, such as falling out of the crib and possible pinching or lacerations to pediatric patients and help provide a reasonable assurance of safety and effectiveness of the device.

(Comment 3) Multiple comments requested clarification of the scope of the rule and the applicability of the special controls. One comment requested that the special controls identified in this rule apply to devices that have already been sold in interstate commerce.

(Response 3) After the effective date of this rule, manufacturers of pediatric medical cribs or medical bassinets, whether or not they have been legally marketed prior to January 18, 2017, must comply with the special controls identified in this rule to provide a reasonable assurance of safety and effectiveness of these devices. However, FDA does not intend to enforce the special controls for devices legally marketed prior to this date due to the logistical issues associated with requiring manufacturers to locate devices that have been sold.

(Comment 4) One comment suggested that we provide educational material for users of prescription medical pediatric cribs in non-traditional health care settings that address use errors.

(Response 4) The FD&C Act and its implementing regulations require all devices to be accompanied by adequate instructions for use (see section 502(f) of the FD&C Act (21 U.S.C. 352(f)) and § 801.5). In addition, the special controls identified in this rule include a requirement for “adequate instructions for users to care for, maintain, and clean the crib” and for warning labels alerting users to risks associated with crib use. The Agency believes these requirements sufficiently address the commenter's concern regarding use error.

(Comment 5) One comment stated that this rule should not affect contractors or business owners who provide a unique service or product.

(Response 5) To the extent the unique product referred to in the comment is a pediatric medical crib or medical bassinet that meets the definition of a custom device in section 520(b) of the FD&C Act (21 U.S.C. 360j(b)), these devices are exempt from, among other things, premarket approval requirements and conformance to mandatory performance standards (sections 514 and 515 of the FD&C Act (21 U.S.C. 360d and 360e)). However, the definition of custom device is narrow and requires a fact specific analysis. FDA expects that few “unique” pediatric medical cribs or bassinets will qualify as custom devices. FDA notes that patient-specific or patient-matched devices—those that have ranges of different specifications on one general design—are not generally regarded as custom devices. Manufacturers should see FDA's “Custom Device Exemption” guidance document for more information (Ref. 2). It is important that this rule apply to all pediatric medical cribs and bassinets that do not meet the custom device exemption to provide the broadest protection to users.

(Comment 6) One comment requested that we expand the device identification for pediatric medical cribs to include specialty cribs that allow parents who are disabled to access their children.

(Response 6) This rule establishes an identification and special controls specific to pediatric medical cribs intended for medical purposes and use with a pediatric patient. FDA developed the special controls only after considering the manufacture, use, and risks to health specific to these cribs. The special controls were not developed with other cribs, such as the specialty cribs described in the comment, in mind. As a result, FDA disagrees with including specialty cribs used by disabled parents for access to their children under this regulation classification.

(Comment 7) One comment requested that FDA make the following changes to the proposed rule regarding pediatric medical crib dimensions: (1) Citing FDA's reference of ASTM F1169-13 (formerly the American Society for Testing and Materials), section 5.7.2.1, in relation to rail height requirement, the commenter stated that, “Based on user need we believe that this reference should be removed to allow for full access to the patient without interference from the siderail [sic] in the lowest height position.” The commenter stated that they believe dimensions should be determined through the design process and should balance risks and benefits. (2) The proposed rule suggested that “no gap shall exist between the edge of the bottom rail and the top of the mattress surface,” based on ASTM F1169-13. The commenter proposed instead that, based on International Electrotechnical Commission (IEC) 60601-2-52, a maximum gap of 23/8 inches be allowed. The commenter stated that a requirement for “no gap” would be practically difficult to design. (3) The commenter also pointed out that the proposed requirement for the height of the side rail is inconsistent with the requirement provided by ASTM F1169-13, section 5.7.2.2, and recommended harmonization with ASTM F1169-13.

(Response 7) FDA agrees that clarification of dimensional requirements is needed for the special controls to mitigate entrapment, pinching, lacerations, and other risks associated with pediatric medical cribs. The Agency responds to the previous comments as follows: (1) Given the many potential differences in crib designs, including different mattress heights, a specific requirement for the height of a pediatric medical crib's side rail at the lowest position is unnecessary and may not mitigate the risk of falls as effectively in all designs. As a result, FDA has removed the specific height requirement when side rails are in their lowest position, but revised the height requirement when the rail is in the highest position (as described as follows in this response). Also, FDA has added a requirement for a warning label that states that pediatric patients should be attended to whenever a rail is in its lowest, or most open, position, regardless of design, to monitor and mitigate the risk of the patient falling out of the medical crib.

(2) FDA agrees that it may be difficult to design for “no gap”; however, the Agency does not agree that 23/8 inches is an appropriate maximum dimension, as this may leave room for entrapment or impingement. FDA has revised the special controls to eliminate the requirement for “no gap,” but is retaining the requirement that crib mattresses must fit tightly around all four sides of the crib, such that the occurrence of entrapment and impingement is prevented.

(3) FDA agrees that the proposed requirement height of 20 inches was incorrect because the measurement failed to include the CPSC standard as required in CPSC's guidance entitled “Full-Size Baby Crib Business Guidance” for a pediatric medical crib mattress that requires the height measurement for the mattress to be 6 inches thick (Ref. 3). As a result, FDA is revising the special control requirement to be consistent with that standard. The height of the rail and end panel as measured from the top of the rail or panel in its highest position to the top of the mattress support in its lowest position shall be at least 26 inches (66 centimeters). The mattress will also be required to not exceed 6 inches in thickness. This requirement is to ensure that high mattresses do not create a hazard by reducing the rail height.

(Comment 8) One comment opposed the proposed rule because it did not require any safety testing data be reviewed by FDA. According to the commenter, testing was especially important given the lack of scientific evidence that drop-side rail cribs provide important benefits in hospital settings.

(Response 8) Section 510(m)(2) of the FD&C Act permits FDA to exempt a class II device from the premarket notification requirements on its own initiative or upon petition of an interested person, if FDA determines that a 510(k) is not necessary to provide reasonable assurance of the safety and effectiveness of the device. Pediatric medical cribs have been exempt from premarket notification since 1998 and they have been essential to the provision of efficient medical care to pediatric patients since they entered the market. FDA reviewed the MedSun Survey (Ref. 1) and analyzed the MDRs submitted to the MAUDE database for medical cribs to identify the relevant risks to health associated with these devices (section IV of the proposed rule) and determined that, based on these risks, the number of MDRs received, and FDA's experience with these devices, there is sufficient information available to establish special controls that in combination with the general controls will provide a reasonable assurance of safety and effectiveness by mitigating the risks to health associated with these devices (section VI of the proposed rule) without the need to reinstate the requirement for 510(k) review. The special controls require manufacturers to perform appropriate testing to demonstrate the mechanical and structural stability of their pediatric medical cribs, among other things. As a result, FDA does not agree that it needs to review the testing data through review of a manufacturer's premarket notification (510(k)) to provide reasonable assurance of the safety and effectiveness.

(Comment 9) One comment suggested that FDA make the effective date 120 days after the publication of this rule to allow manufacturers of devices legally on the market to have time to conduct gap analysis, plan for design changes, and comply with other special controls.

(Response 9) FDA does not intend to extend the effective date to 120 days for the established special controls in this rule for both pediatric medical cribs and bassinets because many of the special controls in this rule are consistent with current industry practice among many manufacturers of products currently on the market. As stated earlier, due to the CPSC rule prohibiting the use of cribs with a drop-side rail design for non-medical purposes, FDA believes it is necessary to allow consumers to use pediatric medical cribs and bassinets in non-traditional health care facilities as soon as possible if they are prescribed by a health care professional. As a result, FDA has decided to change the effective date from the proposed 60 days stated in the proposed rule to now being 30 days after its publication in the Federal Register as stated in this final rule to provide a reasonable assurance of safety and effectiveness of these devices.

Also, FDA is unaware of a possible shortage of devices entering the market due to manufacturers having to comply with the new special controls; however, FDA does not intend to enforce compliance with the special controls for manufacturers of new devices until they have been brought onto the market.

In addition to the revisions made to the special controls for pediatric medical cribs and bassinets based on the comments submitted for the proposed rule, FDA is making additional clarifying changes to the special controls. FDA has determined that CPSC's Standard for the Flammability of Mattresses and Mattress Pads (FF 4-72, Amended) and Standard for the Flammability (Open Flame) of Mattress Sets (16 CFR parts 1632 and 1633) are inapplicable to medical bassinets because the mattresses for medical bassinets do not meet the measurements required for CPSC's mattress flammability standards. FDA is therefore removing this special control.

In addition, FDA has revised the labeling special control for both medical cribs and medical bassinets to include adequate instructions for cleaning of the device. The labeling for adequate maintenance of a bassinet should include the use of proper cleaning materials to allow safe and continuous use of these devices for both pediatric patients and personnel in traditional health care settings.

FDA believes that the special controls, listed in the revised regulations § 880.5140 and new regulation § 880.5145, in combination with the general controls, will provide a reasonable assurance of safety and effectiveness for pediatric medical cribs and medical bassinets for their intended use.

This final rule will become effective 30 days after its publication in the Federal Register.

We have examined the impacts of the final rule under Executive Order 12866, Executive Order 13563, the Regulatory Flexibility Act (5 U.S.C. 601-612), and the Unfunded Mandates Reform Act of 1995 (Pub. L. 104-4). Executive Orders 12866 and 13563 direct us to assess all costs and benefits of available regulatory alternatives and, when regulation is necessary, to select regulatory approaches that maximize net benefits (including potential economic, environmental, public health and safety, and other advantages; distributive impacts; and equity). We have developed a comprehensive Economic Analysis of Impacts that assesses the impacts of the final rule. We believe that this final rule is not a significant regulatory action as defined by Executive Order 12866.

The Regulatory Flexibility Act requires us to analyze regulatory options that would minimize any significant impact of a rule on small entities. Because the expected costs associated with this rule are expected to be modest, we certify that the final rule will not have a significant economic impact on a substantial number of small entities.

The Unfunded Mandates Reform Act of 1995 (section 202(a)) requires us to prepare a written statement, which includes an assessment of anticipated costs and benefits, before issuing “any rule that includes any Federal mandate that may result in the expenditure by State, local, and tribal governments, in the aggregate, or by the private sector, of $100,000,000 or more (adjusted annually for inflation) in any one year.” The current threshold after adjustment for inflation is $146 million, using the most current (2015) Implicit Price Deflator for the Gross Domestic Product. This final rule would not result in an expenditure in any year that meets or exceeds this amount.

This rule establishes special controls for medical bassinets and pediatric medical cribs, and permits prescription use of these devices outside of traditional health care settings. This regulation will also change the name of the classification regulation for “pediatric hospital beds” to “pediatric medical cribs” and establish a separate classification regulation for medical bassinets as a class II device. The special control requirements set forth in this rule will clarify safety standards to help minimize the risk of injury to pediatric patients posed by these devices. Additionally, permitting use of pediatric medical cribs by prescription outside of traditional health care settings will benefit pediatric patients who require the specialized care provided by these devices. Costs estimated in this analysis include costs related to the new warning labeling requirements, the prescription and performance testing for medical bassinets and pediatric medical cribs, along with physical modification of pediatric medical crib design. The annual costs are $2,379,400, and include the costs of the warning labels and prescription provision. The cost of performance testing is $3,360 per unit and the cost of modifying a pediatric crib is $1,125 per unit.

The full discussion of economic impacts is available in Docket No. FDA-2015-N-0701 and at http://www.fda.gov/AboutFDA/ReportsManualsForms/Reports/EconomicAnalyses/default.htm (Ref. 4).

The Agency has determined under 21 CFR 25.34(b) that this action is of a type that does not individually or cumulatively have a significant effect on the human environment. Therefore, neither an environmental assessment nor an environmental impact statement is required.

The final rule refers to previously approved collections of information found in FDA regulations. These collections of information are subject to review by the Office of Management and Budget (OMB) and the Paperwork Reduction Act of 1995 (44 U.S.C. 3501-3520). The collections of information regarding premarket notification submissions (part 807, subpart E), are approved under OMB control number 0910-0120. The collections of information regarding labeling (21 CFR part 801), including prescription device labeling and adequate directions for use, are approved under OMB control number 0910-0485. The collections of information regarding current good manufacturing practice quality systems (21 CFR part 820), including design controls (as referenced in §§ 880.5140(b)(1) and 880.5145(b)(1) and (3) of this document), are approved under OMB control number 0910-0073. The collections of information in 16 CFR parts 1632 and 1633, regarding mattress flammability, are approved under OMB control number 3041-0014.

In addition, FDA concludes that the warning labels for pediatric medical cribs and medical bassinets are not subject to review by OMB because they do not constitute a “collection of information” under the PRA. Rather, the labeling statements are “public disclosure(s) of information originally supplied by the Federal government to the recipient for the purpose of disclosure to the public” (5 CFR 1320.3(c)(2)).

