Federal Register Vol. 81, No.244,

Federal Register Volume 81, Issue 244 (December 20, 2016)

Page Range92499-93569
FR Document

81_FR_244
Current View
Page and SubjectPDF
81 FR 92813 - Sunshine Act NoticePDF
81 FR 92880 - Sunshine Act Meeting NoticePDF
81 FR 92499 - To Implement the Nepal Preference Program and for Other PurposesPDF
81 FR 92626 - Narrowing the Digital Divide Through Installation of Broadband Infrastructure in HUD-Funded New Construction and Substantial Rehabilitation of Multifamily Rental HousingPDF
81 FR 92594 - Receiverships for Uninsured National BanksPDF
81 FR 92966 - Update to U.S. Department of Transportation's NEPA Implementing ProceduresPDF
81 FR 92760 - Endangered and Threatened Wildlife and Plants: Notice of 12-Month Finding on a Petition To List the Gulf of Mexico Bryde's Whale as Endangered Under the Endangered Species Act (ESA); CorrectionPDF
81 FR 92774 - Confidentiality Pledge Revision NoticePDF
81 FR 92957 - Requested Administrative Waiver of the Coastwise Trade Laws: Vessel KALULU; Invitation for Public CommentsPDF
81 FR 92957 - Requested Administrative Waiver of the Coastwise Trade Laws: Vessel ANDANTE MAR; Invitation for Public CommentsPDF
81 FR 92958 - Request for Comments of a Previously Approved Information CollectionPDF
81 FR 92758 - Receipt of Several Pesticide Petitions Filed for Residues of Pesticide Chemicals in or on Various CommoditiesPDF
81 FR 92793 - Applications for New Awards; Teacher and School Leader Incentive ProgramPDF
81 FR 92855 - Notice of Lodging of Proposed Consent Decree Under the Comprehensive Response, Compensation, and Liability Act and the Clean Water ActPDF
81 FR 92940 - Agency Information Collection Activities: Requests for Comments; Clearance of Renewed Approval of Information Collection: Pilot Records Improvement Act of 1996 (PRIA)/Pilot Records Database (PRD)PDF
81 FR 92958 - Reports, Forms, and Record Keeping RequirementsPDF
81 FR 92852 - Heavy Forged Hand Tools From ChinaPDF
81 FR 92848 - Assessment of Eligible and Ineligible Lands for Consideration as Wilderness Areas: Big South Fork National River and Recreation Area and Obed Wild and Scenic RiverPDF
81 FR 92947 - Commercial Driver's License Standards: Application for Exemption; New Prime, Inc. (Prime)PDF
81 FR 92975 - Open Meeting of the Federal Advisory Committee on InsurancePDF
81 FR 92860 - Southern Nuclear Operating Company, Inc., Vogtle Electric Generating Plant, Units 3 and 4; Initial Test Program ChangesPDF
81 FR 92881 - Southern Nuclear Operating Company, Inc., Vogtle Electric Generating Plant, Units 3 and 4; Reconciliation of Tier 1 Valve DifferencesPDF
81 FR 92814 - Formations of, Acquisitions by, and Mergers of Bank Holding CompaniesPDF
81 FR 92854 - Notice of Lodging of Proposed Consent Decree Under the Clean Water ActPDF
81 FR 92836 - Housing Opportunity Through Modernization Act of 2016: Solicitation of Comments on Implementation of Public Housing Income Limit: Extension of Comment PeriodPDF
81 FR 92784 - Certain Cased Pencils From the People's Republic of China: Amended Final Results of Antidumping Duty New Shipper Review; 2014-2015PDF
81 FR 92783 - Certain Polyester Staple Fiber From the Republic of Korea and Taiwan: Final Results of Expedited Sunset Review of the Antidumping Duty OrdersPDF
81 FR 92938 - Overseas Schools Advisory Council Notice of MeetingPDF
81 FR 92821 - Sun Pharmaceutical Industries, Inc.; Withdrawal of Approval of 28 Abbreviated New Drug ApplicationsPDF
81 FR 92836 - Request for Comments and Recommendations on a Revised Methodology To Track the Extent to Which Moving to Work Agencies Continue To Serve Substantially the Same Number of Eligible FamiliesPDF
81 FR 92550 - Supplemental Nutrition Assistance Program PromotionPDF
81 FR 92840 - Section 8 Housing Assistance Payments ProgramAnnual Adjustment Factors, Fiscal Year 2017PDF
81 FR 92843 - 60-Day Notice of Proposed Information Collection: Application for Resident Opportunity & Self Sufficiency (ROSS) Grant FormsPDF
81 FR 92778 - Civil Nuclear Trade Advisory Committee: Cancellation of the Meeting of the Civil Nuclear Trade Advisory CommitteePDF
81 FR 92787 - Announcing Request for Nominations for Public-Key Post-Quantum Cryptographic AlgorithmsPDF
81 FR 92953 - Federal Fiscal Year 2017 Annual List of Certifications and Assurances for Federal Transit Administration Grants and Cooperative AgreementsPDF
81 FR 92834 - Question-Based Review for the Chemistry, Manufacturing, and Controls Technical Section of Animal Drug Applications; Guidance for Industry; AvailabilityPDF
81 FR 92839 - 60-Day Notice of Proposed Information Collection: HUD Conditional Commitment/Statement of Appraised ValuePDF
81 FR 92843 - 60-Day Notice of Proposed Information Collection: Exigent Health and Safety Deficiency Correction CertificationPDF
81 FR 92859 - South Carolina Electric & Gas Company; South Carolina Public Service Authority; Virgil C. Summer Nuclear Station, Units 2 and 3; Containment Hydrogen Igniter ChangesPDF
81 FR 92861 - Southern Nuclear Operating Company, Inc., Vogtle Electric Generating Plant, Units 3 and 4; Compressed and Instrument Air System High Pressure Air Subsystem ChangesPDF
81 FR 92776 - Census Bureau 2020 Advisory CommitteePDF
81 FR 92816 - Common Formats for Reporting on Health Care Quality and Patient SafetyPDF
81 FR 92814 - Agency Information Collection Activities: Proposed Collection; Comment RequestPDF
81 FR 92949 - Qualification of Drivers; Exemption Applications; DiabetesPDF
81 FR 92692 - Freedom of Information Act RegulationsPDF
81 FR 92770 - Codex Alimentarius Commission: Meeting of the Codex Committee on Fats and OilsPDF
81 FR 92772 - Notice of Request for a New Information Collection: In-Home Food Safety Behaviors and Consumer Education: Annual Observational StudyPDF
81 FR 92789 - Proposed Information Collection; Comment Request; Southeast Region Permit Family of FormsPDF
81 FR 92848 - Announcement of Requirements and Registration for a Prize Competition Titled: Sub-Seasonal Climate Forecast RodeoPDF
81 FR 92944 - Qualification of Drivers; Exemption Applications; VisionPDF
81 FR 92792 - Notice of Intent To Grant an Exclusive License; SpringStar Inc.PDF
81 FR 92791 - Notice of Intent To Grant an Exclusive License; Adaptive Phage Therapeutics, Inc.PDF
81 FR 92946 - Qualification of Drivers; Exemption Applications; DiabetesPDF
81 FR 92941 - Qualification of Drivers; Exemption Applications; DiabetesPDF
81 FR 92952 - Qualification of Drivers; Exemption Applications; VisionPDF
81 FR 92792 - Notice of Intent To Grant Exclusive Patent License; Solar Tech, Inc.PDF
81 FR 92792 - Notice of Intent To Grant an Exclusive License; Rotunda Scientific Technologies, LLCPDF
81 FR 92845 - Endangered and Threatened Wildlife and Plants; Jaguar Draft Recovery PlanPDF
81 FR 92847 - Eastern States: Filing of Plat of SurveyPDF
81 FR 92792 - Notice of Intent To Grant an Exclusive License; DBC Medical Innovations, LLCPDF
81 FR 92778 - Aluminum Extrusions from the People's Republic of China: Final Results and Partial Rescission of Countervailing Duty Administrative Review; 2014PDF
81 FR 92852 - Certain Pumping Bras Commission Determination To Review In-Part an Initial Determination Granting Complainant's Motion for Summary Determination of Section 337 Violation by Defaulted RespondentsPDF
81 FR 92964 - Mercedes-Benz USA, LLC, Receipt of Petition for Decision of Inconsequential NoncompliancePDF
81 FR 92963 - General Motors, LLC, Grant of Petition for Decision of Inconsequential NoncompliancePDF
81 FR 92664 - Drawbridge Operation Regulation; Calcasieu River, Westlake, LAPDF
81 FR 92663 - Drawbridge Operation Regulation; Pearl River, LA/MSPDF
81 FR 92938 - Reporting and Recordkeeping Requirements Under OMB ReviewPDF
81 FR 92770 - Submission for OMB Review; Comment RequestPDF
81 FR 92925 - Self-Regulatory Organizations; Chicago Board Options Exchange, Incorporated; Notice of Filing and Immediate Effectiveness of a Proposed Rule Change To Move the Web Site and Vendor Through Which It Sells and Disseminates Open and Close Volume Data on the CBOEPDF
81 FR 92923 - Self-Regulatory Organizations; NYSE MKT LLC; Notice of Filing and Immediate Effectiveness of Proposed Change Modifying the NYSE Amex Options Fee SchedulePDF
81 FR 92889 - Self-Regulatory Organizations; NYSE MKT LLC; Notice of Filing and Immediate Effectiveness of Proposed Change Modifying the NYSE Amex Options Fee SchedulePDF
81 FR 92919 - Self-Regulatory Organizations; BOX Options Exchange LLC; Notice of Filing and Immediate Effectiveness of a Proposed Rule Change To Detail How Complex Orders Will Execute Through the Solicitation Auction MechanismPDF
81 FR 92935 - Self-Regulatory Organizations; The NASDAQ Stock Market LLC; Notice of Filing and Immediate Effectiveness of Proposed Rule Change To Modify Distributor Fees for ITTO and BONO Data FeedsPDF
81 FR 92928 - Self-Regulatory Organizations; C2 Options Exchange, Incorporated; Order Approving a Proposed Rule Change Relating to Price Protection Mechanisms and Risk ControlsPDF
81 FR 92927 - Self-Regulatory Organizations; The Nasdaq Stock Market LLC; Notice of Designation of a Longer Period for Commission Action on a Proposed Rule Change To Amend Rule 4702 To Adopt a New Retail Post-Only OrderPDF
81 FR 92928 - Self-Regulatory Organizations; Bats BZX Exchange, Inc.; Notice of Designation of a Longer Period for Commission Action on Proposed Rule Change To Amend Exchange Rule 11.23, Auctions, To Enhance the Reopening Auction Process Following a Trading Halt Declared Pursuant to the Plan To Address Extraordinary Market Volatility Pursuant to Rule 608 of Regulation NMSPDF
81 FR 92885 - Self-Regulatory Organizations; The Nasdaq Stock Market LLC; Notice of Designation of a Longer Period for Commission Action on Proposed Rule Change To Enhance the Reopening Auction Process Following a Trading Halt Declared Pursuant to the Plan To Address Extraordinary Market VolatilityPDF
81 FR 92892 - Self-Regulatory Organizations; NYSE Arca, Inc.; Notice of Designation of a Longer Period for Commission Action on a Proposed Rule Change To List and Trade Shares of the ForceShares Daily 4X US Market Futures Long Fund and ForceShares Daily 4X US Market Futures Short Fund Under Commentary .02 to NYSE Arca Equities Rule 8.200PDF