FDA has analyzed this final rule in accordance with the principles set forth in Executive Order 13132. FDA has determined that the rule does not contain policies that would have substantial direct effects on the States, on the relationship between the National Government and the States, or on the distribution of power and responsibilities among the various levels of government. Accordingly, the Agency has concluded that the rule does not contain policies that have federalism implications as defined in the Executive order and, consequently, a federalism summary impact statement is not required.

The following references are on display in the Division of Dockets Management (HFA-305), Food and Drug Administration, 5630 Fishers Lane, rm. 1061, Rockville, MD 20852, and are available for viewing by interested persons between 9 a.m. and 4 p.m., Monday through Friday; they are also available electronically at http://www.regulations.gov. FDA has verified the Web site addresses, as of the date this document publishes in the Federal Register, but Web sites are subject to change over time.

Therefore, under the Federal Food, Drug, and Cosmetic Act and under authority delegated to the Commissioner of Food and Drugs, 21 CFR part 880 is amended as follows:

Background and Explanation of Provisions 1. Overview

On November 22, 2004, the Department of the Treasury (Treasury Department) and the IRS published in the Federal Register (69 FR 67873) a notice of proposed rulemaking (REG-145535-02) containing proposed regulations under section 355(e)(4)(D) of the Code (the proposed regulations). After considering the comments received on the proposed regulations and taking into account subsequently issued guidance as described in part 3. of this preamble, the Treasury Department and the IRS are issuing temporary regulations that adopt the proposed regulations with significant modifications based on the comments received on the proposed regulations. The temporary regulations also serve as the text of new proposed regulations in the related notice of proposed rulemaking (REG-140328-15) published in the Proposed Rules section in this issue of the Federal Register.

The temporary regulations amend 26 CFR part 1 under section 355 to provide necessary guidance under section 355(e)(4)(D) regarding the identity of predecessor and successor corporations of distributing and controlled corporations and to enable taxpayers to utilize the benefit of certain gain limitation rules. The temporary regulations also provide guidance regarding the extent to which section 355(f) precludes the application of section 355 to certain distributions and exchanges between members of an affiliated group. Finally, the regulations provide guidance regarding the application of section 336(e) to certain distributions of controlled stock to which section 355(e) applies.

Section 355(a) generally provides that if a distributing corporation (Distributing) distributes stock or securities of a controlled corporation (Controlled) to Distributing's shareholders or security holders and certain requirements are met, then no gain or loss is recognized by (and no amount is includible in the income of) Distributing's shareholders or security holders upon their receipt of the Controlled stock. Section 355(c) generally provides that Distributing does not recognize gain or loss on any distribution of qualified property to which section 355 (or so much of section 356 as relates to section 355) applies. Similar rules under section 361(c) apply in the case of a divisive reorganization under section 368(a)(1)(D) (a divisive D reorganization). Controlled stock or securities are qualified property under section 355(c)(2)(B) (or section 361(c)(2)(B)(ii) in the case of a divisive D reorganization), unless certain exceptions apply.

One exception to treating Controlled stock or securities as qualified property is provided under section 355(e), which was enacted as part of the Taxpayer Relief Act of 1997, Public Law 105-34, section 1012(a), 111 Stat. 788. Under section 355(e), stock or securities of Controlled generally will not be treated as qualified property under sections 355(c)(2) or 361(c)(2) if the stock or securities are distributed as part of a plan or series of related transactions (a Plan) pursuant to which one or more persons acquire directly or indirectly stock representing a 50-percent or greater interest in the stock of Distributing or Controlled (a Planned 50-percent Acquisition). Section 1.355-7 of the Income Tax Regulations provides additional guidance on the meaning of a Plan.

Under section 355(e)(2)(C), the existence of a purported Plan that includes a Planned 50-percent Acquisition will not prevent Controlled stock or securities from being treated as qualified property for purposes of section 355(c)(2) or section 361(c)(2) if, immediately after the completion of such Plan, Distributing and each Controlled are members of a single affiliated group, as defined in section 1504 without regard to section 1504(b) (an Expanded Affiliated Group or EAG). As a result, section 355(e) generally does not apply to a distribution between members of the same EAG unless the distribution precedes a distribution of Controlled stock or securities outside of the EAG (an External Distribution) so that Controlled and Distributing are not members of the same EAG after completion of the Plan.

Section 355(f) provides a special rule that applies to certain distributions between certain related corporations that do not qualify for the exception from section 355(e) under section 355(e)(2)(C). In particular, section 355(f) provides that, except as provided in regulations, section 355 (or so much of section 356 as relates to section 355) does not apply to the distribution of stock from one member of an affiliated group (as defined in section 1504(a)) to another member of the group if the distribution is part of a Plan that includes a Planned 50-percent Acquisition and is not described in section 355(e)(2)(C). For example, assume that a Planned 50-percent Acquisition of stock of a corporation (a Higher-Tier Distributing) that is the common parent of an affiliated group, as defined in section 1504(a), occurs when the Higher-Tier Distributing owns all of the stock of a subsidiary member (a Lower-Tier Distributing), which in turn owns all of the stock of Controlled (also a member of the affiliated group). Under the Plan, the Lower-Tier Distributing distributes Controlled stock to the Higher-Tier Distributing (an Internal Distribution), and the Higher-Tier Distributing then distributes the Controlled stock in an External Distribution. Under these facts, section 355(e) would apply to the Internal Distribution of all of Controlled's stock by the Lower-Tier Distributing to the Higher-Tier Distributing because the distribution is part of a Plan (after application of any exceptions to section 355(e), including section 355(e)(2)(C)). However, section 355(f) provides that section 355 (or so much of section 356 as applies to section 355) would not apply to such an Internal Distribution. Therefore, the Internal Distribution would be taxable to the Lower-Tier Distributing under section 311 and to the Higher-Tier Distributing under section 301 (subject to any available dividends received deduction and section 1059) or subject to the special rules of § 1.1502-13(f) for distributions between members of the same consolidated group.

Without the application of section 355(f), the Lower-Tier Distributing would recognize any gain in the Controlled stock by reason of section 355(e) (section 355(e) gain) in the Internal Distribution, but the Higher-Tier Distributing would be afforded nonrecognition treatment under section 355(a) on the receipt of Controlled stock. As a result, the Higher-Tier Distributing would not take a fair market value basis in the Controlled stock under section 301(d), but a basis determined under section 358(g), despite the Lower-Tier Distributing's recognition of section 355(e) gain. The Higher-Tier Distributing would also likely recognize additional section 355(e) gain on the subsequent External Distribution of the Controlled stock. Section 355(f) is intended to provide a benefit to such an affiliated group by effectively ensuring that the group recognizes section 355(e) gain only once at the lowest-tier Distributing, rather than at multiple levels. In addition, application of section 355(f) may eliminate duplicated loss, in some cases.

Section 355(e)(3)(B) provides that, if the assets of Distributing or any Controlled are acquired by a successor corporation in a reorganization under section 368(a)(1)(A), (C), or (D), or any other transaction specified in regulations by the Secretary, the shareholders (immediately before the acquisition) of the corporation acquiring such assets are treated as acquiring stock in the corporation from which the assets were acquired.

Section 355(e)(4)(D) provides that, for purposes of section 355(e), any reference to Controlled or Distributing includes a reference to any predecessor or successor of such corporation. As a result, Controlled stock or securities generally will not be treated as qualified property under section 355(c)(2) or 361(c)(2) if there is a Planned 50-percent Acquisition of the stock of a predecessor or successor of Distributing or Controlled.

Section 355(e) does not provide a definition of a predecessor or successor of Distributing or Controlled. The proposed regulations generally defined the terms predecessor and successor for purposes of section 355(e) and provided guidance regarding the acquisition or deemed acquisition of the stock of predecessors of Distributing and certain other acquisitions. As more fully described in part 2.E. of this preamble, the proposed regulations also limited Distributing's recognition of gain in two cases and provided an overall gain limitation. Parts 2.A. through 2.F. of this preamble describe the proposed regulations, which the temporary regulations largely adopt with the modifications described in part 3. of this preamble.

The preamble to the proposed regulations stated that the definition of a Predecessor of Distributing (a POD) in those regulations was intended to reflect the fact that section 355(e) generally denies tax-free treatment under sections 355(c)(1) and 361(c)(1) if there is a division of Distributing's assets to which section 355(a) applies that is coupled with a Planned 50-percent Acquisition of Distributing or Controlled. The proposed regulations attempted to provide a similar result in cases in which the ownership of a POD's assets (rather than those of Distributing) would otherwise be divided tax-free as part of a Plan that included a Planned 50-percent Acquisition of a POD or Distributing.

The proposed regulations generally defined a POD as a corporation that transferred its property in a transaction to which section 381(a) applies (section 381 transaction) to Distributing (a combining transfer) but only if Distributing then transferred some, but not all, of the property acquired in the combining transfer to Controlled in a transferred basis transaction before the distribution (a separating transfer). The definition was slightly different if Controlled stock was an asset transferred in the combining transfer. In addition, under the proposed regulations, no corporation could have been a predecessor of a POD.

In addition, the proposed regulations provided three operating rules relating to the determination of predecessor status. The first was a substitute asset rule that prevented a corporation from avoiding treatment as a POD simply because property received by Distributing in a combining transfer (or by Controlled in a separating transfer) was transferred by Distributing before the separating transfer (or by Controlled before the distribution) in exchange for other property in a nonrecognition transaction. The second rule provided that the transferor corporation and resulting corporation in a reorganization under section 368(a)(1)(F) (an F reorganization) would be treated as the same entity for purposes of determining whether a corporation is a POD or a Predecessor of Controlled (POC), as described in part 2.B. of this preamble. Without such a rule, a corporation could circumvent the proposed regulations by engaging in an F reorganization, because the proposed regulations did not take into account predecessors of a POD or POC. The third rule provided that there may be more than one POD, for example, if multiple corporations merged directly with and into Distributing in distinct transactions to which section 381 applied.

Under the proposed regulations, the definition of a POD was not tied to the existence of a Plan. Accordingly, a combining transfer and a separating transfer would be taken into account in identifying a POD even if neither transfer was part of a Plan; as a result, taxpayers would have been required to track the assets of any potential POD for an unlimited period prior to the distribution. In addition, once a POD had been identified, it would have been necessary to determine whether the distribution and any acquisitions (deemed or actual) of stock of the POD were part of a Plan, although the proposed regulations included no guidance relating to whether acquisitions of the stock of a POD and the distribution were part of a Plan.

The proposed regulations defined a POC as a corporation that transferred its assets to Controlled in a section 381 transaction before the distribution. However, whether a corporation was a POC was only taken into account for very limited purposes: (1) The definition of a POD, (2) the gain limitation rules described in part 2.E. of this preamble, and (3) the application of section 355(e)(2)(C), which is described in part 2.F. of this preamble. Other than for those limited purposes, a corporation would not be a POC under the proposed regulations. Further, no corporation could have been a predecessor of a POC.

The proposed regulations defined a Successor of Distributing or Controlled as a corporation to which Distributing or Controlled, respectively, transferred its assets in a section 381 transaction after the distribution (a Successor Transaction). If, after the distribution, Distributing transferred its assets to a Successor in a Successor Transaction, the proposed regulations provided that the shareholders of the Successor immediately before the transaction would be deemed to acquire Distributing stock (and stock of any POD) in the Successor Transaction. Subsequent acquisitions of stock of the Successor would be treated as acquisitions of Distributing (and any PODs).

Under the proposed regulations, the determination of whether there was a Planned 50-percent Acquisition was made separately with respect to Distributing and the POD. Therefore, Distributing may have been required to recognize section 355(e) gain if there was a Planned 50-percent Acquisition of a POD, but not of Distributing, and vice versa.

The proposed regulations provided special rules to determine whether there had been an acquisition of the stock of a POD in connection with and after a combining transfer from a POD to Distributing. Consistent with section 355(e)(3)(B), the proposed regulations provided that each person that owned an interest in Distributing immediately before the combining transfer would be treated as acquiring stock of the POD in the transaction. For example, if Distributing acquired the assets of a POD in a statutory merger qualifying as a reorganization under section 368(a)(1)(A) (an A reorganization), and individual A owned stock of Distributing immediately before the merger, A would be treated as acquiring stock of the POD in the transaction. In addition, an acquisition of Distributing that occurred after Distributing's combination with a POD would be treated not only as an acquisition of Distributing, but also as an acquisition of the POD. For example, if Distributing acquired the assets of a POD in a statutory merger qualifying as an A reorganization and, after the merger, individual B acquired stock of Distributing, B would be treated as acquiring not only stock of Distributing, but also stock of the POD. Similar rules applied with respect to Controlled except that there was no provision for a deemed acquisition of the stock of a POC because such acquisitions were of no consequence under the proposed regulations.

In addition, the proposed regulations provided that acquisitions of the stock of a corporation and its Successors would be combined to determine whether there had been a Planned 50-percent Acquisition of the corporation. For example, planned acquisitions of the stock of a POD, Distributing, and Distributing's Successors would be combined to determine whether there had been a Planned 50-percent Acquisition of the POD. Similarly, planned acquisitions of the stock of Distributing and its Successors would be combined to determine whether there had been a Planned 50-percent Acquisition of Distributing. In addition, planned acquisitions of the stock of Controlled and its Successors would be combined to determine whether there had been a Planned 50-percent Acquisition of Controlled.

Generally, if there is a Planned 50-percent Acquisition of Distributing (or a POD), Controlled, or their Successors, then section 355(e) requires Distributing to recognize the full amount of the built-in gain in the Controlled stock on the date of the distribution under section 355(c)(2) or section 361(c)(2), as applicable. The proposed regulations provided two gain limitation rules limiting the amount of gain that Distributing must recognize in certain cases in which there was a POD and a third gain limitation rule providing an overall limitation on Distributing's gain.

The first gain limitation rule applied when there was a Planned 50-percent Acquisition of one or more PODs. In those cases, the calculation of the section 355(e) gain focused on assets of the POD(s) that were transferred to Controlled and any Controlled stock transferred by the POD(s) to Distributing. Specifically, the proposed regulations limited the section 355(e) gain recognized by Distributing to the amount of gain, if any, that any PODs would have recognized if, immediately before the distribution each POD had (1) transferred the property that was transferred to Controlled (and any stock of Controlled that the POD transferred to Distributing) to a newly-formed, wholly-owned corporation solely for stock of such corporation in an exchange to which section 351 applied (section 351 exchange), and (2) then sold the stock of that corporation to an unrelated person in exchange for cash equal to its fair market value. In applying this first gain limitation rule, the proposed regulations provided four operating rules. The first operating rule was a substitute asset rule (similar to that described in part 2.A. of this preamble) that applied if property received by Distributing in a combining transfer had been exchanged tax-free. In such case, the property Distributing received in the exchange would be treated as property received in the combining transfer. The second operating rule provided that (other than Controlled stock) the only property taken into account for purposes of the first gain limitation rule would be property that was transferred to Controlled in the separating transfer (or a substitute asset received in a tax-free exchange for property received in the separating transfer) and held by Controlled at the time of the distribution. Under the third operating rule, the basis and value of the property (other than Controlled stock) would be determined as of the date of the distribution. The fourth operating rule provided that the basis and value of any Controlled stock that the POD transferred to Distributing would be measured on the date of the combining transfer.

The second gain limitation rule applied if a section 381 transaction (for example, an A reorganization of a POD into Distributing) caused a Planned 50-percent Acquisition of Distributing stock. Under those circumstances, the second gain limitation rule effectively limited the amount of section 355(e) gain that Distributing would recognize to the excess of the amount described in section 355(c)(2) or section 361(c)(2), as applicable, over any section 355(e) gain that Distributing would have been required to recognize if there had been a Planned 50-percent Acquisition of one or more PODs (but not Distributing). The section 355(e) gain computed on the hypothetical Planned 50-percent Acquisition of Distributing would take into account the first gain limitation rule.

The third gain limitation rule was an overall limitation on gain recognition. This rule limited the total amount of section 355(e) gain that could be recognized by Distributing as a result of the distribution to the amount of the built-in gain in the Controlled stock that, without regard to the first and second gain limitation rules, would be taken into account under section 355(c)(2) or section 361(c)(2).

As described in part 1.B. of this preamble, section 355(e)(2)(C) provides that section 355(e) does not apply to a distribution between members of an EAG if, immediately after completion of the Plan, Distributing and Controlled both remain members of the same EAG. The proposed regulations included a special rule that would rationalize the application of section 355(e)(2)(C) within an EAG, following a section 381 transaction. The proposed regulations provided that, for purposes of section 355(e)(2)(C), a POD or POC that was a member of the same EAG as Distributing or Controlled (as relevant) at the time of the section 381 transaction would be treated as continuing in existence within the EAG following its transfer of property to Distributing or Controlled in the section 381 transaction. Similarly, Distributing or Controlled would be treated as continuing in existence following a transfer of property to a Successor that was a member of the same EAG. Without this rule, for example, because a POD that was a historic member of the EAG would not continue to exist for Federal income tax purposes after transferring property to Distributing in a combining transfer, section 355(e)(2)(C) would not prevent section 355(e) from applying to a Planned 50-percent Acquisition of the stock of a POD, even if Distributing and Controlled remained members of the same EAG immediately after completion of the Plan.

The Treasury Department and the IRS received formal and informal comments regarding the proposed regulations. The comments and modifications to the proposed regulations adopted in the temporary regulations are discussed here. The temporary regulations retain many of the rules of the proposed regulations; however, in response to comments, the temporary regulations modify some provisions and add new provisions, as discussed in parts 3.A. through 3.D. of this preamble. In addition, the temporary regulations include certain non-substantive modifications to the organization of the rules of the proposed regulations.

The Treasury Department and the IRS received a comment regarding the narrow scope of the definition of a POD in the proposed regulations. Under the proposed regulations, the definition of a POD was limited to a corporation that, before the distribution, transferred property to Distributing in a section 381 transaction. Further, following the transfer from a POD, Distributing must have transferred some (but not all) of the acquired property to Controlled (or to a POC, as described below), and the basis of such property immediately after the transfer to Controlled (or a POC) must have been determined in whole or in part by reference to the basis of the property in the hands of Distributing immediately before the transfer. The commenter noted that the results contemplated by the definition of a POD of the proposed regulations (the tax-free separation of the POD's assets in the distribution, coupled with a potential 50-percent acquisition of the POD's stock) could be effectively replicated in a manner that would circumvent that definition and thereby avoid the application of section 355(e) in substantially similar transactions. For example, assume that corporation D2 owns 100 percent of both classes (voting class A and voting class B) of corporation D1's stock, and D1 owns all of the stock of corporation C. The three corporations together file a consolidated return (the D2 group). Assume that the following steps occur as part of a Plan: D2 acquires all of the stock of unrelated corporation P in exchange for 10 percent of D2's only class of outstanding stock in a reorganization under section 368(a)(1)(B). After joining the D2 group, P transfers an asset to D1 for less than 20 percent of D1's voting class A stock in a section 351 exchange by application of § 1.1502-34. D1 then transfers the asset to C and distributes all the C stock with respect to its voting class B stock to D2 in a transaction qualifying under section 355(a). D2 in turn distributes all the C stock to its shareholders in a transaction qualifying under section 355(a). In such a case, P's assets have been divided tax-free as a result of the distribution of C stock, and P has undergone a 50-percent acquisition of its stock, but section 355(e) would not apply because P did not engage in a section 381 transaction, although all steps occurred under a Plan.

Commenters also expressed concern that the definition of a POD in the proposed regulations would apply without regard to whether the combining transfer or separating transfer were part of a Plan. These commenters further noted that the Plan rules of § 1.355-7, which were published after the proposed regulations, did not provide express guidance regarding their application in cases involving an acquisition of a POD's stock that could implicate section 355(e). The commenters recommended that the proposed regulations be modified to include: (1) A rule stating that a corporation can satisfy the definition of a POD only if both the combining transfer and the separating transfer are part of a Plan, and (2) express guidance regarding the application of the § 1.355-7 Plan rules in cases involving an acquisition of a POD's stock. The comments indicated that, absent the requirement that the combining transfer and the separating transfer both be part of a Plan, there could be uncertainty as to whether section 355(e) would apply to the acquisition of a potential POD if there is no Plan in existence at the time of the section 381 transaction. Further, this uncertainty would burden taxpayers by requiring assets acquired by Distributing in any section 381 transaction at any time to be tracked through the date of the distribution without knowing whether section 355(e) would apply.

The Treasury Department and the IRS have determined that the normal construct of the Plan rules in § 1.355-7 generally should apply to acquisitions of POD stock (as well as to acquisitions of the stock of Distributing, Controlled, and their Successors). Accordingly, the temporary regulations provide a general rule that references in § 1.355-7 to Distributing or Controlled are treated as references to a POD, POC, or Successor of Distributing or Controlled, as the context may require. Further, a reference to a distribution generally includes a reference to a distribution and other related pre-distribution transactions that together effect a division of the assets of a POD. However, special rules apply with regard to the actions taken into account in determining whether a 50-percent acquisition of a POD occurs as part of Plan. Although a 50-percent acquisition of a POD may occur contemporaneously with a distribution made by Distributing, the acquisition and distribution might occur as part of a Plan of the POD, but without the participation (or even the knowledge) of Distributing. Because Distributing would be the corporation that could recognize section 355(e) gain, the Treasury Department and the IRS have determined that it is not appropriate to apply the rules of § 1.355-7 by imputing to Distributing the actions of a POD or its shareholders. Accordingly, these temporary regulations provide that any agreement, understanding, arrangement, or substantial negotiations with regard to the acquisition of a POD is analyzed under § 1.355-7 by taking into account the actions of officers or directors of Distributing or Controlled, controlling shareholders (as defined in § 1.355-7(h)(3)) of Distributing or Controlled, or a person acting with the implicit or explicit permission of one of those parties. The actions of officers or directors of a POD and other parties that might be relevant with regard to an analysis under § 1.355-7 if the POD were an actual Distributing are not considered unless those actions otherwise would be examined under the preceding sentence (for example, if a POD or its shareholder is a controlling shareholder of Distributing).

In addition, the Treasury Department and the IRS agree with the comment that the definition of a POD in the proposed regulations, with its exclusive application to transferors in section 381 transactions, did not adequately address section 355(e) policy concerns regarding the use of section 355 to facilitate tax-free dispositions of assets. The Treasury Department and the IRS also agree with commenters that the existence of a Plan should be relevant to the determination of whether a corporation is a POD, to minimize the burden of tracking a corporation's assets prior to the distribution. Therefore, as described in the following paragraphs, the modified definition of a POD contained in the temporary regulations takes into account both of these comments.

Study by the Treasury Department and the IRS arising from consideration of the comments received on the proposed regulations has led to the identification of a variety of pre-distribution transactions that taxpayers could use to achieve results substantially similar to a combining transfer and separating transfer. For example, as described in part 3.A.i. of this preamble, a corporation could transfer some, but not all, of its assets to Distributing in a section 351 exchange, with those assets ultimately being held by Controlled when its stock is distributed by Distributing. However, under the proposed regulations, POD status would not attach to the transferor because the division of the transferor's assets would be accomplished using a section 351 exchange and not in a section 381 transaction (that is, a combining transfer).

The Treasury Department and the IRS have reviewed the major goal of the proposed regulations, as discussed at part 2.A. of this preamble: To apply section 355(e) in cases in which, as part of a Plan, a tax-free division of the ownership of the POD's assets would otherwise be achieved through the use of a section 355 distribution. Although not discussed in depth in the preamble of the proposed regulations, the overarching theory was to apply section 355(e) to a section 355 distribution if, as part of a Plan, some of the assets of a POD were transferred to Controlled without full recognition of gain, and the distribution accomplished a division of the POD's assets. The Treasury Department and the IRS viewed (and continue to view) this type of transaction as a vehicle for achieving, as a result of the distribution of Controlled stock, the tax-free separation of the assets that the POD transferred to Distributing that are further transferred to Controlled (a synthetic spin-off). The POD might have separated those assets in a divisive D reorganization, without the intervention of Distributing. However, in that case, section 355(e) may have applied to the section 355 distribution, whereas, absent treatment as a POD, a synthetic spin-off of the POD's assets would not be subject to section 355(e).

The proposed regulations defined a POD narrowly, so that a corporation that transferred some of its assets to Controlled would be a POD only if it first transferred those assets to Distributing in a section 381 transaction. To achieve the goal of applying section 355(e) to synthetic spin-offs more effectively, these temporary regulations have both broadened and limited the scope of the definition of a POD. As discussed in greater detail in part 3.A.ii.b. of this preamble, the temporary regulations eliminate the formalistic requirements of a combining transfer followed by a separating transfer and generally identify as a POD any corporation whose assets are divided as part of a Plan as a result of some but not all of those assets being transferred to Controlled without the recognition of all of the built-in gain on the transferred assets before the distribution. No specific transactional form is required with regard to the transfer(s) of assets to Controlled, although such transfers must be made as part of a Plan. Thus, Distributing may recognize section 355(e) gain on a distribution of Controlled stock if Controlled acquired assets of any corporation identified as a POD, and the POD experiences a Planned 50-percent Acquisition of its stock.