81 FR 92886 - Self-Regulatory Organizations; NASDAQ BX, Inc.; Notice of Filing and Immediate Effectiveness of Proposed Rule Change To Amend Rule 4770 (Compliance With Regulation NMS Plan To Implement a Tick Size Pilot)PDF
81 FR 92883 - Self-Regulatory Organizations; Chicago Board Options Exchange, Incorporated; Notice of Filing and Immediate Effectiveness of a Proposed Rule Change To Amend the Fees SchedulePDF
81 FR 92892 - Self-Regulatory Organizations; NYSE Arca, Inc.; Notice of Filing and Immediate Effectiveness of Proposed Rule Change Amending NYSE Arca Rule 10.17 and NYSE Arca Equities Rule 10.15PDF
81 FR 92932 - Self-Regulatory Organizations; The NASDAQ Stock Market LLC; Notice of Filing and Immediate Effectiveness of Proposed Rule Change To Amend Rule 4770 (Compliance With Regulation NMS Plan To Implement a Tick Size Pilot)PDF
81 FR 92916 - Self-Regulatory Organizations; NASDAQ PHLX LLC; Notice of Filing and Immediate Effectiveness of Proposed Rule Change To Amend Rule 3317 (Compliance With Regulation NMS Plan To Implement a Tick Size Pilot)PDF
81 FR 92809 - Notice of ApplicationsPDF
81 FR 92807 - National Fuel Gas Supply Corporation; Notice of Intent To Prepare an Environmental Assessment for the Proposed Heath Compressor Station Abandonment and Line FM-92 Refunctionalization Project and Request for Comments on Environmental IssuesPDF
81 FR 92811 - Combined Notice of Filings #2PDF
81 FR 92812 - Combined Notice of Filings #1PDF
81 FR 92810 - Records Governing Off-the-Record Communications; Public NoticePDF
81 FR 92811 - PPA Grand Johanna LLC; Supplemental Notice That Initial Market- Based Rate Filing Includes Request for Blanket Section 204 AuthorizationPDF
81 FR 92813 - InterGen Energy Solutions, LLC; Supplemental Notice That Initial Market-Based Rate Filing Includes Request for Blanket Section 204 AuthorizationPDF
81 FR 92812 - Combined Notice of Filings #2PDF
81 FR 92808 - Combined Notice of Filings #1PDF
81 FR 92785 - Welded Carbon Steel Standard Pipe and Tube Products From Turkey: Final Results of Antidumping Duty Administrative Review and Final Determination of No Shipments; 2014-2015PDF
81 FR 92891 - Minnesota Life Insurance Company, et al; Notice of ApplicationPDF
81 FR 92897 - Equus Total Return, Inc.; Notice of ApplicationPDF
81 FR 92901 - In the Matter of the Application of MIAX PEARL, LLC for Registration as a National Securities Exchange; Findings, Opinion, and Order of the CommissionPDF
81 FR 92885 - Order Approving Public Company Accounting Oversight Board Budget and Annual Accounting Support Fee for Calendar Year 2017PDF
81 FR 92777 - Notice of Petitions by Firms for Determination of Eligibility To Apply for Trade Adjustment AssistancePDF
81 FR 92853 - Sulfanilic Acid From China and India; Scheduling of Expedited Five-Year ReviewsPDF
81 FR 92694 - Suspension of Community EligibilityPDF
81 FR 92822 - Authorization of Emergency Use of an In Vitro Diagnostic Device for Detection of Zika Virus; AvailabilityPDF
81 FR 92882 - Product ChangePriority Mail Negotiated Service AgreementPDF
81 FR 92847 - Notice of Relocation: Consolidation and Change of Address for Oklahoma Field Office-Tulsa and Moore Field StationPDF
81 FR 92883 - Product ChangePriority Mail Negotiated Service AgreementPDF
81 FR 92832 - Determination of Regulatory Review Period for Purposes of Patent Extension; COSENTYXPDF
81 FR 92835 - Agency Information Collection Activities: Electronic Visa Update SystemPDF
81 FR 92818 - Mine Safety and Health Research Advisory Committee: Notice of Charter RenewalPDF
81 FR 92856 - Agency Information Collection Activities; Submission for OMB Review; Comment Request; Attestation by Employers Using Alien Crewmembers for Longshore Activities in U.S. PortsPDF
81 FR 92820 - Board of Scientific Counselors, Office of Infectious Diseases (BSC, OID)PDF
81 FR 92821 - Request for Nominations of Candidates To Serve on the Board of Scientific Counselors (BSC), National Institute for Occupational Safety and Health (NIOSH)PDF
81 FR 92819 - Advisory Board on Radiation and Worker Health (ABRWH or the Advisory Board), Subcommittee for Dose Reconstruction Reviews (SDRR), National Institute for Occupational Safety and Health (NIOSH)PDF
81 FR 92818 - Advisory Board on Radiation and Worker Health (ABRWH or the Advisory Board), Subcommittee on Procedures Review (SPR), National Institute for Occupational Safety and Health (NIOSH)PDF
81 FR 92820 - Advisory Board on Radiation and Worker Health (ABRWH or the Advisory Board), National Institute for Occupational Safety and Health (NIOSH)PDF
81 FR 92819 - Disease, Disability, and Injury Prevention and Control Special Emphasis Panel (SEP): Initial ReviewPDF
81 FR 92882 - Product ChangePriority Mail and First-Class Package Service Negotiated Service AgreementPDF
81 FR 92857 - Advisory Board on Toxic Substances and Worker Health: Working Group on PresumptionsPDF
81 FR 92855 - Agency Information Collection Activities; Submission for OMB Review; Comment Request; Coal Mine Rescue Teams: Arrangements for Emergency Medical Assistance and Transportation for Injured Persons- Agreements, Reporting Requirements, and Posting RequirementsPDF
81 FR 92844 - Endangered Species; Marine Mammals; Receipt of Applications for PermitPDF
81 FR 92937 - Notice of Surrender of License of Small Business Investment CompanyPDF
81 FR 92939 - Forty Sixth RTCA SC-224 PlenaryPDF
81 FR 92976 - Reimbursement for Caskets and Urns for Burial of Unclaimed Remains in a National CemeteryPDF
81 FR 92791 - Submission for OMB Review; Comment Request; Secrecy and License To ExportPDF
81 FR 92805 - Agency Information Collection Activities; Submission to the Office of Management and Budget for Review and Approval; Comment Request; NCER-NPNCER-NPSAS Grant StudyFinancial Aid Nudges 2017: A National Experiment To Increase Retention of Financial Aid and College PersistencePDF
81 FR 92806 - Agency Information Collection Activities; Submission to the Office of Management and Budget for Review and Approval; Comment Request; NCER-NPSAS Grant StudyConnecting Students With Financial Aid (CSFA) 2017: Testing the Effectiveness of FAFSA Interventions on College OutcomesPDF
81 FR 92858 - Notice of Intent to Grant Partially Exclusive LicensePDF
81 FR 92790 - Gulf of Mexico Fishery Management Council; Public MeetingPDF
81 FR 92814 - Change in Bank Control Notices; Acquisitions of Shares of a Bank or Bank Holding CompanyPDF
81 FR 92814 - Formations of, Acquisitions by, and Mergers of Savings and Loan Holding CompaniesPDF
81 FR 92974 - Agency Information Collection Activities: Information Collection Renewal; Comment Request: Record and Disclosure RequirementsConsumer Financial Protection Bureau Regulations B, C, E, M, Z, and DD and Board of Governors of the Federal Reserve System Regulation CCPDF
81 FR 92788 - Taking and Importing Marine Mammals; Taking Marine Mammals Incidental to Geophysical Surveys in the Gulf of MexicoPDF
81 FR 92938 - Monarch Ventures Inc.Acquisition of ControlQuick Coach Lines Ltd. and Vancouver Tours and Transit Ltd. D/B/A Charter Bus Lines of British ColumbiaPDF
81 FR 92791 - Divert Activities and Exercises, Commonwealth of the Northern Mariana IslandsPDF
81 FR 92603 - Postmarketing Safety Reporting for Combination ProductsPDF
81 FR 93448 - Metropolitan Planning Organization Coordination and Planning Area ReformPDF
81 FR 92666 - Revisions to the Unregulated Contaminant Monitoring Rule (UCMR 4) for Public Water Systems and Announcement of Public MeetingPDF
81 FR 92755 - Approval and Promulgation of State Implementation Plans; Interstate Transport for UtahPDF
81 FR 92549 - Privacy Act of 1974: Implementation of Exemptions; Department of Homeland Security DHS/U.S. Customs and Border Protection (CBP)-023 Border Patrol Enforcement Records (BPER) System of RecordsPDF
81 FR 92696 - State Long-Term Care Ombudsman ProgramsPDF
81 FR 92863 - Biweekly Notice; Applications and Amendments to Facility Operating Licenses and Combined Licenses Involving No Significant Hazards ConsiderationsPDF
81 FR 92703 - Unfair Practices and Undue Preferences in Violation of the Packers and Stockyards ActPDF
81 FR 92723 - Poultry Grower Ranking SystemsPDF
81 FR 92566 - Scope of Sections 202(a) and (b) of the Packers and Stockyards ActPDF
81 FR 92761 - Fisheries of the Northeastern United States; Amendment 18 to the Northeast Multispecies Fishery Management PlanPDF
81 FR 92564 - Domestic Dates Produced or Packed in Riverside County, California; Decreased Assessment RatePDF
81 FR 92557 - Cherries Grown in Designated Counties in Washington; Increased Assessment RatePDF
81 FR 92940 - Notice of Final Federal Agency Actions on Franklin Boulevard: I- 5McVay Highway. City of Springfield, Lane County, ORPDF
81 FR 92559 - Almonds Grown in California; Increased Assessment RatePDF
81 FR 93030 - Runaway and Homeless YouthPDF
81 FR 93489 - Federal Acquisition Regulation; Federal Acquisition Circular 2005-93; Small Entity Compliance GuidePDF
81 FR 93481 - Federal Acquisition Regulations; Payment of SubcontractorsPDF
81 FR 93476 - Federal Acquisition Regulation; Privacy TrainingPDF
81 FR 93476 - Federal Acquisition Regulation; Federal Acquisition Circular 2005-94; IntroductionPDF
81 FR 92665 - Approval and Limited Approval and Limited Disapproval of Air Quality Implementation Plans; California; Northern Sonoma County Air Pollution Control District; Stationary Source Permits; Correcting AmendmentPDF
81 FR 92654 - Interstate Compact on Educational Opportunity for Military ChildrenPDF
81 FR 92639 - Savings Arrangements Established by Qualified State Political Subdivisions for Non-Governmental EmployeesPDF
81 FR 92697 - Fisheries of the Exclusive Economic Zone Off Alaska; Bering Sea and Aleutian Islands Crab Rationalization ProgramPDF
81 FR 92753 - Airworthiness Directives; The Boeing Company AirplanesPDF
81 FR 92747 - Airworthiness Directives; Dassault Aviation AirplanesPDF
81 FR 92740 - Airworthiness Directives; The Boeing Company AirplanesPDF
81 FR 92742 - Airworthiness Directives; The Boeing Company AirplanesPDF
81 FR 92745 - Airworthiness Directives; Learjet, Inc. AirplanesPDF
81 FR 92749 - Airworthiness Directives; Airbus AirplanesPDF
81 FR 93066 - Stream Protection RulePDF
81 FR 92978 - Regulatory Implementation of the Centers of Excellence and ExpertisePDF
81 FR 93492 - Flexibility, Efficiency, and Modernization in Child Support Enforcement ProgramsPDF