Consistent with the synthetic spin-off analysis described in part 3.A.ii.a. of this preamble, the temporary regulations focus in a more conceptual manner on the division of property of any corporation other than Distributing or Controlled (a Potential Predecessor) as part of a Plan. Certain property of a Potential Predecessor (Relevant Property) is required to be tracked for the purpose of determining whether a division of the Potential Predecessor's property has occurred. Relevant Property is defined as any property held, directly or indirectly, by the Potential Predecessor at any point during the Plan Period. The Plan Period, in turn, is defined as the period that ends immediately after the distribution and begins on the earliest date on which any pre-distribution step that is part of the Plan is agreed to or understood, arranged, or substantially negotiated by one or more officers or directors acting on behalf of Distributing or Controlled, by controlling shareholders of Distributing or Controlled, or by another person or persons with the implicit or explicit permission of one or more of such officers, directors, or controlling shareholders. The temporary regulations generally do not treat as Relevant Property any property of a Potential Predecessor that was held directly or indirectly by Distributing or Controlled before a Plan existed. Rather, the definition of Relevant Property of a Potential Predecessor excludes any property held directly or indirectly by Distributing unless that property was directly or indirectly transferred to Distributing as part of a Plan, and it was Relevant Property of the Potential Predecessor before the transfer.

Because POD status under the temporary regulations depends in large part upon the division of the Relevant Property of a Potential Predecessor, Relevant Property must be carefully defined and transfers of Relevant Property as part of a Plan must be tracked to achieve the goals of the temporary regulations. Thus, although the modified definition of a POD is conceptual in nature, it is implemented through application of a set of defined terms. In addition to Relevant Property and Plan Period, the following defined terms are integral to applying the modified definition of a POD:

Relevant Stock—Stock that is a Potential Predecessor's Relevant Property.

Substitute Asset—In general, any property that is held directly or indirectly by Distributing during the Plan Period and that was received in exchange for Relevant Property that was acquired directly or indirectly by Distributing if all gain on the transferred Relevant Property is not recognized in the exchange. In addition, stock received by Distributing in a distribution qualifying under section 305(a) or section 355(a) on Relevant Stock is a Substitute Asset.

Separated Property—Each item of Relevant Property that is transferred to Controlled as part of a Plan and is held by Controlled immediately before the distribution. Also, Controlled stock that is Relevant Property and that is transferred to, and distributed by, Distributing as part of a Plan.

Underlying Property—Property directly or indirectly held by a corporation that is the issuer of Relevant Stock.

The definition of a POD, which focuses on the division of Relevant Property as part of a Plan, requires the satisfaction of both pre-distribution and post-distribution requirements. There are two pre-distribution requirements: A Relevant Property requirement and a reflection of basis requirement. The Relevant Property requirement may be satisfied in two ways. The Relevant Property requirement may be satisfied if, before the distribution and as part of a Plan, Distributing directly or indirectly acquires Controlled stock in exchange for a direct or indirect interest in Relevant Property. In addition, Controlled must directly or indirectly hold Relevant Property immediately before the distribution, and the gain in the Relevant Property must not have been fully recognized as part of the Plan. The Relevant Property requirement also may be satisfied if any Controlled stock that is distributed as part of the Plan is Relevant Property, and the full amount of gain on that Controlled stock is not recognized as part of the Plan. In either case and as discussed earlier in this part 3.A.ii.b., for purposes of determining POD status, a Potential Predecessor will not be treated as an indirect owner of property that is directly or indirectly held by Distributing unless that property was transferred to Distributing as part of a Plan.

The reflection of basis requirement is satisfied only if any Controlled stock distributed in the distribution reflects the basis of any Separated Property. This requirement ensures that there is a connection between the gain in the property of a POD and the gain that would be included under an application of section 355(e) and these temporary regulations. For example, under this rule, if section 355(e) applies to each of two sequential distributions of Controlled stock, the Controlled stock that is distributed in the second distribution might not reflect any gain in Separated Property of a Potential Predecessor of the first Distributing. In that case, the Potential Predecessor will not be treated as a POD for purposes of the second distribution, even though that Potential Predecessor may have been a POD for purposes of the first distribution.

In addition to the two pre-distribution requirements, a single post-distribution requirement applies: Immediately after the distribution, direct or indirect ownership of Relevant Property must have been divided between Controlled on the one hand, and Distributing or the Potential Predecessor (or a successor of a Potential Predecessor) on the other hand. For purposes of the preceding sentence, if a Potential Predecessor transfers property in a section 381 transaction to a corporation (other than Distributing or Controlled) during the Plan Period, the corporation is a successor to the Potential Predecessor. If all of the Relevant Property of a Potential Predecessor is transferred to Controlled before the distribution, that Potential Predecessor is not a POD because its assets have not been divided.

Special rules apply to ensure that the occurrence of a reorganization under section 368(a)(1)(E) or (F) to which Distributing is a party does not affect the analysis of whether Distributing stock or Distributing's direct and indirect assets are treated as Relevant Property.

The definition of a POD under the temporary regulations captures many of the same transactions that would have been captured under the proposed regulations without modification. For example, the merger of a Potential Predecessor into Distributing as part of a Plan, followed by the transfer of some (but not all) of the assets of the Potential Predecessor to Controlled as part of the Plan would result in the Potential Predecessor being treated as a POD under both regulations. However, the definition of a POD under the temporary regulations will reach a number of other Potential Predecessors, including indirect transferors, particularly because, under the modified definition, Relevant Property expressly includes both the directly and indirectly-held property of a Potential Predecessor. Therefore, in determining whether Relevant Property has been divided (and, thus, whether a POD exists), the temporary regulations consider an expanded pool of Potential Predecessors. For example, if a Potential Predecessor transfers Relevant Property to Distributing in a section 351 exchange as part of a Plan, the Potential Predecessor may be a POD, as may be a direct or indirect corporate shareholder of the Potential Predecessor (an indirect owner of the Relevant Property during the Plan Period), if the Potential Predecessor's Relevant Property (directly or indirectly held) is ultimately divided, as part of the Plan, as a result of the distribution. As another example, a Potential Predecessor that merges into Distributing in a forward triangular merger as part of a Plan may be a POD, as well as a direct or indirect corporate shareholder of the Potential Predecessor during the Plan Period. However, as discussed earlier in this part 3.A.ii.b., in either case, the Potential Predecessor's Relevant Property ultimately must be divided as part of the Plan to satisfy the post-distribution requirement.

As discussed earlier in this part 3.A.ii.b., the temporary regulations require the tracking of assets for purposes of identifying PODs; as discussed further in part 3.B. of this preamble, the temporary regulations also require asset tracking for purposes of application of the gain limitation rules. However, to alleviate this burden (as identified in the comments received on the proposed regulations), the temporary regulations provide that only direct or indirect transfers of Relevant Property (including Controlled stock) by a Potential Predecessor to Distributing (or to a POD (see discussion in part 3.A.iii. of this preamble)) that occur as part of a Plan are relevant in determining whether a Potential Predecessor is treated as a POD or a predecessor of a POD (the Plan Limitation). Similarly, only assets transferred as part of a Plan are relevant for application of the gain limitation rules. If no transfer of property of a Potential Predecessor to Distributing or Controlled occurs as part of a Plan, there is no requirement for taxpayers to track assets of any Potential Predecessor under the temporary regulations.

The Treasury Department and the IRS recognize that there may be potential difficulties in applying section 355(e) to a POD that does not cease to exist as a result of the transaction in which it becomes a POD. However, it is expected that in many (if not most) cases, a POD will cease to exist as a result of the transaction in which it becomes a POD. Further, under the first gain limitation rule of the temporary regulations, Distributing will recognize section 355(e) gain on the division of Relevant Property only if there has been a Planned 50-percent Acquisition of a POD. Because only acquisitions of a POD's stock that occur as part of a Plan are relevant to these inquiries, Distributing should be in possession of the necessary information to determine whether section 355(e) will apply. The Treasury Department and the IRS request comments regarding the integration of the Plan Limitation rule and the definition of a POD under the temporary regulations.

As discussed in part 3.A.ii.b. of this preamble, the POD status under these temporary regulations depends in large part upon the division of Relevant Property of a Potential Predecessor as part of a Plan. Therefore, to better effectuate the tracking of Relevant Property (and, by extension, Separated Property), these temporary regulations broaden the definition of a Substitute Asset, which is treated as Relevant Property. Under these temporary regulations, a Substitute Asset is any property that is held directly or indirectly by Distributing during the Plan Period and was received in exchange for Relevant Property that was acquired directly or indirectly by Distributing if all gain on the transferred Relevant Property is not recognized on the exchange. Controlled stock may constitute a Substitute Asset (and thus, Relevant Property) only if that Controlled stock received (or deemed received) in the exchange reflects the basis of Relevant Stock and the issuer of that Relevant Stock ceases to exist for Federal income tax purposes under the Plan. Treatment of this type of Controlled stock as Relevant Property eliminates the need for application of the POC concept for purposes of determining POD status and computing gain limitations. Accordingly, these temporary regulations reduce the scope of the POC rule to apply solely for purposes of applying the affiliated group rule of section 355(e)(2)(C).

The Treasury Department and the IRS have determined that the Plan Limitation rule described in part 3.A.ii.b. of this preamble mitigates much of the burden associated with tracking successive PODs. Thus, the temporary regulations treat a predecessor of a POD as a POD. A corporation is a predecessor of a POD if it transfers assets to the POD as part of a Plan, and all additional pre- and post-distribution requirements are satisfied with respect to its assets. The temporary regulations include a similar rule with respect to a predecessor of a POC. Because the temporary regulations recognize successive predecessors of Distributing and Controlled, it is no longer necessary to include the general operating rule contained in the proposed regulations that would have treated the resulting corporation in an F reorganization as the same corporation that engaged in the reorganization. Accordingly, the temporary regulations eliminate this operating rule.

The gain limitation rules of the proposed regulations are incorporated in the temporary regulations, with modifications to address certain concerns of commenters. Commenters expressed three main concerns with respect to the first gain limitation in the proposed regulations, which applies if there is a Planned 50-percent Acquisition of a POD.

First, commenters stated that the hypothetical section 351 exchange construct used in the first gain limitation rule to determine Distributing's section 355(e) gain on a Planned 50-percent Acquisition of a POD was unnecessarily complicated because of its reliance on rules ancillary to section 351. Specifically, commenters were uncertain as to whether (or how) the loss importation rules under then-recently-enacted section 362(e) would apply to the hypothetical section 351 exchange. Commenters requested that, in lieu of the hypothetical section 351 exchange, gain be limited to the difference between the aggregate basis in the POD's assets actually transferred to Controlled and the aggregate fair market value of those assets immediately before the distribution.

The second main concern of commenters was that the proposed regulations imposed a tracking burden with respect to a POD's assets. Third, commenters noted that measuring the value of Controlled stock acquired by Distributing from a POD at the time of the combining transfer (as opposed to at the time of the distribution, as is the case with other property) could be burdensome.

With regard to the first concern, the Treasury Department and the IRS do not agree with the commenters' suggestion that the first gain limitation rule applicable to a Planned 50-percent Acquisition of a POD should be measured solely by reference to the difference between the aggregate basis and the aggregate fair market value in a POD's assets transferred to Controlled. Outside of the POD context, application of section 355(e) results in the recognition of gain on Controlled stock, rather than on assets held by Controlled. As discussed in part 3.A.ii.a. of this preamble, the policy underlying the proposed regulations was to apply section 355(e) to result in section 355(e) gain equivalent to that obtained if some of the assets of a POD had been transferred to a hypothetical Controlled without full recognition of gain, and a division of the POD's assets were accomplished through a hypothetical distribution to which section 355(e) applied. That theory continues to underlie these temporary regulations. Therefore, the Treasury Department and the IRS have determined that a limitation on section 355(e) gain equal to the gain in the stock of a hypothetical Controlled following a transfer of POD assets is appropriate. In addition, the commenters' concerns regarding the possible application of section 362(e), highlighted by the use of a hypothetical section 351 and sale construct in the proposed regulations, should be eased by the intervening promulgation of final regulations under section 362(e)(1) and (2). See §§ 1.362-3 and 1.362-4. However, to avoid confusion regarding the applicable Code provisions to be applied in determining the appropriate amount of section 355(e) gain to be recognized by Distributing, these temporary regulations modify the first and second gain limitation rules to result in section 355(e) gain that would have been present in hypothetical Controlled stock, had Distributing transferred assets to a hypothetical Controlled and distributed its stock in a hypothetical reorganization under section 368(a)(1)(D) and section 355(e) (a Hypothetical D/355(e) Reorganization), rather than a section 351 exchange followed by a hypothetical sale. This formulation will more closely reflect the policy underlying the proposed regulations and these temporary regulations.

With regard to the second concern, as discussed in part 3.A.ii.b. of this preamble, these temporary regulations mitigate the burden of tracking assets by providing that a Potential Predecessor can be a POD only if the assets of the Potential Predecessor are transferred as part of a Plan. If such a transfer occurs as part of a Plan, the required tracking burden is knowable by Distributing; if there is no Plan, there is no requirement to track any assets of a Potential Predecessor under the temporary regulations. In addition, the Treasury Department and the IRS continue to view the burden of tracking a POD's assets imposed by the first gain limitation rule as preferable to requiring Distributing to recognize the full amount of section 355(e) gain that Distributing would otherwise recognize under section 355(c)(2) or 361(c)(2) (the Statutory Recognition Amount) in the absence of such a rule. Nevertheless, the temporary regulations provide that Distributing may choose not to apply the first or second gain limitation rules to a distribution, and instead may recognize the Statutory Recognition Amount, by reporting the Statutory Recognition Amount on its original or amended Federal income tax return for the year of the distribution.

With regard to the measurement of gain on Controlled stock that is Separated Property, the Treasury Department and the IRS agree that it is preferable to measure this gain as of the time of the distribution. Using the date of the distribution to measure the gain attributable to the POD's Controlled stock allows for investment adjustments to be made with respect to such stock if Distributing is a member of a consolidated group. Such adjustments often will mitigate the effect of multiple layers of taxation on the same economic gain. Accordingly, these temporary regulations include modifications to the proposed regulations that address the commenters' concerns.

The temporary regulations implement the modifications discussed using terminology that is consistent with the modification of the definition of a POD. Thus, the temporary regulations provide that the first gain limitation rule applicable to a Planned 50-percent Acquisition of a POD equals the amount of section 355(e) gain Distributing would have recognized if, immediately before the distribution, Distributing had transferred all the Separated Property received from the POD to a newly-formed corporation in exchange solely for stock of such corporation in a Hypothetical D/355(e) Reorganization.

With regard to situations in which there is a Planned 50-percent Acquisition of Distributing, the temporary regulations modify the language of the second gain limitation rule to conform to the modified definition of a POD. However, the substance of the rule remains: If the Planned 50-percent Acquisition of Distributing stock occurs in a section 381 transaction in which a POD transfers its assets to Distributing, the amount of section 355(e) gain recognized is limited. This rule is intended to minimize the Federal income tax impact of directionality between economically equivalent section 381 transactions. That is, the same result should obtain under the temporary regulations regardless of which party to the section 381 transaction is the transferor corporation and which is the acquiring corporation.

Because the temporary regulations require the tracking of both the direct and indirect assets of PODs, the Treasury Department and the IRS have determined that certain additional limitations on the recognition of gain are appropriate. First, the definition of Separated Property excludes property indirectly held by a POD if the stock of the corporation that directly owns the property is Separated Property (and thus is already taken into account for gain recognition purposes). Thus, a corporation's Underlying Property is excluded from the gain recognition computation if the corporation's stock is Relevant Stock transferred to Controlled as part of a Plan and held by Controlled immediately before the distribution. The temporary regulations also provide a prohibition on counting the same asset as Relevant Property of successive PODs, as well as a more general anti-duplication rule, which ensures that the same economic gain is not captured multiple times under section 355(e) and these regulations.

Effective for certain sales, exchanges, or distributions of stock made by a domestic corporation on or after May 15, 2013, regulations under section 336(e) permit, in certain circumstances, a domestic corporation to elect to treat a sale, exchange, or distribution of the stock of a corporation as an asset sale. See §§ 1.336-1 through 1.336-5. The temporary regulations clarify that Distributing may elect to apply the regulations under section 336(e) to a distribution of Controlled stock to which the temporary regulations apply, provided that the transaction otherwise satisfies the requirements of the regulations under section 336(e), and Distributing would otherwise be required under these temporary regulations to recognize the Statutory Recognition Amount with respect to the Controlled stock its distributes.

In the preamble to the proposed regulations, the Treasury Department and the IRS requested comments regarding whether transferees of the property of Distributing or Controlled in transactions other than section 381 transactions should be considered Successors. One comment on the proposed regulations endorsed treating a transferee in a section 351 or section 721 transaction as a Successor, but only in limited circumstances. Although the Treasury Department and the IRS continue to study this issue, the temporary regulations treat as a Successor for section 355(e) purposes only a transferee to which Distributing or Controlled transferred its assets in a section 381 transaction after a distribution.

As described in part 1.B. of this preamble, by operation of section 355(e)(2)(C), section 355(e) does not apply to an Internal Distribution if immediately after the Plan Distributing and each Controlled remain members of the same Expanded Affiliated Group. Also, as described in part 1.B. of this preamble, section 355(f) prevents section 355 from applying to an Internal Distribution if section 355(e) would otherwise apply to such distribution (that is, if after the Plan, Controlled or the Lower-Tier Distributing is not a member of the affiliated group as a result of an External Distribution). Because section 355 would not apply, the Internal Distribution would be taxable, and the shareholder or security holder would take the Controlled stock or securities with a fair market value basis under section 301(d). Upon the subsequent External Distribution, there typically no longer would be built-in gain in the Controlled stock or securities to result in additional section 355(e) gain.

The Treasury Department and the IRS have determined that the application of section 355(f) may frustrate the policy underlying the first and second gain limitation rules of these temporary regulations in certain cases. Specifically, if there is a Planned 50-percent Acquisition of only a predecessor of the Lower-Tier Distributing (and not of Controlled or the Lower-Tier Distributing), the stock or securities of Controlled are distributed in an Internal Distribution by the Lower-Tier Distributing, and each of the acquisition(s) and the Internal Distribution precedes an External Distribution of Controlled as part of the same Plan, then section 355(f) would be expected to apply to the Internal Distribution. If section 355(f) were to apply, no part of section 355 would apply (including the gain limitation rules under these temporary regulations). Without application of the first and second gain limitation rules, the full amount of built-in gain in the Controlled stock or securities would be recognized by the Lower-Tier Distributing under section 311 on its distribution of Controlled stock, even though section 355(f) would have applied only as a result of a Planned 50-percent Acquisition of a predecessor of the Lower-Tier Distributing (and not of Controlled or the Lower-Tier Distributing). However, there may be circumstances under which taxpayers wish to apply section 355(f) to such distributions instead of the first or second gain limitation rules provided by these temporary regulations.

Accordingly, these temporary regulations provide that section 355(f) does not apply if there is a Planned 50-percent Acquisition of the stock of a predecessor of a Lower-Tier Distributing but not of the stock of the Lower-Tier Distributing or Controlled. As a result, section 355(e), including the first and second gain limitation rules in these temporary regulations, applies to the Internal Distribution. However, the temporary regulations provide that a Lower-Tier Distributing may choose to apply section 355(f) to an Internal Distribution it makes without any limitation on the gain it recognizes, but only if each member of the affiliated group (as defined in section 1504(a)) of which the Lower-Tier Distributing is a member reports the Federal income tax consequences of the Internal Distribution consistent with the application of section 355(f).

These temporary regulations apply to distributions that occur after January 18, 2017. However, these regulations do not apply to a distribution that is: (1) Made pursuant to a binding agreement in effect on or before December 16, 2016, and at all times thereafter, (2) described in a ruling request submitted to the IRS on or before December 16, 2016 for a transaction that is not modified after such date, or (3) described on or before December 16, 2016 in a public announcement or in a filing with the Securities and Exchange Commission. In addition, Distributing and any affiliated group of which it is a member may consistently apply these regulations in their entirety to any distribution occurring after November 22, 2004. If so, taxpayers must consistently apply this section in its entirety to all distributions occurring after November 22, 2004, that are part of the same Plan.

Certain IRS regulations, including this one, are exempt from the requirements of Executive Order 12866, as supplemented and reaffirmed by Executive Order 13563. Therefore, a regulatory impact assessment is not required. These temporary regulations are necessary to provide necessary guidance regarding the identity of predecessor and successor corporations of distributing and controlled corporations, to enable taxpayers to utilize the benefit of certain gain limitation rules with respect to certain section 355(e) transactions, and to enable taxpayers to choose to apply or not to apply section 355(f). These subjects were framed for discussion in a prior notice of proposed rulemaking (REG-145535-02) and modifications to the proposed regulations in these temporary regulations either flow directly from comments received relating to the definition of a Predecessor of Distributing set forth in that notice of proposed rulemaking or permit taxpayers to effectively elect the tax consequences of transactions subject to the proposed regulations. For this reason, it has been determined, pursuant to 5 U.S.C. 553(b)(B), that good cause exists for dispensing with the notice and public comment procedures. However, to minimize their effect on pending transactions, these regulations apply only to distributions occurring 30 days or more after the date this Treasury decision is published in the Federal Register. For the applicability of the Regulatory Flexibility Act (5 U.S.C. chapter 6), refer to the Special Analyses section of the preamble of the cross-referenced notice of proposed rulemaking published in the Proposed Rules section of this issue of the Federal Register. Pursuant to section 7805(f) of the Internal Revenue Code, this regulation has been submitted to the Chief Counsel for Advocacy of the Small Business Administration for comment on its impact on small businesses.

The principal author of these regulations is Lynlee C. Baker, formerly of the Office of Associate Chief Counsel (Corporate). However, other personnel from the Treasury Department and the IRS participated in their development.

Accordingly, 26 CFR part 1 is amended as follows:

Paperwork Reduction Act

The collection of information contained in these final regulations has been reviewed and approved by the Office of Management and Budget in accordance with the Paperwork Reduction Act of 1995 (44 U.S.C. 3507(d)) under control number 1545-2232.

The collection of information in these regulations is in § 1.36B-5. The collection of information is necessary to reconcile advance payments of the premium tax credit and determine the allowable premium tax credit. The collection of information is required to comply with the provisions of section 36B of the Internal Revenue Code (Code). The likely respondents are Marketplaces that enroll individuals in qualified health plans.

The burden for the collection of information contained in these regulations will be reflected in the burden estimate for Form 1095-A, Health Insurance Marketplace Statement, which is the form that the Marketplace will use to submit the information described in the final regulations.

An agency may not conduct or sponsor, and a person is not required to respond to, a collection of information unless it displays a valid control number assigned by the Office of Management and Budget.

This document contains final regulations amending the Income Tax Regulations (26 CFR part 1) under section 36B relating to the health insurance premium tax credit. Section 36B was enacted by the Patient Protection and Affordable Care Act, Public Law 111-148 (124 Stat. 119 (2010)), and the Health Care and Education Reconciliation Act of 2010, Public Law 111-152 (124 Stat. 1029 (2010)) (collectively, the Affordable Care Act). Final regulations under section 36B (TD 9590) were published on May 23, 2012 (77 FR 30,385). These regulations were amended in 2014 by TD 9663, published on May 7, 2014 (79 FR 26,117), and in 2015 by TD 9745, published December 18, 2015 (80 FR 78,974). On July 8, 2016, a notice of proposed rulemaking (REG-109086-15) was published in the Federal Register (81 FR 44,557). Written comments responding to the proposed regulations were received. The comments have been considered in connection with these final regulations and are available for public inspection at www.regulations.gov or on request. No public hearing was requested or held. After consideration of all the comments, the proposed regulations are adopted, in part, as amended by this Treasury decision. The rules proposed under REG-109086-15 on the effect of opt-out arrangements on an employee's required contribution for employer-sponsored coverage have been reserved and the Treasury Department and the IRS expect to finalize those regulations separately (see, section 1.d of this preamble).

A taxpayer is eligible for a premium tax credit only if the taxpayer is an applicable taxpayer. To be an applicable taxpayer, a taxpayer's household income generally must be between 100 percent and 400 percent of the Federal poverty line (FPL) for the taxpayer's family size. The existing regulations in § 1.36B-2(b)(6) allow a taxpayer whose household income is below 100 percent of the applicable FPL to be treated as an applicable taxpayer if (1) the taxpayer or a family member enrolls in a qualified health plan, (2) an Exchange estimates at the time of enrollment that the taxpayer's household income for the taxable year will be between 100 and 400 percent of the applicable FPL, (3) advance credit payments are authorized and paid for one or more months during the taxable year, and (4) the taxpayer would be an applicable taxpayer but for the fact that the taxpayer's household income for the taxable year is below 100 percent of the applicable FPL.

An applicable taxpayer is allowed a premium tax credit for a month only if one or more members of the applicable taxpayer's family is enrolled in one or more qualified health plans through an Exchange and is not eligible for minimum essential coverage in that month. Section 36B(c)(2), § 1.36B-2(a). In general, government-sponsored programs are minimum essential coverage. Section 1.36B-2(c)(1). Under § 1.36B-2(c)(2)(v), an individual is treated as not eligible for Medicaid, the Children's Health Insurance Program (CHIP), or a similar program for a period of coverage under a qualified health plan if, when the individual enrolls in the qualified health plan, an Exchange determines or considers (within the meaning of 45 CFR 155.302(b)) the individual to be ineligible for such program.