Issue

81 244 Tuesday, December 20, 2016 Contents Agency Health Agency for Healthcare Research and Quality NOTICES Agency Information Collection Activities; Proposals, Submissions, and Approvals, 92814-92816 2016-30603 Common Formats for Reporting on Health Care Quality and Patient Safety, 92816-92818 2016-30604 Aging Aging Administration RULES State Long-Term Care Ombudsman Programs; Correction, 92696-92697 2016-30455 Agricultural Marketing Agricultural Marketing Service RULES Decreased Assessment Rates: Domestic Dates Produced or Packed in Riverside County, CA, 92564-92566 2016-30303 Increased Assessment Rates: Almonds Grown in California, 92559-92564 2016-30264 Cherries Grown in Designated Counties in Washington, 92557-92559 2016-30302 Agriculture Agriculture Department See

Agricultural Marketing Service

See

Food and Nutrition Service

See

Food Safety and Inspection Service

See

Grain Inspection, Packers and Stockyards Administration

See

National Agricultural Statistics Service

NOTICES Agency Information Collection Activities; Proposals, Submissions, and Approvals, 92770 2016-30567
AIRFORCE Air Force Department NOTICES Records of Decision: Divert Activities and Exercises, Commonweatlth of the Northern Mariana Islands, 92791 2016-30488 Census Bureau Census Bureau NOTICES Committee Establishment: Census Bureau 2020 Advisory Committee, 92776 2016-30606 Requests for Nominations: Census Bureau 2020 Advisory Committee, 92776-92777 2016-30605 Centers Disease Centers for Disease Control and Prevention NOTICES Charter Renewals: Mine Safety and Health Research Advisory Committee, 92818 2016-30525 Meetings: Advisory Board on Radiation and Worker Health, National Institute for Occupational Safety and Health, 92820 2016-30519 Advisory Board on Radiation and Worker Health, Subcommittee for Dose Reconstruction Reviews, 92819-92820 2016-30521 Advisory Board on Radiation and Worker Health, Subcommittee on Procedures Review, National Institute for Occupational Safety and Health, 92818-92819 2016-30520 Board of Scientific Counselors, Office of Infectious Diseases, 92820 2016-30523 Disease, Disability, and Injury Prevention and Control Special Emphasis Panel, 92819 2016-30518 Requests for Nominations: Board of Scientific Counselors, National Institute for Occupational Safety and Health, 92821 2016-30522 Centers Medicare Centers for Medicare & Medicaid Services RULES Flexibility, Efficiency, and Modernization in Child Support Enforcement Programs, 93492-93569 2016-29598 Children Children and Families Administration RULES Flexibility, Efficiency, and Modernization in Child Support Enforcement Programs, 93492-93569 2016-29598 Runaway and Homeless Youth, 93030-93064 2016-30241 Coast Guard Coast Guard RULES Drawbridge Operations: Calcasieu River, Westlake, LA, 92664 2016-30576 Pearl River, LA and MS, 92663-92664 2016-30572 Commerce Commerce Department See

Census Bureau

See

Economic Development Administration

See

International Trade Administration

See

National Institute of Standards and Technology

See

National Oceanic and Atmospheric Administration

See

Patent and Trademark Office

Comptroller Comptroller of the Currency RULES Receiverships for Uninsured National Banks, 92594-92603 2016-30666 NOTICES Agency Information Collection Activities; Proposals, Submissions, and Approvals: Record and Disclosure Requirements—Consumer Financial Protection Bureau Regulations B, C, E, M, Z, and DD and Board of Governors of the Federal Reserve System Regulation CC, 92974-92975 2016-30497 Defense Department Defense Department See