In addition, coverage under an eligible employer-sponsored plan is generally minimum essential coverage.1 However, an individual who may (but does not) enroll in an employer-sponsored plan is generally considered eligible for that plan only if the plan is considered affordable and provides minimum value. Section 36B(c)(2)(C), § 1.36B-2(c)(3). In addition, under the employee safe harbor in § 1.36B-2(c)(3)(v)(A)(3), an employer-sponsored plan is not considered affordable for a plan year if, when the employee or a related individual enrolls in a qualified health plan for a period coinciding with the plan year, an Exchange determines that the employer-sponsored plan is not affordable for that plan year.

The existing regulations describing the employee safe harbor contain an exception for reckless disregard for the facts. Under the exception, the safe harbor does not apply in situations in which an Exchange determines that an individual is not eligible for affordable employer-sponsored coverage because an individual, with reckless disregard of the facts, provides incorrect information to the Exchange regarding affordability of the plan.

The proposed regulations add two additional intentional or reckless disregard exceptions to provisions regarding eligibility determinations by the Exchanges. First, to reduce the likelihood that individuals who recklessly or intentionally provide inaccurate information to an Exchange will benefit from the rule in § 1.36B-2(b)(6) (regarding an Exchange determination that the taxpayer's household income for the taxable year will be between 100 and 400 percent of the applicable FPL), the proposed regulations provide that a taxpayer whose household income is below 100 percent of the applicable FPL for the taxpayer's family size does not receive the benefit of that rule if, with intentional or reckless disregard for the facts, the taxpayer provided incorrect information to an Exchange for the year of coverage.

Second, the proposed regulations provide that an individual who was determined or considered by an Exchange to be ineligible for Medicaid, CHIP, or a similar program (such as a Basic Health Program) does not receive the benefit of the rule in § 1.36B-2(c)(2)(v) (regarding an Exchange determination that an individual was not eligible for coverage under Medicaid, CHIP, or a similar program) if, with intentional or reckless disregard for the facts, the individual (or a person claiming a personal exemption for the individual) provided incorrect information to an Exchange for the year of coverage.

In each of the three instances in the existing and proposed section 36B regulations where an intentional or reckless disregard for the facts exception is provided, the proposed regulations clarify that a reckless disregard of the facts occurs if the taxpayer makes little or no effort to determine whether the information provided to the Exchange is accurate under circumstances that demonstrate a substantial deviation from the standard of conduct a reasonable person would observe. The proposed regulations also provide that a disregard of the facts is intentional if the taxpayer knows the information provided to the Exchange is inaccurate.

Commenters asked that the final regulations clarify how the IRS will determine whether an individual has acted with reckless or intentional disregard of the facts, and how these standards will be applied and enforced. Some commenters requested that the final regulations clarify the definition of “reckless disregard” and provide examples. Other commenters expressed concern that the proposed rule would make taxpayers responsible for information provided by third parties who provide assistance with enrollment. Thus, the commenters recommended that the final regulations clarify that an individual is only responsible for information he or she provides to the Exchange and is not responsible for information provided by third parties. The commenters also suggested that the final regulations provide that individuals who use an expert to assist with enrolling in coverage should not be considered to have acted recklessly when relying on the expert's professional advice. Other commenters requested that the final regulations require that individuals be notified of the consequences of potential income-based eligibility fraud.

A commenter also stated that, under the final regulations, the IRS should have the burden of showing that a taxpayer's incorrect information was provided to the Exchange with intentional or reckless disregard for the facts. One commenter suggested that the final regulations clarify that the reckless or intentional disregard for the facts exceptions will be applied on an individual basis. In addition, the commenter asked that the final regulations address how the intentional or reckless disregard for the facts exception, as it applies to the employee safe harbor in § 1.36B-2(c)(3)(v)(A)(3), will be implemented by the Exchanges.

Finally, one commenter requested that the final regulations not adopt the intentional or reckless disregard for the facts exceptions.

After careful consideration of the comments received, the final regulations adopt the intentional or reckless disregard for the facts exception, and the definition of its terms, to the section 36B eligibility safe harbors for household income below 100 percent of the FPL, government programs such as Medicaid, and employer-sponsored coverage. As clarified in the proposed and final regulations, the intentional or reckless disregard for the facts exception applies only when the taxpayer knowingly provides inaccurate information to the Exchange or makes little or no effort to determine whether the information provided is accurate under circumstances that demonstrate a substantial deviation from the standard of conduct of a reasonable person. The commenters' concerns are further addressed in this preamble.

These final regulations, in adopting the intentional or reckless disregard for the facts exceptions set forth in the proposed regulations without modification, do not create new or heightened standards or rules for determining whether a taxpayer acted with intentional or reckless disregard for the facts. Rather, the phrase “intentional or reckless disregard for the facts” as used in the section 36B regulations has a similar meaning and application currently used in other areas of the Code. For example, an intentional or reckless disregard standard also is applied in determining eligibility for other tax credits such as the earned income tax credit and the American opportunity tax credit, see sections 32(k) and 25A(i)(7)(A).

The IRS is responsible for enforcement of the intentional or reckless disregard for the facts exceptions during an examination of a taxpayer's tax return. Thus, the IRS must make the initial showing of facts demonstrating intentional or reckless behavior. Exchanges have no role in enforcing or implementing this standard, although other provisions of law provide Exchanges the authority to impose penalties on individuals who provide incorrect information to an Exchange.

To provide additional clarity, in general, the intentional or reckless disregard for the facts exception only applies to the conduct of the individual attesting to the Exchange. Thus, an individual is only responsible for the information that he or she provides to the Exchange and is not liable for inaccurate information provided by third parties, such as an employer.

An individual's attestations, however, may affect the eligibility of all individuals who are listed on a Marketplace Application for Health Coverage and who the taxpayer intends at the time of enrollment to claim as a dependent. For example, if a taxpayer, with intentional or reckless disregard for the facts, provides incorrect information to an Exchange concerning his household income and receives advance credit payments for coverage of himself and his three dependents, and his actual household income is below 100% of the applicable FPL, then the taxpayer is not an applicable taxpayer and a premium tax credit is not allowed for his coverage or the coverage of his three dependents.

Similarly, many individuals solicit and receive assistance with enrollment and completing the Marketplace Application for Health Coverage. To ensure effective and efficient enrollment through the Exchange, the Department of Health and Human Services uses Navigators, as described at 45 CFR 155.210, to assist potential applicants. In addition, the Marketplaces administer a program for individuals and entities to apply for and receive recognition as a certified application counselor, as defined in 45 CFR 155.225, who may formally offer and provide enrollment assistance to individuals and small businesses. Finally, 45 CFR 155.220 provides standards under which agents and brokers may register and facilitate enrollments through the Marketplaces. Navigators, certified application counselors, agents, and brokers (collectively, authorized advisors) receive comprehensive training on enrollment and completion of a Marketplace Application for Health Coverage, and individuals are encouraged to use them when making enrollment and advance credit payment decisions. Accordingly, for purposes of the final regulations, an individual does not act recklessly when following the advice of an authorized advisor, so long as the individual provided the authorized advisor with necessary and accurate information. Whether reliance on advice provided by a person other than an authorized advisor is reckless will depend on all of the relevant facts and circumstances, including whether reliance was reasonable and whether the taxpayer provided necessary and accurate information to the other person.

To illustrate, assume Individual D is told by a Navigator that the child support payments D receives from her former spouse are included in her household income in determining whether she is eligible for advance credit payments. Relying on that information, D reports on a Marketplace Application for Health Coverage that her household income for the year of coverage will be over 100 percent of the applicable FPL for D's family size, and D receives the benefit of advance credit payments for the year. When filing her tax return for the year of coverage, D learns that child support payments are not included in her household income for the year of coverage and, thus, her household income is actually under 100 percent of the applicable FPL. D is not considered to have acted with intentional or reckless disregard for the facts because she relied on the advice of a Navigator in providing the information that the Marketplace used to determine whether she was eligible for advance credit payments. Thus, the provision in § 1.36B-2(b)(6) that allows a taxpayer whose household income is below 100 percent of the applicable FPL to be treated as an applicable taxpayer will apply to D despite the fact that her household income for the taxable year is below 100 percent of the applicable FPL.

In contrast, assume Individual E told the Navigator assisting with E's Marketplace Application for Health Coverage that E's lowest-cost option for purchasing self-only employer-sponsored coverage that provides minimum value would cost E $10,000 for the taxable year, when in fact E knew that he could purchase such coverage for $5,000. Based on the information E provided, the Navigator advises E that he should indicate on his Marketplace Application for Health Coverage that his required contribution for employer-sponsored coverage is $10,000. E follows this advice and consequently receives the benefit of advance credit payments for the year. During a subsequent examination, the IRS determines that E could have purchased employer-sponsored coverage that provides minimum value for $5,000. For the year of coverage, E is not considered to have reasonably relied on the advice of a Navigator in providing information to the Marketplace because E knowingly provided inaccurate information to the Navigator. Thus, the employee safe harbor in § 1.36B-2(c)(3)(v)(A)(3) does not apply to E.

The proposed regulations provide that the Nonappropriated Fund Health Benefits Program of the Department of Defense (the Program) is treated as an eligible employer-sponsored plan for purposes of determining if an individual is eligible for minimum essential coverage under section 36B. This treatment conforms the regulations under section 36B to the regulations under section 5000A, which treat the Program as an eligible employer-sponsored plan. Thus, if coverage under the Program does not provide minimum value (under § 1.36B-2(c)(3)(vi)) or is not considered affordable (under § 1.36B-2(c)(3)(v)) for an individual who does not enroll in the coverage, he or she is not treated as eligible for minimum essential coverage under the Program for purposes of premium tax credit eligibility.

One commenter requested that the final regulations clarify how Marketplaces will determine and verify whether an offer of coverage under the Program provides minimum value and is affordable. In general, employers are required to provide certain information to employees about the coverage that they offer, including information that is relevant to affordability and minimum value. These regulations do not make any changes to those requirements.

The existing section 36B regulations provide that an individual is eligible for minimum essential coverage through an eligible employer-sponsored plan if the individual had the opportunity to enroll in the plan and the plan is affordable and provides minimum value. Because in some instances individuals may not be allowed an annual opportunity to decide whether to enroll in eligible employer-sponsored coverage, the proposed regulations provide that if an individual declines to enroll in employer-sponsored coverage for a plan year and does not have the opportunity to enroll in that coverage for one or more succeeding plan years, for purposes of section 36B, the individual is treated as ineligible for that coverage for the succeeding plan year or years for which there is no enrollment opportunity. This rule relating to eligibility for employer-sponsored coverage is proposed to apply for taxable years beginning after December 31, 2016.2

One commenter sought clarification on how this rule relating to eligibility for employer-sponsored coverage applies to employers with fiscal-year employer plans. The commenter also requests a delay in the effective date to allow additional time for implementation.

The rule in the proposed regulations relating to eligibility for employer-sponsored coverage applies to fiscal year plans in the same manner that it applies to calendar year plans. For example, assume an employer offers an employee affordable, minimum value coverage for a plan year of April 1, 2017 through March 30, 2018. In addition, under the terms of the employer's plan, if the employee declines the coverage beginning on April 1, 2017, the employee is precluded from enrolling for the plan year of April 1, 2018 through March 30, 2019, absent a special enrollment period. Under the proposed regulations, the employee is treated as eligible for this employer-sponsored coverage only for the period between April 1, 2017 and March 31, 2018. Thus, assuming the employee does not enroll in the employer-sponsored coverage through a special enrollment period, the employee is not considered eligible for this employer coverage during the period April 1, 2018 through March 31, 2019.

The final regulations do not adopt the commenter's suggestion to delay the applicability date of the provision relating to eligibility for employer-sponsored coverage to a year after 2017. The Treasury Department and the IRS believe that it would be unfair to employees and their family members who do not have an annual opportunity to enroll in coverage offered to them by an employer to delay the applicability date of this provision. Consequently, the final regulations provide that this provision is applicable for taxable years beginning after December 31, 2016.

The proposed regulations provide rules on the effect of payments made available under opt-out arrangements on an employee's required contribution for purposes of eligibility for the premium tax credit and an exemption from the section 5000A individual shared responsibility provision.3 An opt-out arrangement is an arrangement under which a payment (called an opt-out payment) is made available to an employee by an employer only if the employee declines coverage under an eligible employer-sponsored plan offered by the employer. Prior to the proposed regulations, the Treasury Department and the IRS released Notice 2015-87, 2015-52 I.R.B. 889, which also addressed the effect of opt-out arrangements on an employee's required contribution.

Several comments on the proposed rule were received. The Treasury Department and the IRS continue to examine the issues raised by opt-out arrangements and expect to finalize regulations on the effect of opt-out arrangements on an employee's required contribution at a later time.

As provided in Notice 2015-87, Q&A 9, and reiterated in the proposed rule, the regulations on opt-out arrangements generally will apply only for periods after the applicability of those final regulations. Until those final regulations are applicable, individuals and employers can continue to rely on the guidance provided in Notice 2015-87 and on the proposed rule, including transition relief as clarified and expanded in section 2.f of the preamble to the proposed rule (for opt-out arrangements contained in collective bargaining agreements in effect before December 16, 2015). See 81 FR 44,561.

Accordingly, until the applicability date of final regulations on opt-out arrangements, individuals may treat opt-out payments made available under unconditional opt-out arrangements (as defined in the Background section of the preamble to the proposed regulations (see 81 FR 44,560)) as increasing the employee's required contribution for purposes of sections 36B and 5000A. In addition, for the same period, an individual who can demonstrate that he or she meets the condition(s) (in addition to declining the employer's health coverage) that must be satisfied to receive an opt-out payment under a conditional opt-out arrangement (as defined in the Background section of the preamble to the proposed regulations (see 81 FR 44,560)), may treat the amount of the conditional opt-out payment as increasing the employee's required contribution for purposes of sections 36B and 5000A.

In contrast, until the applicability date of final regulations on opt-out arrangements, employers are not required to increase an employee's required contribution by the amount of an opt-out payment made available under an opt-out arrangement (other than a payment made available under a non-relief-eligible opt-out arrangement 4 ) for purposes of section 6056 (Form 1095-C, Employer-Provided Health Insurance Offer and Coverage), and an opt-out payment made available under an opt-out arrangement (other than a payment made available under a non-relief-eligible opt-out arrangement) will not be treated as increasing an employee's required contribution for purposes of any potential consequences under section 4980H.

The proposed regulations provide that if an individual who is enrolled in a qualified health plan for which advance credit payments are made informs the Exchange that the individual is or will soon be eligible for other minimum essential coverage and that advance credit payments should be discontinued, but the Exchange does not discontinue advance credit payments for the first calendar month beginning after the month the individual notifies the Exchange, the individual is treated as eligible for the other minimum essential coverage no earlier than the first day of the second calendar month beginning after the first month the individual may enroll in the other minimum essential coverage. Similarly, if a determination is made that an individual is eligible for Medicaid or CHIP but advance credit payments are not discontinued for the first calendar month beginning after the eligibility determination, the individual is treated as eligible for Medicaid or CHIP no earlier than the first day of the second calendar month beginning after the determination.

Commenters noted that the proposed regulations do not address how the IRS will identify and verify scenarios in which an individual requested prospective discontinuation of advance credit payments but there was a delay in the discontinuation. The commenters also pointed out that consumers may request an accelerated termination if the Exchange and health plan issuer allow it and the proposed regulations do not address how these scenarios will be handled. Consequently, the commenters requested that the IRS issue clear instructions and guidance for taxpayers and tax preparers for situations in which there is a delay discontinuing or terminating advance credit payments to ensure that taxpayers will not be subject to penalties or repayment of advance credit payments for which they are not responsible.

The Instructions to Form 8962, Premium Tax Credit (PTC), and Publication 974, Premium Tax Credit, will include a discussion of this rule concerning eligibility for certain non-Marketplace minimum essential coverage when the discontinuance of advance credit payments is delayed. Furthermore, the IRS intends to, in Questions and Answers on www.irs.gov, address situations in which there is a delay in the discontinuance of advance credit payments and the taxpayer is allowed a premium tax credit for a month for which the taxpayer receives a Form 1095-B or Form 1095-C showing that the taxpayer was enrolled in non-Marketplace minimum essential coverage.

Commenters requested that the final regulations acknowledge that this rule concerning eligibility for non-Marketplace minimum essential coverage when there has been a delay in the discontinuance of advance credit payments does not change the obligations of health plan issuers for prior years, notwithstanding that the rule in the proposed regulations may be relied on by taxpayers for taxable years beginning after December 31, 2013. Although the obligations of health plan issuers are generally outside the scope of these regulations, it is the understanding of the Treasury Department and the IRS, in consultation with the Department of Health and Human Services (HHS), that this rule regarding when an individual is eligible for certain non-Marketplace coverage does not affect the obligations of health plan issuers or the deadlines imposed by or on those issuers.

One commenter requested that the rule extend to other situations, such as when an individual receiving the benefit of advance credit payments is incarcerated after disposition of charges. Under section 1312(f)(1)(B) of the Affordable Care Act (42 U.S.C. 18032(f)(1)(B)), incarcerated individuals may not be enrolled through a Marketplace. However, unlike an individual enrolled in minimum essential coverage outside of the Marketplace, if there is a delay in disenrolling the incarcerated individual and discontinuing the advance credit payments, neither section 36B nor its regulations prohibit a taxpayer from claiming a premium tax credit for an incarcerated individual's Marketplace coverage. Thus, the final regulations do not adopt this comment.

The same commenter also requested a change in the rule concerning delays in discontinuance of advance credit payments after a Medicaid or CHIP determination. Under the proposed regulations, if there is a delay in discontinuance of advance credit payments following a Medicaid or CHIP eligibility determination, the individual is treated as eligible for Medicaid or CHIP no earlier than the first day of the second calendar month beginning after the determination. The commenter stated that, under the final regulations, an individual should be treated as eligible for Medicaid or CHIP no earlier than the first day of the second calendar month beginning after the eligibility determination is communicated to the Exchange.

The final regulations do not adopt this comment. The commenter is likely concerned about a situation in which the office that made a Medicaid or CHIP determination for an individual does not promptly notify the Marketplace of that status and the individual remains enrolled in Marketplace coverage with advance credit payments for multiple months. However, individuals enrolled in Marketplace coverage with advance credit payments who are determined eligible for Medicaid or CHIP should also promptly notify their Marketplace to discontinue the advance credit payments. Amending the rule to delay eligibility until the second month after the determination is communicated to the Marketplace effectively allows individuals who fail to promptly communicate with their Marketplaces to be dual enrolled for multiple months with advance credit payments.

Under existing § 1.36B-3(c)(1)(ii), a month is a coverage month for an individual only if the share of the premium for the individual's coverage for the month not covered by advance credit payments is paid by the unextended due date of the income tax return for the year of coverage of the taxpayer claiming a personal exemption for the individual.

As discussed in the preamble to the proposed regulations, instances arise in which an individual is initially determined ineligible for advance credit payments, does not enroll in a qualified health plan pending the individual's appeal of the determination, and is later determined to be eligible for advance credit payments through the appeals process. If the individual then elects to be retroactively enrolled in an Exchange health plan, the deadline for paying premiums for the retroactive coverage may be after the unextended due date for filing an income tax return for the year of coverage. To address this issue, the proposed regulations provide that a taxpayer who is eligible for advance credit payments pursuant to an eligibility appeal for a member of the taxpayer's coverage family who, based on the appeals decision, retroactively enrolls in a qualified health plan, is considered to have met the requirement in § 1.36B-3(c)(1)(ii) for a month if the taxpayer pays the individual's share of the premium for coverage under the plan for the month on or before the 120th day following the date of the appeals decision (the appeal premium payment period).

A commenter opined that to ensure accurate and consistent identification and reporting of payment deadlines, the triggering event that begins the appeal premium payment period under the section 36B regulations should align with the triggering event provided in 45 CFR 155.400(e)(1)(iii), which provides as follows: “For coverage to be effectuated under retroactive effective dates, . . . the deadline for making the binder payment must be no earlier than 30 calendar days from the date the issuer receives the enrollment transaction.” The commenter notes that the date the appeal premium payment period begins under the proposed regulations (the date of the appeals decision) is different from the date the period begins under 45 CFR 155.400(e)(1)(iii) (the date the issuer receives the enrollment transaction) and suggests that the final regulations conform to the language in 45 CFR 155.400(e)(1)(iii) because qualified health plan issuers would not know the date of the appeals decision and would not know whether the premium payment was made within 120 days of the appeals decision. The commenter also opined that the 120-day period in the proposed regulations may be too long for some retroactive enrollment scenarios, such as a situation in which an individual is enrolled in retroactive coverage for only a few months. The commenter also suggested that the appeal premium payment rule in the section 36B regulations should apply only in situations in which the appeal decision is after the individual's unextended due date for filing an income tax return for the year of coverage.

The final regulations do not adopt the suggested changes. The purpose of the appeal premium payment period in the section 36B regulations is to ensure that taxpayers who pay their premiums within a reasonable time following a favorable appeal decision may qualify for a premium tax credit. On the other hand, the payment date rule in 45 CFR 155.400(e)(1)(iii) relates to when the payment must be made to effectuate the retroactive coverage. Qualified health plan issuers need to know the date they received the enrollment transaction and thus whether the premium payments were timely made to effectuate the retroactive coverage, but have no need to know whether the payments were made within 120 days of the appeal decision. In addition, the 120-day period is needed to provide equitable treatment, whether the appeal decision is before or after the unextended due date for filing an income tax return for the year of coverage. It would be inequitable to allow a taxpayer who gets a favorable appeal decision five days after the unextended due date of his or her tax return the benefit of the 120-day appeal premium payment period but not extend the same benefit to a taxpayer who gets an appeal decision five days before the unextended due date.

Under the existing section 36B regulations, if a member of a taxpayer's coverage family is enrolled in a stand-alone dental plan, the portion of the monthly premium for the stand-alone dental plan allocable to pediatric dental benefits is added to the taxpayer's monthly enrollment premium in determining the taxpayer's premium assistance amount for the month. Under the existing regulations, however, the portion of the monthly premium for a stand-alone dental plan allocable to pediatric dental benefits does not affect the taxpayer's applicable benchmark plan premium.

Because the existing regulations frustrate the goal of section 36B of making coverage for essential health benefits affordable to individuals eligible for the premium tax credit, the proposed regulations provide that, if an Exchange offers one or more silver-level qualified health plans that do not include pediatric dental benefits, the applicable benchmark plan is determined by ranking (1) the premiums for the silver-level qualified health plans that include pediatric dental benefits offered by the Exchange and (2) the aggregate of the premiums for the silver-level qualified health plans offered by the Exchange that do not include pediatric dental benefits plus the portion of the premium allocable to pediatric dental benefits for stand-alone dental plans offered by the Exchange. In constructing this ranking, the premium for the lowest-cost silver plan that does not include pediatric dental benefits is added to the premium allocable to pediatric dental benefits for the lowest cost stand-alone dental plan, and similarly, the premium for the second lowest-cost silver plan that does not include pediatric dental benefits is added to the premium allocable to pediatric dental benefits for the second lowest-cost stand-alone dental plan. The second lowest-cost amount from this combined ranking of premiums is the taxpayer's applicable benchmark plan premium. Finally, the proposed regulations provide that the rule for determining the applicable benchmark plan for situations in which an Exchange offers one or more silver-level qualified health plans that do not cover pediatric dental benefits (the pediatric dental rule) is applicable for taxable years beginning after December 31, 2018.

One commenter noted that the effect of the rule in the proposed regulations relating to pediatric dental benefits is that some taxpayers will have a lower monthly premium assistance amount as compared to their monthly premium assistance amount under the existing section 36B regulations. In particular, the commenter pointed to Example 4 of § 1.36B-3(f)(9) of the proposed regulations in which the taxpayer's benchmark plan premium is lower under the rules of the proposed regulations than under the existing section 36B regulations. Under this example, the applicable benchmark plan premium would be based on the lowest-cost rather than the second-lowest-cost silver-level qualified health plan. The commenter suggested that this is likely not a result intended by the Treasury Department and the IRS and recommended that the final regulations include a revision to the language of the proposed regulations to fix this unintended result.

The final regulations adopt the recommendation in this comment. Under the final regulations, if one or more silver-level qualified health plans offered through an Exchange do not cover pediatric dental benefits, the premium for the applicable benchmark plan is determined based on the second lowest-cost option among (i) the silver-level qualified health plans that are offered by the Exchange to the members of the coverage family and that provide pediatric dental benefits; and (ii) the silver-level qualified health plans that are offered by the Exchange to the members of the coverage family that do not provide pediatric dental benefits in conjunction with the second lowest-cost portion of the premium for a stand-alone dental plan (within the meaning of section 1311(d)(2)(B)(ii) of the Affordable Care Act (42 U.S.C. 18031(d)(2)(B)(ii)) offered by the Exchange to the members of the coverage family that is properly allocable to pediatric dental benefits. Thus, under the final regulations, if a taxpayer's coverage family is able to enroll in one or more silver-level qualified health plans that do not provide pediatric dental benefits, the second lowest-cost portion of the premium for a stand-alone dental plan offered by the Exchange to the members of the coverage family that is properly allocable to pediatric dental benefits is added to the premium for each of those silver-level plans in determining the taxpayer's applicable benchmark plan.