Air Force Department

See

Navy Department

RULES Federal Acquisition Regulations: Federal Acquisition Circular 2005-93; Small Entity Compliance Guide, 93489 2016-30222 Federal Acquisition Circular 2005-94; Introduction, 93476 2016-30212 Payment of Subcontractors, 93481-93488 2016-30221 Privacy Training, 93476-93481 2016-30213 Interstate Compact on Educational Opportunity for Military Children, 92654-92663 2016-30110
Economic Development Economic Development Administration NOTICES Trade Adjustment Assistance Eligibility; Petitions, 92777-92778 2016-30536 Education Department Education Department NOTICES Agency Information Collection Activities; Proposals, Submissions, and Approvals: NCER-NPNCER-NPSAS Grant Study—Financial Aid Nudges 2017: A National Experiment to Increase Retention of Financial Aid and College Persistence, 92805-92806 2016-30505 NCER-NPSAS Grant Study—Connecting Students with Financial Aid 2017: Testing the Effectiveness of FAFSA Interventions on College Outcomes, 92806 2016-30504 New Awards; Applications: Teacher and School Leader Incentive Program, 92793-92805 2016-30643 Employee Benefits Employee Benefits Security Administration RULES Savings Arrangements Established by Qualified State Political Subdivisions for Non-Governmental Employees, 92639-92654 2016-30069 Energy Department Energy Department See

Federal Energy Regulatory Commission

Environmental Protection Environmental Protection Agency RULES Air Quality State Implementation Plans; Approvals and Promulgations: California; Northern Sonoma County Air Pollution Control District; Stationary Source Permits, 92665-92666 2016-30186 Revisions to the Unregulated Contaminant Monitoring Rule for Public Water Systems; Public Meeting, 92666-92692 2016-30469 PROPOSED RULES Air Quality State Implementation Plans; Approvals and Promulgations: Interstate Transport for Utah, 92755-92758 2016-30462 Pesticide Petitions: Residues of Pesticide Chemicals in or on Various Commodities, 92758-92760 2016-30647 Federal Aviation Federal Aviation Administration PROPOSED RULES Airworthiness Directives: Airbus Airplanes, 92749-92753 2016-30018 Dassault Aviation Airplanes, 92747-92749 2016-30027 Learjet, Inc. Airplanes, 92745-92747 2016-30019 The Boeing Company Airplanes, 92740-92745, 92753-92755 2016-30021 2016-30026 2016-30028 NOTICES Agency Information Collection Activities; Proposals, Submissions, and Approvals: Pilot Records Improvement Act of 1996; Pilot Records Database, 92940 2016-30638 Meetings: Forty Sixth RTCA SC-224 Plenary, 92939-92940 2016-30511 Federal Emergency Federal Emergency Management Agency RULES Suspensions of Community Eligibility, 92694-92696 2016-30533 Federal Energy Federal Energy Regulatory Commission NOTICES Applications: Port Arthur LNG, LLC; PALNG Common Facilities Company, LLC; Port Arthur Pipeline, LLC, 92809-92810 2016-30550 Combined Filings, 92808-92809, 92811-92813 2016-30542 2016-30543 2016-30547 2016-30548 Environmental Assessments; Availability, etc.: National Fuel Gas Supply Corp., Heath Compressor Station Abandonment and Line FM-92 Refunctionalization Project, 92807-92808 2016-30549 Initial Market-Based Rate Filings Including Requests for Blanket Section 204 Authorizations: InterGen Energy Solutions, LLC, 92813 2016-30544 PPA Grand Johanna LLC, 92811-92812 2016-30545 Records Governing Off-the-Record Communications, 92810-92811 2016-30546 Federal Highway Federal Highway Administration RULES Metropolitan Planning Organization Coordination and Planning Area Reform, 93448-93473 2016-30478 NOTICES Final Federal Agency Actions: Franklin Boulevard; I-5—McVay Highway, Springfield, Lane County, OR, 92940-92941 2016-30293 Federal Mine Federal Mine Safety and Health Review Commission NOTICES Meetings; Sunshine Act, 92813 2016-30771 Federal Motor Federal Motor Carrier Safety Administration NOTICES Commercial Driver's Licenses; Exemption Applications: New Prime, Inc., 92947-92949 2016-30633 Qualification of Drivers; Exemption Applications: Diabetes, 92941-92943, 92946-92947, 92949-92952 2016-30588 2016-30589 2016-30602 Vision, 92944-92946, 92952-92953 2016-30587 2016-30592 Federal Reserve Federal Reserve System NOTICES Changes in Bank Control: Acquisitions of Shares of a Bank or Bank Holding Company, 92814 2016-30499 Formations of, Acquisitions by, and Mergers of Bank Holding Companies, 92814 2016-30629 Formations of, Acquisitions by, and Mergers of Savings and Loan Holding Companies, 92814 2016-30498 Federal Transit Federal Transit Administration RULES Metropolitan Planning Organization Coordination and Planning Area Reform, 93448-93473 2016-30478 NOTICES Certifications and Assurances: Federal Fiscal Year 2017 Annual List for Grants and Cooperative Agreements, 92953-92957 2016-30614 Fish Fish and Wildlife Service NOTICES Endangered and Threatened Wildlife and Plants: Jaguar Draft Recovery Plan, 92845-92847 2016-30584 Permit Applications: Endangered Species; Marine Mammals, 92844-92845 2016-30514 Food and Drug Food and Drug Administration RULES Postmarketing Safety Reporting for Combination Products, 92603-92626 2016-30485 NOTICES Abbreviated New Drug Applications: Sun Pharmaceutical Industries, Inc.; Withdrawal, 92821-92822 2016-30623 Determinations of Regulatory Review Periods for Purposes of Patent Extensions: COSENTYX, 92832-92833 2016-30528 Emergency Use; Authorizations: In Vitro Diagnostic Device for Detection of Zika Virus, 92822-92832 2016-30532 Guidance: Question-Based Review for the Chemistry, Manufacturing, and Controls Technical Section of Animal Drug Applications, 92834-92835 2016-30613 Food and Nutrition Food and Nutrition Service RULES Supplemental Nutrition Assistance Program Promotion, 92550-92556 2016-30621 Food Safety Food Safety and Inspection Service NOTICES Agency Information Collection Activities; Proposals, Submissions, and Approvals: In-Home Food Safety Behaviors and Consumer Education: Annual Observational Study, 92772-92774 2016-30599 Meetings: Codex Alimentarius Commission; Codex Committee on Fats and Oils, 92770-92772 2016-30600 General Services General Services Administration RULES Federal Acquisition Regulations: Federal Acquisition Circular 2005-93; Small Entity Compliance Guide, 93489 2016-30222 Federal Acquisition Circular 2005-94; Introduction, 93476 2016-30212 Payment of Subcontractors, 93481-93488 2016-30221 Privacy Training, 93476-93481 2016-30213 Grain Inspection Grain Inspection, Packers and Stockyards Administration RULES Scope of Sections 202(a) and (b) of the Packers and Stockyards Act, 92566-92594 2016-30424 PROPOSED RULES Poultry Grower Ranking Systems, 92723-92740 2016-30429 Unfair Practices and Undue Preferences in Violation of the Packers and Stockyards Act, 92703-92723 2016-30430 Health and Human Health and Human Services Department See

Agency for Healthcare Research and Quality

See

Aging Administration

See

Centers for Disease Control and Prevention

See

Centers for Medicare & Medicaid Services

See

Children and Families Administration

See

Food and Drug Administration

Homeland Homeland Security Department See

Coast Guard

See

Federal Emergency Management Agency

See

U.S. Customs and Border Protection

RULES Privacy Act; Implementation of Exemptions, 92549-92550 2016-30457
Housing Housing and Urban Development Department RULES Narrowing the Digital Divide Through Installation of Broadband Infrastructure in HUD-Funded New Construction and Substantial Rehabilitation of Multifamily Rental Housing, 92626-92639 2016-30708 NOTICES Agency Information Collection Activities; Proposals, Submissions, and Approvals: Application for Resident Opportunity and Self Sufficiency Grant Forms, 92843 2016-30617 Exigent Health and Safety Deficiency Correction Certification, 92843-92844 2016-30609 HUD Conditional Commitment/Statement of Appraised Value, 92839-92840 2016-30612 Housing Opportunity through Modernization Act of 2016: Implementation of Public Housing Income Limit, 92836 2016-30627 Revised Methodology to Track the Extent to which Moving to Work Agencies Continue to Serve Substantially the Same Number of Eligible Families, 92836-92839 2016-30622 Section 8 Housing Assistance Payments Program: Annual Adjustment Factors, Fiscal Year 2017, 92840-92842 2016-30618 Interior Interior Department See

Fish and Wildlife Service

See

Land Management Bureau

See

National Park Service

See

Reclamation Bureau

See

Surface Mining Reclamation and Enforcement Office

RULES Freedom of Information Act Regulations, 92692-92694 2016-30601
International Trade Adm International Trade Administration NOTICES Antidumping or Countervailing Duty Investigations, Orders, or Reviews: Aluminum Extrusions from the People's Republic of China, 92778-92783 2016-30581 Certain Cased Pencils from the People's Republic of China; Amended Final Results of Antidumping Duty New Shipper Review; 2014-2015, 92784-92785 2016-30626 Certain Polyester Staple Fiber from the Republic of Korea and Taiwan; Final Results of Expedited Sunset Review of the Antidumping Duty Orders, 92783-92784 2016-30625 Welded Carbon Steel Standard Pipe and Tube Products from Turkey; Administrative Review, 2014-2015, 92785-92787 2016-30541 Meetings: Civil Nuclear Trade Advisory Committee; Cancellation, 92778 2016-30616 International Trade Com International Trade Commission NOTICES Investigations; Determinations, Modifications, and Rulings, etc.: Certain Pumping Bras, 92852-92853 2016-30580 Heavy Forged Hand Tools from China, 92852 2016-30636 Sulfanilic Acid from China and India, 92853-92854 2016-30534 Justice Department Justice Department NOTICES Consent Decrees: CERCLA and the Clean Air Act, 92855 2016-30642 Clean Water Act, 92854-92855 2016-30628 Labor Department Labor Department See

Employee Benefits Security Administration

See

Workers Compensation Programs Office

NOTICES Agency Information Collection Activities; Proposals, Submissions, and Approvals: Attestation by Employers Using Alien Crewmembers for Longshore Activities in U.S. Ports, 92856-92857 2016-30524 Coal Mine Rescue Teams: Arrangements for Emergency Medical Assistance and Transportation for Injured Persons—Agreements, Reporting Requirements, and Posting Requirements, 92855-92856 2016-30515
Land Land Management Bureau NOTICES Plats of Surveys: Eastern States, 92847-92848 2016-30583 Relocations: Consolidation and Change of Address for Oklahoma Field Office—Tulsa and Moore Field Station, 92847 2016-30530 Maritime Maritime Administration NOTICES Agency Information Collection Activities; Proposals, Submissions, and Approvals, 92958 2016-30650 Requests for Administrative Waivers of the Coastwise Trade Laws: Vessel ANDANTE MAR, 92957 2016-30652 Vessel KALULU, 92957-92958 2016-30656 NASA National Aeronautics and Space Administration RULES Federal Acquisition Regulations: Federal Acquisition Circular 2005-93; Small Entity Compliance Guide, 93489 2016-30222 Federal Acquisition Circular 2005-94; Introduction, 93476 2016-30212 Payment of Subcontractors, 93481-93488 2016-30221 Privacy Training, 93476-93481 2016-30213 NOTICES Intent to Grant Partially Exclusive Licenses, 92858 2016-30501 National Agricultural National Agricultural Statistics Service NOTICES Confidentiality Pledge, 92774-92776 2016-30658 National Highway National Highway Traffic Safety Administration NOTICES Agency Information Collection Activities; Proposals, Submissions, and Approvals, 92958-92963 2016-30637 Petitions for Decisions of Inconsequential Noncompliance: General Motors, LLC, 92963-92964 2016-30578 Mercedes-Benz USA, LLC, 92964-92966 2016-30579 National Institute National Institute of Standards and Technology NOTICES Requests for Nominations: Public-Key Post-Quantum Cryptographic Algorithms, 92787-92788 2016-30615 National Oceanic National Oceanic and Atmospheric Administration RULES Fisheries of the Exclusive Economic Zone Off Alaska: Bering Sea and Aleutian Islands Crab Rationalization Program, 92697-92702 2016-30068 PROPOSED RULES Endangered and Threatened Wildlife and Plants: 12-Month Finding on a Petition to List the Gulf of Mexico Bryde's Whale as Endangered; Correction, 92760-92761 2016-30659 Fisheries of the Northeastern United States: Amendment 18 to the Northeast Multispecies Fishery Management Plan, 92761-92769 2016-30356 NOTICES Agency Information Collection Activities; Proposals, Submissions, and Approvals: Southeast Region Permit Family of Forms, 92789-92790 2016-30594 Meetings: Gulf of Mexico Fishery Management Council, 92790-92791 2016-30500 Takes of Marine Mammals: Incidental to Geophysical Surveys in the Gulf of Mexico, 92788-92789 2016-30492 National Park National Park Service NOTICES Wilderness Area Eligibility Assessments: Big South Fork National River and Recreation Area and Obed Wild and Scenic River, 92848 2016-30635 Navy Navy Department NOTICES Exclusive Patent Licenses: Adaptive Phage Therapeutics, Inc., 92791-92792 2016-30590 DBC Medical Innovations, LLC, 92792 2016-30582 Rotunda Scientific Technologies, LLC, 92792-92793 2016-30585 Solar Tech, Inc., 92792 2016-30586 SpringStar Inc., 92792 2016-30591 Nuclear Regulatory Nuclear Regulatory Commission NOTICES Exemptions and Combined License Amendments: South Carolina Electric and Gas Company South Carolina Public Service Authority; Virgil C. Summer Nuclear Station, Units 2 and 3; Containment Hydrogen Igniter Changes, 92859-92860 2016-30608 Southern Nuclear Operating Company, Inc., Vogtle Electric Generating Plant, Units 3 and 4; Compressed and Instrument Air System High Pressure Air Subsystem Changes, 92861-92863 2016-30607 Southern Nuclear Operating Company, Inc., Vogtle Electric Generating Plant, Units 3 and 4; Initial Test Program Changes, 92860-92861 2016-30631 Southern Nuclear Operating Company, Inc., Vogtle Electric Generating Plant, Units 3 and 4; Reconciliation of Tier 1 Valve Differences, 92881-92882 2016-30630 Facility Operating and Combined Licenses: Applications and Amendments Involving No Significant Hazards Considerations; Biweekly Notice, 92863-92880 2016-30438 Meetings; Sunshine Act, 92880-92881 2016-30747 Patent Patent and Trademark Office NOTICES Agency Information Collection Activities; Proposals, Submissions, and Approvals: Secrecy and License to Export, 92791 2016-30506 Postal Service Postal Service NOTICES Product Changes: Priority Mail and First-Class Package Service Negotiated Service Agreement, 92882 2016-30517 Priority Mail Negotiated Service Agreement, 92882-92883 2016-30526 2016-30529 2016-30531 Presidential Documents Presidential Documents PROCLAMATIONS Trade: Nepal Preference Program; Implementation Provisions (Proc. 9555), 92499-92547 2016-30738 Reclamation Reclamation Bureau NOTICES Prize Competitions; Requirements and Registrations: Sub-Seasonal Climate Forecast Rodeo, 92848-92851 2016-30593 Securities Securities and Exchange Commission NOTICES Applications: Equus Total Return, Inc., 92897-92901 2016-30539 MIAX PEARL, LLC, 92901-92916 2016-30538 Minnesota Life Insurance Company, et al, 92891-92892 2016-30540 Public Company Accounting Oversight Board Budget and Annual Accounting Support Fee, 92885-92886 2016-30537 Self-Regulatory Organizations; Proposed Rule Changes: Bats BZX Exchange, Inc., 92928 2016-30558 BOX Options Exchange LLC, 92919-92923 2016-30562 C2 Options Exchange, Inc., 92928-92932 2016-30560 Chicago Board Options Exchange, Inc., 92883-92885, 92925-92927 2016-30554 2016-30565 NASDAQ BX, Inc., 92886-92889 2016-30555 NASDAQ PHLX LLC, 92916-92919 2016-30551 NASDAQ Stock Market LLC, 92885, 92927, 92932-92937 2016-30552 2016-30557 2016-30559 2016-30561 NYSE Arca, Inc., 92892-92897 2016-30553 2016-30556 NYSE MKT LLC, 92889-92890, 92923-92925 2016-30563 2016-30564 Small Business Small Business Administration NOTICES Agency Information Collection Activities; Proposals, Submissions, and Approvals, 92938 2016-30569 Surrender of License of Small Business Investment Companies: DeltaPoint Capital III, LP, 92937 2016-30503 DeltaPoint Capital IV, LP, 92937 2016-30513 State Department State Department NOTICES Meetings: Overseas Schools Advisory Council, 92938 2016-30624 Surface Mining Surface Mining Reclamation and Enforcement Office RULES Stream Protection Rule, 93066-93445 2016-29958 Surface Transportation Surface Transportation Board NOTICES Acquisition of Control Exemptions: Monarch Ventures Inc., Quick Coach Lines Ltd., et al., 92938-92939 2016-30489 Transportation Department Transportation Department See

Federal Aviation Administration

See

Federal Highway Administration

See

Federal Motor Carrier Safety Administration

See

Federal Transit Administration

See

Maritime Administration

See

National Highway Traffic Safety Administration

NOTICES National Environmental Policy Act Implementing Procedures Update, 92966-92974 2016-30660
Treasury Treasury Department See

Comptroller of the Currency

NOTICES Meetings: Federal Advisory Committee on Insurance, 92975-92976 2016-30632
Customs U.S. Customs and Border Protection RULES Regulatory Implementation of the Centers of Excellence and Expertise, 92978-93027 2016-29719 NOTICES Agency Information Collection Activities; Proposals, Submissions, and Approvals: Electronic Visa Update System, 92835 2016-30527 Veteran Affairs Veterans Affairs Department NOTICES Reimbursement for Caskets and Urns for Burial of Unclaimed Remains in a National Cemetery, 92976 2016-30510 Workers' Workers Compensation Programs Office NOTICES Meetings: Advisory Board on Toxic Substances and Worker Health: Working Group on Presumptions, 92857-92858 2016-30516 Separate Parts In This Issue Part II Homeland Security Department, U.S. Customs and Border Protection, 92978-93027 2016-29719 Part III Health and Human Services Department, Children and Families Administration, 93030-93064 2016-30241 Part IV Interior Department, Surface Mining Reclamation and Enforcement Office, 93066-93445 2016-29958 Part V Transportation Department, Federal Highway Administration, 93448-93473 2016-30478 Transportation Department, Federal Transit Administration, 93448-93473 2016-30478 Part VI Defense Department, 93476-93489 2016-30222 2016-30212 2016-30221 2016-30213 General Services Administration, 93476-93489 2016-30222 2016-30212 2016-30221 2016-30213 National Aeronautics and Space Administration, 93476-93489 2016-30222 2016-30212 2016-30221 2016-30213 Part VII Health and Human Services Department, Centers for Medicare & Medicaid Services, 93492-93569 2016-29598 Health and Human Services Department, Children and Families Administration, 93492-93569 2016-29598 Reader Aids

Consult the Reader Aids section at the end of this issue for phone numbers, online resources, finding aids, and notice of recently enacted public laws.

To subscribe to the Federal Register Table of Contents electronic mailing list, go to https://public.govdelivery.com/accounts/USGPOOFR/subscriber/new, enter your e-mail address, then follow the instructions to join, leave, or manage your subscription.

81 244 Tuesday, December 20, 2016 Rules and Regulations DEPARTMENT OF HOMELAND SECURITY Office of the Secretary 6 CFR Part 5 [Docket No. DHS-2016-0091] Privacy Act of 1974: Implementation of Exemptions; Department of Homeland Security DHS/U.S. Customs and Border Protection (CBP)-023 Border Patrol Enforcement Records (BPER) System of Records AGENCY:

Department of Homeland Security, Privacy Office.

ACTION:

Final rule.

SUMMARY:

The Department of Homeland Security is issuing a final rule to amend its regulations to exempt portions of a newly established system of records titled, “Department of Homeland Security U.S. Customs and Border Protection (DHS/CBP)-023 Border Patrol Enforcement Records (BPER) System of Records” from certain provisions of the Privacy Act. Specifically, the Department exempts portions of the “DHS/CBP-023 BPER System of Records” from one or more provisions of the Privacy Act because of criminal, civil, and administrative enforcement requirements.

DATES:

This final rule is effective December 20, 2016.

FOR FURTHER INFORMATION CONTACT:

For general questions, please contact: Debra Danisek (202-344-1191), CBP Privacy Officer, Privacy and Diversity Office, 1300 Pennsylvania Avenue NW., Washington, DC 20229. For privacy issues please contact: Jonathan R. Cantor (202-343-1717), Acting Chief Privacy Officer, Privacy Office, Department of Homeland Security, Washington, DC 20528.

SUPPLEMENTARY INFORMATION: I. Background

The Department of Homeland Security (DHS) U.S. Customs and Border Protection (CBP) published a notice of proposed rulemaking in the Federal Register, (81 FR 72551, October 20, 2016) proposing to exempt portions of the system of records from one or more provisions of the Privacy Act because of criminal, civil, and administrative enforcement requirements. DHS issued the “DHS/CBP-023 Border Patrol Enforcement (BPER) Records System of Records” in the Federal Register at 81 FR 72601 on October 20, 2016, to provide notice to the public that DHS/CBP will collect and maintain enforcement records to secure the U.S. border between Ports of Entry (POE), furthering its enforcement and immigration mission. DHS previously maintained these records under the DHS/ICE-011 Criminal Arrest Records and Immigration Enforcement Records (CARIER) (81 FR 72080, October 19, 2016) and the DHS/USVISIT-004 DHS Automated Biometric Identification System (IDENT) (72 FR 31080, June 5, 2007) System of Records Notices. DHS/CBP issued this new system of records to claim ownership of records created as a result of CBP interactions between POE.

DHS/CBP invited comments on both the Notice of Proposed Rulemaking (NPRM) and System of Records Notice (SORN).

II. Public Comments

DHS/CBP received one positive comment on the NPRM and no comments on the SORN for the DHS/CBP-023 BPER System of Records. After consideration of the public comment, DHS will implement the rulemaking as proposed.

List of Subjects in 6 CFR Part 5

Freedom of information, Privacy.

For the reasons stated in the preamble, DHS amends Chapter I of Title 6, Code of Federal Regulations, as follows:

PART 5—DISCLOSURE OF RECORDS AND INFORMATION 1. The authority citation for Part 5 continues to read as follows: Authority:

Pub. L. 107-296, 116 Stat. 2135; (6 U.S.C. 101 et seq.); 5 U.S.C. 301. Subpart A also issued under 5 U.S.C. 552. Subpart B also issued under 5 U.S.C. 552a.

2. Add paragraph 76 to appendix C to part 5 to read as follows:: Appendix C to Part 5—DHS Systems of Records Exempt From the Privacy Act

76. The DHS/CBP-023 Border Patrol Enforcement Records (BPER) System of Records consists of electronic and paper records and will be used by DHS and its components. The DHS/CBP-023 BPER System of Records is a repository of information held by DHS/CBP in connection with its several and varied missions and functions, including, but not limited to the enforcement of civil and criminal laws; investigations, inquiries, and proceedings there under; and national security and intelligence activities. The DHS/CBP-023 BPER System of Records contains information that is collected by, on behalf of, in support of, or in cooperation with DHS and its components and may contain personally identifiable information collected by other federal, state, local, tribal, foreign, or international government agencies. The Secretary of Homeland Security, pursuant to 5 U.S.C. 552a(j)(2), has exempted this system from the following provisions of the Privacy Act: 5 U.S.C. 552a (c)(3), (c)(4); (d); (e)(1), (e)(2), (e)(3), (e)(4)(G), (e)(4)(H), (e)(5), (e)(8); and (g). Additionally, the Secretary of Homeland Security, pursuant to 5 U.S.C. 552a(k)(2), has exempted this system from the following provisions of the Privacy Act: 5 U.S.C. 552a (c)(3); (d); (e)(1), (e)(4)(G), and (e)(4)(H). Exemptions from these particular subsections are justified, on a case-by-case basis to be determined at the time a request is made, for the following reasons:

(a) From subsection (c)(3) and (4) (Accounting for Disclosures) because release of the accounting of disclosures could alert the subject of an investigation of an actual or potential criminal, civil, or regulatory violation to the existence of that investigation and reveal investigative interest on the part of DHS as well as the recipient agency. Disclosure of the accounting would therefore present a serious impediment to law enforcement efforts and/or efforts to preserve national security. Disclosure of the accounting would also permit the individual who is the subject of a record to impede the investigation, to tamper with witnesses or evidence, and to avoid detection or apprehension, which would undermine the entire investigative process.

(b) From subsection (d) (Access to Records) because access to the records contained in this system of records could inform the subject of an investigation of an actual or potential criminal, civil, or regulatory violation to the existence of that investigation and reveal investigative interest on the part of DHS or another agency. Access to the records could permit the individual who is the subject of a record to impede the investigation, to tamper with witnesses or evidence, and to avoid detection or apprehension. Amendment of the records could interfere with ongoing investigations and law enforcement activities and would impose an unreasonable administrative burden by requiring investigations to be continually reinvestigated. In addition, permitting access and amendment to such information could disclose security-sensitive information that could be detrimental to homeland security.

(c) From subsection (e)(1) (Relevancy and Necessity of Information) because in the course of investigations into potential violations of federal law, the accuracy of information obtained or introduced occasionally may be unclear, or the information may not be strictly relevant or necessary to a specific investigation. In the interests of effective law enforcement, it is appropriate to retain all information that may aid in establishing patterns of unlawful activity.

(d) From subsection (e)(2) (Collection of Information from Individuals) because requiring that information be collected from the subject of an investigation would alert the subject to the nature or existence of the investigation, thereby interfering with that investigation and related law enforcement activities.

(e) From subsection (e)(3) (Notice to Subjects) because providing such detailed information could impede law enforcement by compromising the existence of a confidential investigation or reveal the identity of witnesses or confidential informants.

(f) From subsections (e)(4)(G) and (e)(4)(H) (Agency Requirements) because portions of this system are exempt from the individual access provisions of subsection (d) for the reasons noted above, and therefore DHS is not required to establish requirements, rules, or procedures with respect to such access. Providing notice to individuals with respect to existence of records pertaining to them in the system of records or otherwise setting up procedures pursuant to which individuals may access and view records pertaining to themselves in the system would undermine investigative efforts and reveal the identities of witnesses, and potential witnesses, and confidential informants.

(g) From subsection (e)(5) (Collection of Information) because with the collection of information for law enforcement purposes, it is impossible to determine in advance what information is accurate, relevant, timely, and complete. Compliance with subsection (e)(5) would preclude DHS agents from using their investigative training and exercise of good judgment to both conduct and report on investigations.

(h) From subsection (e)(8) (Notice on Individuals) because compliance would interfere with DHS's ability to obtain, serve, and issue subpoenas, warrants, and other law enforcement mechanisms that may be filed under seal and could result in disclosure of investigative techniques, procedures, and evidence.

(i) From subsection (g)(1) (Civil Remedies) to the extent that the system is exempt from other specific subsections of the Privacy Act.

Dated: December 13, 2016. Jonathan R. Cantor, Acting Chief Privacy Officer, Department of Homeland Security.
[FR Doc. 2016-30457 Filed 12-19-16; 8:45 am] BILLING CODE 9111-14-P
DEPARTMENT OF AGRICULTURE Food and Nutrition Service 7 CFR Parts 251, 271, 272 and 277 [FNS-2016-0028] RIN: 0584-AE44 Supplemental Nutrition Assistance Program Promotion AGENCY:

Food and Nutrition Service (FNS), USDA.

ACTION:

Final rule.

SUMMARY:

This final rule implements Section 4018 of the Agricultural Act of 2014. Section 4018 created new limitations on the use of Federal funds authorized in the Food and Nutrition Act of 2008, as amended (FNA), for the Supplemental Nutrition Assistance Program (SNAP) promotion and outreach activities. Specifically, Section 4018 of the 2014 Farm Bill prohibits the use of Federal funds appropriated in the FNA from being used for: recruitment activities designed to persuade an individual to apply for SNAP benefits; television, radio, or billboard advertisements that are designed to promote SNAP benefits and enrollment; or agreements with foreign governments designed to promote SNAP benefits and enrollment. The prohibition on using funds appropriated under the FNA for television, radio, or billboard advertisements does not apply to Disaster SNAP.

Section 4018 also prohibits any entity that receives funds under the FNA from compensating any person engaged in outreach or recruitment activities based on the number of individuals who apply to receive SNAP benefits. Lastly, Section 4018 modifies Section 16(a)(4) of the FNA to prohibit the Federal government from paying administrative costs associated with recruitment activities designed to persuade an individual to apply for program benefits or that promote the program through television, radio, or billboard advertisements.

This final rule also impacts the Food Distribution Program on Indian Reservations (FDPIR) and The Emergency Food Assistance Program (TEFAP), both of which receive funding and/or foods authorized under the FNA.

DATES:

This final rule is effective January 19, 2017.

FOR FURTHER INFORMATION CONTACT:

Mary Rose Conroy, Chief, Program Development Division, Program Design Branch, Food and Nutrition Services, U.S. Department of Agriculture, 3101 Park Center Drive, Room 810, Alexandria, VA 22302, or by phone at (703) 305-2803, or by email at [email protected]

SUPPLEMENTARY INFORMATION: I. Background II. Discussion of Comments and the Final Rule III. Procedural Matters I. Background

This rule implements Section 4018 of the Agricultural Act of 2014 (Pub L. 113-79, 2014 Farm Bill). Section 4018 of the 2014 Farm Bill creates new limitations on the use of Federal funds authorized in the Food and Nutrition Act of 2008 (FNA) for Supplemental Nutrition Assistance Program (SNAP) promotion and recruitment activities. Specifically, Section 4018:

• Amends Section 16(a)(4) of the FNA to prohibit Federal reimbursement for activities that are designed to persuade an individual to apply for program benefits or that promote the program through television, radio, or billboard advertisements.

• Amends the end of Section 18 of the FNA to prohibit the use of Federal funds authorized to be appropriated under the FNA from being used for:

(1) Recruitment activities designed to persuade an individual to apply for SNAP benefits;

(2) Television, radio, or billboard advertisements that are designed to promote SNAP benefits and enrollment. This provision does not apply to Disaster SNAP; or

(3) Any agreements with foreign governments designed to promote SNAP benefits and enrollment.

• Amends the end of Section 18 of the FNA to require the Secretary of Agriculture to issue regulations that prohibit entities that receive funds under the FNA from compensating any person engaged in outreach or recruitment activities based on the number of individuals who apply to receive SNAP benefits.

II. Discussion of Comments and the Final Rule General Comments

On March 14, 2016, the Department published a proposed rule to implement the changes made by Section 4018. See Supplemental Nutrition Assistance Program Promotion, 81 FR 13290 (Mar. 14, 2016). The Department received 94 comments on the proposed rule published on March 14, 2016 and open for public comments for 60 days. Commenters included 17 private individuals, one anonymous commenter, 23 food banks or food bank coalitions, two county governments, one university association, one member of a university, and 49 other not-for-profit organizations. Sixty-six of the comments received were variations of two form letters, and 28 comments were unique comments.

Overall, comments were very supportive of the proposed rule. Commenters, however, did point to specific areas in need of clarification. The Department has reviewed these comments and in many cases has made the suggested recommendations, as discussed below. The Department appreciates the efforts of community partners and concerned members of the public to offer insightful comments that have enhanced the final regulations.

Definition of Recruitment Activities Designed To Persuade

The Agricultural Act of 2014 prohibits the use of funds appropriated under the FNA from being used for recruitment activities that are designed to persuade an individual to apply for SNAP benefits.

In the proposed rule, prohibited recruitment activities were defined as those designed to persuade an individual to apply for SNAP benefits through the use of persuasive practices. Persuasive practices constitute coercing or pressuring an individual to apply, or providing incentives to fill out an application. Communicating factual information pertaining to SNAP is not a recruitment activity designed to persuade an individual to apply for SNAP benefits.

Overall, the definition of recruitment activities that would be prohibited in the proposed rule were supported by commenters, with the specific exceptions discussed below. Commenter support focused on the importance of providing factual information through SNAP outreach (n = 78), and the importance of outreach to clear up myths or misconceptions about SNAP (n = 71). Commenters appreciated that the definition in the proposed rule supported these important outreach activities.

However, commenters felt two components of the definition of recruitment activities designed to persuade were in need of clarification. First, a large number of commenters (n = 73) felt the rule should state that individuals are allowed to make an “informed choice” about whether or not to apply for SNAP benefits and that this phrase should be added to the regulatory definition of recruitment activities designed to persuade. These commenters explained that long-standing FNS regulations clearly state that prohibited recruitment activities are those that persuade an individual who has made an informed choice not to apply for SNAP to change his or her mind and apply for benefits. Some commenters also pointed to floor statements made by Members of Congress during consideration of the conference report on the 2014 Farm Bill. In these floor statements, Members explained that the statute made no change with respect to the role of the applicant to make an “informed choice” on whether or not to apply for benefits. These commenters recommended that the Department's final rule explicitly incorporate the long-standing “informed choice” standard in the regulatory definition of activities designed to persuade.

Second, a majority of commenters (n = 68) felt that the rule needed to be clarified to explain that outreach workers should be allowed to ask follow-up questions to potential SNAP applicants to clear-up misinformation. Some commenters pointed to a specific example in the preamble of the proposed rule in which a food pantry visitor comes by a SNAP informational table and expresses disinterest in learning more about SNAP. In this example, the Department explained continuing to discuss SNAP with the visitor would constitute a persuasive practice because the visitor had clearly expressed a lack of interest and should not be pressured to apply. These commenters felt that frequently a follow-up question about why an individual is not interested is necessary in order to determine whether or not he or she has accurate information about the program, and should not be considered a persuasive practice. If the individual responds to the follow-up question in such a way as to show he or she is misinformed about SNAP, the outreach worker then has an opportunity to clarify his or her misunderstanding, so that he or she can then make a well-informed choice about applying.

The Department agrees with the commenters that it is important that potential SNAP applicants have the necessary information to make an informed choice about whether or not to apply for benefits, and that outreach is an important tool to ensure that SNAP applicants can make this informed choice. The Department also understands that it was not the intent of Congress to prohibit informational activities that provide basic program information to potentially eligible individuals, as specifically authorized in Section 11(e)(1) of the FNA. Basic program information allows individuals to make a well-informed decision about whether or not to apply based on accurate information, rather than myths or other types of misinformation.

Pursuant to these comments the Department has clarified the regulations at a new 7 CFR 277.4(b)(5). As in the proposed rule, the Federal reimbursement rate shall not include recruitment activities designed to persuade an individual to apply for SNAP benefits through the use of persuasive practices. Persuasive practices constitute coercing or pressuring an individual to apply, or providing incentives to fill out an application for SNAP benefits. However, in the final rule the Department has added the “informed choice” standard to the third sentence: communicating factual information so that an individual can make an informed choice pertaining to SNAP is not a recruitment activity designed to persuade an individual to apply for SNAP benefits. As a result, prohibited recruitment activities would not include providing accurate program information to dispel misinformation, answering questions about SNAP, providing assistance in filling out forms or obtaining verification documents, or providing basic information about SNAP availability, application procedures, eligibility requirements, and the benefits of the program, as specifically permitted by Section 11(e)(1) of the FNA.

To conform to this change from the proposed rule, the Department is clarifying one of the examples from the preamble of the proposed rule to make a distinction between persuasive practices and asking appropriate follow-up questions to ensure an individual has made an informed choice. The revised example is as follows:

A worker funded by SNAP funds is staffing a SNAP informational table at a food pantry. A food pantry visitor comes to the table, but soon replies that he is not interested in learning more. The worker may ask a follow-up question about why the visitor is not interested in learning more. If the visitor's answer demonstrates a lack of accurate information about SNAP, the worker may correct the misunderstanding, thus helping the visitor make an informed choice about applying. However, if the visitor responds to the follow-up questions with a further expression of disinterest, continuing to question the visitor would be pressuring the individual to apply and therefore constitutes a persuasive practice.

Similarly, the Department is hereby clarifying one of the examples from the preamble of the proposed rule about allowable informational activities:

An outreach worker is talking to a senior citizen who explains that he does not think he is eligible because he owns his own home. The worker would be allowed to correct this misconception, including asking any necessary follow-up questions to ensure the senior citizen makes an informed choice about whether or not to apply.

Application of Recruitment Activities Designed To Persuade to Written Materials

The preamble to the proposed rule explained that written materials would also be expected to comply with the designation of allowable and unallowable activities that are described in the above definition of recruitment activities designed to persuade an individual to apply for SNAP benefits through coercion, pressure, or incentives. One commenter sought clarification on what information may be included in written outreach materials. This commenter suggested that FNS expand the list of permissible written outreach materials to include additional examples in the preamble.

The Department has reviewed the commenter's request and feels that the original language in the preamble was sufficiently clear that it was not intended to be an exhaustive list, and that written outreach materials are permissible, so long as they are not recruitment activities designed to persuade, as defined in 277.4(b)(5)(i).

Specialized Services

The Manager's Statement to the Conference Report, H.R. Rep. 113-333 stated that the changes in Section 4018 of the Agricultural Act of 2014 do not preclude specialized services for eligible SNAP applicants, including application assistance for vulnerable populations. The Manager's Statement explained that specialized services are particularly important for vulnerable populations, including the elderly, homeless, and individuals with disabilities, to ensure they receive the food assistance they need. Consequently, the proposed rule would not have prohibited specialized services that provide vulnerable populations (including the elderly, homeless, and individuals with disabilities) with application assistance or basic program information, including information about rights, program rules, client responsibilities, and benefits.

A majority of commenters (n = 63) supported the language in the proposed rule, agreeing that Congressional intent was never to prohibit specialized or targeted services to vulnerable populations. However, commenters (n = 65) also argued that neither the Act nor the Manager's Statement in the Conference Report, H.R. Rep. 113-333, limit application assistance and specialized services to these vulnerable populations only. These commenters felt that the Department should clarify that application assistance and specialized services can be provided to all individuals, not just so-called vulnerable populations cited in the preamble. For example, these commenters explained, targeted SNAP outreach can be important for limited English proficient populations, pregnant women receiving WIC only benefits, recently unemployed families in a factory town that has lost its primary business, or a community that has suffered severe weather and power outages that do not rise to the level of a Presidentially declared disaster.

The Department considers specialized services to be a subset of all activities provided under informational activities, as defined in 7 CFR 272.5(c). Specialized services are informational activities targeted to specific populations based on their specific needs. For example, a community outreach partner may develop a SNAP Web site targeted to households who have become recently unemployed, informing those households of available SNAP Employment and Training activities. The Web site is a specialized service provided to a targeted group to provide information about SNAP based on their needs and available local resources. Therefore, the Department agrees with the commenters and concludes that specialized services, as a subset of allowable informational activities in 7 CFR 272.5(c), can be targeted to any particular group to meet the specific needs of that population. However, the Department does not believe any changes are needed to the regulatory text to address that clarification.

Incentives

As discussed above, the proposed rule prohibited recruitment activities that are designed to persuade an individual to apply for SNAP benefits through the use of persuasive practices. Providing an incentive to fill out an application was defined as one type of persuasive practice. The preamble to the proposed rule also included an example where a worker funded by SNAP funds at a community-based organization explained to a group of likely eligible SNAP applicants, that every person who applied that day for SNAP would be allowed to stay for a free parenting class. The preamble to the proposed rule explained that this practice would be prohibited if only those who filled out the SNAP application were allowed to attend the parenting class. However, if everyone was allowed to participate in the parenting class, regardless of whether or not they completed an application, the practice would be allowable.

While no comments were received that directly supported the incentive language in the proposed rule, some commenters (n = 19) felt the incentive language in the definition of recruitment activities designed to persuade needed to be clarified. For example, some of the commenters explained that providing information about the ancillary benefits of participating in SNAP and offering outreach reinforcement items that are not dependent on the recipient submitting a SNAP application should be clarified as permissible reimbursable outreach activities. Commenters explained that the Department's longstanding State Outreach Plan Guidance allows for reimbursement of appropriate outreach reinforcement items, but not those “intended as rewards for pre-screening or completing an application.”

To address these comments, the Department is hereby clarifying that providing individuals with information about the ancillary benefits of applying for SNAP is not an incentive or a recruitment activity designed to persuade. Providing factual information to an individual about the benefits of SNAP, such as that SNAP participation may make a household's children eligible for the National School Lunch Program, is a permissible sharing of factual information, per the regulations on allowable informational activities in 7 CFR 272.5(c). The Department is also hereby clarifying that offering outreach reinforcement items at any point in the process of sharing information about SNAP with an interested individual(s) is permissible and not a recruitment activity designed to persuade, so long as the receipt of such reinforcements is not contingent on applying for SNAP. The Department does not think any changes are needed to the regulatory text to address these clarifications.

Radio, Television and Billboard Advertisements

Section 4018 of the Agricultural Act of 2014 prohibits the use of funds authorized to be appropriated under the FNA for television, radio, or billboard advertisements that are designed to promote SNAP benefits and enrollment. The proposed rule would have prohibited States or other entities from using these Federal funds for television, radio, or billboard advertisements designed to promote program benefits and enrollment.

Several commenters (n = 14) supported language in the preamble that stated only funds authorized by the FNA would be prohibited from purchasing television, radio and billboard advertisements that promote SNAP benefits and enrollment, but that funding from other sources could be spent on these advertisements. In addition, some commenters had concerns about individual elements of the restriction on radio, television, and billboard advertisements, which are discussed more below.

Billboards and Retailer Informational Activities

The proposed rule defined billboards as large format advertising displays intended for viewing from extended distances of more than 50 feet. There were no comments that directly supported the billboard definition in the proposed rule. Several commenters (n = 18) stated that the billboard definition needed to be changed or clarified to consider the context in which a billboard is used so as to allow for large signs at health fairs, farmers markets, or other similar venues where individuals may be seeking information about SNAP or SNAP services. In addition, one commenter explained that not allowing retailers to advertise would prevent these businesses from educating the community about SNAP benefits and remove opportunities to advertise that they support SNAP beneficiaries.

The Department agrees that the restriction on Federal funding for billboard advertisements is not intended to prohibit Federal funding for large signs used for informational purposes at health fairs, farmers markets, and other venues where most attendees are on foot. Consequently, for the purposes of the final rule, a billboard is now defined as an outdoor, large format advertising display, either permanent or portable, which is used to advertise or inform alongside a roadway. This definition does not include large signs and banners intended for viewing predominantly by individuals not travelling along a roadway.

In addition, the Department believes that retailers advertising where SNAP benefits are accepted does not constitute promoting SNAP benefits and enrollment. FNS has long allowed retailers to advertise that SNAP benefits can be used at their establishment. This practice is essential to help both SNAP beneficiaries identify locations to use their benefits, and retailers to connect with potential customers. As a result, the final regulatory text at 7 CFR 277.4(b)(5)(ii) is amended to state that the restriction on the use of Federal funds for radio, television, and billboard advertising does not restrict retailers, such as farmers markets, from using these methods to provide information about where SNAP benefits are accepted. Similarly, the Department also believes that the restriction on the use of Federal funds for radio, television, and billboard advertising does not restrict retailers from using these methods to provide factual information about their FNS-approved programs for currently enrolled SNAP households, such as fruits and vegetables incentive programs.

Exception for Remote Areas and Native American Tribes, and Other Vulnerable Communities

Six commenters felt that radio, television, and billboard advertisements are helpful ways to communicate information about SNAP and suggested these advertising methods should continue to be allowable activities. Two of these commentators noted that the prohibition on radio, television, and billboard advertising would have a negative impact on Native American communities, especially tribes living in remote areas. In addition, a commenter in Alaska noted that radio advertisements are an effective method to communicate within their state, which has many remote areas. One commenter explained that radio, television, and billboard advertisements are important ways to communicate about SNAP in elderly or highly impoverished communities.