One commenter requested clarification on how to determine the portion of the premium of a stand-alone dental plan properly allocable to the cost of pediatric dental benefits. According to the commenter, the portion of a plan's premium that is allocable to each essential health benefit (EHB) is determined by using an EHB factor (a multiplier that applies to the plan and represents the portion of the total benefit package that represents the EHB), and the EHB factor does not change based on who is purchasing the plan and what benefits they are eligible to use. The commenter asks for clarification on if, and how, an EHB factor is to be applied to a stand-alone dental plan and whether a stand-alone dental plan should have a different EHB factor apply based on whether children, or only adults, are enrolled in the plan.

The determination of the portion of the premium of a stand-alone dental plan properly allocable to pediatric dental benefits is outside the scope of these regulations. However, HHS has confirmed that, under its guidance, if no members of a taxpayer's coverage family are eligible for pediatric dental benefits, the portion of the premium allocable to pediatric dental benefits for all stand-alone dental plans the family may enroll in is $0.

Another commenter stated that the pediatric dental rule in the proposed regulations is inconsistent with the provisions of section 36B. Specifically, the commenter contends that the clear meaning of section 36B(b)(3)(E) is that the portion of a stand-alone pediatric dental plan premium allocable to pediatric dental benefits is added only to the enrollment premium, not the benchmark plan premium, in computing the premium tax credit, and is added only for taxpayers who have a family member who enrolls in a stand-alone dental plan. In addition, the commenter opines that the pediatric dental rule in the proposed regulations is overly complex and provides minimal benefit to a small group of taxpayers.

The Treasury Department and the IRS disagree that the pediatric dental rule is inconsistent with the provisions of section 36B. Although, as noted by the commenter, section 36B(b)(3)(E) relates only to the portion of a stand-alone dental plan premium that is added to a taxpayer's enrollment premium, the proposed regulations do not rely upon an interpretation of section 36B(b)(3)(E). Rather, as discussed in the preamble of the proposed regulations, the pediatric dental rule is based on statutory references to “self-only coverage” and “family coverage” in section 36B(b)(3)(B)(ii), and is consistent with the overall goal of section 36B, which is to make affordable the coverage of each of the essential health benefits described in section 1302(b) of the Affordable Care Act for individuals eligible for a premium tax credit. As discussed, that coverage may be obtained from either a qualified health plan covering all of the essential health benefits or one covering all benefits except pediatric dental in combination with a stand-alone dental plan. Finally, although the pediatric dental rule does add some complexity to the determination of a taxpayer's applicable benchmark plan, the rule will, in general, not result in more complexity to taxpayers because they generally use the benchmark plan premium amount reported to them by Exchanges to compute their premium tax credit. In addition, the pediatric dental rule in the final regulations, which, for stand-alone dental plans, considers just the second lowest-cost portion of the premium properly allocable to pediatric dental benefits in the determination of a taxpayer's applicable benchmark plan, is less complex than the rule in the proposed regulations, which requires consideration of both the lowest-cost and the second lowest-cost portion.

Other commenters supported the pediatric dental rule and asked that taxpayers be allowed to compute their applicable benchmark plan using the pediatric dental rule in the proposed regulations for taxable years beginning before January 1, 2019. However, taxpayers must know their benchmark plan premium amount to properly compute their premium tax credit and, consequently, Exchanges must provide this information to taxpayers. Because this pediatric dental rule involves a change in the manner in which a taxpayer's applicable benchmark plan is determined, Exchanges need time to implement the new rule and have indicated that they are likely unable to do so for taxable years beginning before January 1, 2019. Consequently, the final regulations do not adopt this comment.

Under existing § 1.36B-3(f)(4), if members of a taxpayer's family reside in different states and enroll in separate qualified health plans, the premium for the taxpayer's applicable benchmark plan is the sum of the premiums for the applicable benchmark plans for each group of family members living in the same state. Because this rule may not accurately reflect the cost of available coverage for a taxpayer whose family members reside in different locations in the same state, the proposed regulations provide that if members of a taxpayer's coverage family reside in different locations, whether within the same state or in different states, the taxpayer's benchmark plan premium is the sum of the premiums for the applicable benchmark plans for each group of coverage family members residing in different locations, based on the plans offered to the group through the Exchange for the rating area where the group resides. The proposed regulations provide that the rules for calculating the premium tax credit operate the same for families residing in multiple locations within a state and families residing in multiple states.

One commenter expressed concern that the rule in the proposed regulations concerning the benchmark plan premium for members of the coverage family residing in different locations could result in unequal treatment of separate families, particularly in Marketplaces in which there are many rating areas within a relatively small geographic area and numerous plans are available for enrollment in many or all rating areas. Thus, the commenter asked that Marketplaces be allowed to use their own benchmark plan rating methodology rather than the rule in the proposed regulations for members of the coverage family who reside in different locations within a state.

The final regulations do not adopt this comment. The amount of a taxpayer's premium tax credit depends on the taxpayer's applicable benchmark plan and the premium for that plan. Allowing Exchanges to use different methodologies to determine the benchmark plan premium could result in inequitable treatment of taxpayers in different locations. One Exchange's methodology would undoubtedly provide a more generous benchmark plan premium for taxpayers who enroll in a qualified health plan through that Exchange as compared to taxpayers who enroll through another Exchange using a different methodology.

Another commenter asked that the final regulations clarify how the rule relating to family members residing in different locations works for farm workers who frequently migrate to find agricultural work, especially those who stay enrolled in the same plan despite the relocations. The rule concerning family members residing in different locations has no unique effect for individuals who frequently move to new locations and thus the final regulations include no new rules addressing this situation. HHS regulations at 45 CFR 155.335(e) require individuals who move to a new rating area to inform the Exchange in the new rating area of their move. The move may require a recomputation of the individual's advance credit payments, or perhaps necessitate the individual to enroll in a new qualified health plan, both of which are determined by the Exchange in the new rating area.

Existing § 1.36B-3(f)(3) provides that if one or more silver-level plans offered through an Exchange do not cover all members of a taxpayer's coverage family under one policy (for example, because an issuer will not cover a taxpayer's dependent parent on the same policy the taxpayer enrolls in), the premium for the applicable benchmark plan may be the premium for a single policy or for more than one policy, whichever is the second lowest-cost silver option. Because this rule is complex for taxpayers and difficult for Exchanges and the IRS to administer, the proposed regulations delete the existing rule and provide a new rule in its place. Under the proposed regulations, if a silver-level plan offers coverage to all members of a taxpayer's coverage family who reside in the same location under a single policy, the plan premium taken into account for purposes of determining the applicable benchmark plan is the premium for that policy. However, if a silver-level plan would require multiple policies to cover all members of a taxpayer's coverage family who reside in the same location, the plan premium taken into account for purposes of determining the applicable benchmark plan is the sum of the premiums for self-only policies under the plan for each member of the coverage family who resides in the same location. The proposed regulations also requested comments on an alternative rule under which the sum of the premiums for self-only policies under a plan for each member of the taxpayer's coverage family would always be used to determine a taxpayer's applicable benchmark plan.

One commenter asked that the final regulations adopt the alternative rule discussed in the preamble to the proposed regulations concerning the determination of a taxpayer's applicable benchmark plan, not the rules in the proposed regulations, which vary based on whether a single policy or multiple policies are needed to cover a taxpayer's family. The commenter opined that this alternative rule has the potential to streamline the applicable benchmark plan calculation with minimal impact to the amount of premium tax credit a taxpayer is allowed.

The final regulations do not adopt this comment. Under HHS regulations, the qualified health plan premium for a taxpayer with three dependents is not increased by adding one or more additional dependents to the taxpayer's family. 45 CFR 147.102(c)(1). That is, the portion of the premium due to the taxpayer's dependents is capped at three dependents and does not increase as a result of adding more dependents to the family. However, if the alternative rule suggested by the commenter is adopted, a taxpayer with four or more dependents would have a higher benchmark plan premium than a similarly-situated taxpayer with three dependents even though the additional dependents do not add to the cost of the coverage for the taxpayer with four or more dependents. Thus, aggregating the sum of the self-only policies under a plan for each member of a taxpayer's coverage family may provide an undue benefit to taxpayers with four or more dependents. Accordingly, this approach should be limited to situations in which a silver-level plan requires multiple policies to cover all members of a taxpayer's coverage family who reside in the same location.

Under the proposed regulations, the changes to the rules concerning the determination of a taxpayer's applicable benchmark plan are proposed to be applicable for tax years beginning after December 31, 2018. Commenters noted that State-based Marketplaces often have very different eligibility and enrollment systems from the Federally-Facilitated Marketplace and from each other, and the changes to the applicable benchmark plan rules will require significant changes to their systems and long timelines for implementation. Consequently, the commenters asked that the Treasury Department and the IRS provide flexibility to State-based Marketplaces and provide ample time between the effective date of the final regulations and the date the states must implement the benchmark plan changes.

The final regulations do not alter the applicability date for the rule for computing the benchmark plan. Doing so would permit inequitable treatment of taxpayers in different locations and potentially have an adverse impact on certain taxpayers. Thus, the final regulations provide that the changes to the benchmark plan rules are applicable for taxable years beginning after December 31, 2018.

The proposed regulations provide that when multiple families enroll in a single qualified health plan and advance credit payments are made for the coverage, the enrollment premiums reported by the Exchange for each family are the family's allocable share of the enrollment premiums, which is based on the proportion of each family's applicable benchmark plan premium. One commenter requested clarification that this reporting rule applies only in situations in which a taxpayer requests financial assistance through advance credit payments or cost-sharing reductions, or is seeking to enroll in Medicaid. The final regulations, like the proposed regulations, provide that the Exchange must report a portion of the plan's enrollment premium to each enrolled family if multiple families enroll in a single qualified health plan and advance credit payments are made for coverage under the plan. The portion reported is based on the proportion of each family's applicable benchmark plan premium.

The proposed regulations also provide that, if an individual's coverage in a qualified health plan is terminated before the last day of a month, or if an individual is enrolled in coverage after the first day of a month and the coverage is effective on the date of the individual's birth, adoption, or placement for adoption or in foster care, or on the effective date of a court order, an Exchange must report the enrollment premiums for the month (excluding the premium allocated to benefits in excess of essential health benefits), reduced by any amount that was refunded because the enrollment was for less than a full month. This reporting requirement was proposed to apply for taxable years beginning after December 31, 2016.

One commenter expressed concern with the rule requiring that Exchanges reduce the reported enrollment premium by any amounts of the enrollment premiums that are refunded by the issuer of the qualified health plan. The commenter stated that this requirement is not something that currently is captured by its reporting system, and updating the system would require an effort that would be out of scale with the small size of the population enrolled for less than a full month. The commenter suggests that refund information could be obtained when a taxpayer computes his or her premium tax credit on the taxpayer's Federal income tax return. Alternatively, the commenter requested that this requirement become effective for a taxable year later than 2017. To provide enrollment systems additional time to implement the updates and system modifications necessary to accurately report refunds for partial months of coverage, the final regulations delay the applicability date for this rule by two years, so that it applies for taxable years beginning after December 31, 2018. Exchanges able to comply with the reporting rule before that date are encouraged to do so.

Except as otherwise provided, these final regulations apply for taxable years beginning after December 31, 2016. The rules relating to the benchmark plan premium described in section 3 of this preamble and the rules relating to reporting by the Exchanges described in section 4 of this preamble apply for taxable years beginning after December 31, 2018. As discussed in the Effective/Applicability Date section of the preamble to the proposed regulations, taxpayers may rely on certain provisions of the proposed regulations for taxable years ending after December 31, 2013.

See section 1.d of this preamble for a discussion of the effective date/applicability date for proposed regulations regarding opt-out arrangements.

Certain IRS regulations, including these, are exempt from the requirements of Executive Order 12866, as supplemented and reaffirmed by Executive Order 13563. Therefore, a regulatory assessment is not required.

It is hereby certified that these regulations will not have a significant economic impact on a substantial number of small entities. This certification is based on the fact that the information collection required under these regulations is imposed under section 36B. Consistent with the statute, these regulations require Exchanges to report certain coverage information to the IRS and to furnish a statement to the responsible individual who enrolled an individual or family in the coverage. These regulations merely provide the method for reporting the information and furnishing the statements required under section 36B. Moreover, the regulations attempt to minimize the burden associated with this collection of information by limiting reporting to the information that the IRS requires to administer the premium tax credit.

Based on these facts, a Regulatory Flexibility Analysis under the Regulatory Flexibility Act (5 U.S.C. chapter 6) is not required.

Pursuant to section 7805(f) of the Code, the notice of proposed rulemaking that preceded this regulation was submitted to the Chief Counsel for Advocacy of the Small Business Administration for comment on its impact on small business. No comments were received.

The principal authors of these proposed regulations are Lisa Mojiri-Azad, Shareen S. Pflanz, and Stephen J. Toomey of the Office of Associate Chief Counsel (Income Tax and Accounting). However, other personnel from the IRS and the Treasury Department participated in the development of the regulations.

Accordingly, 26 CFR parts 1 and 301 are amended as follows: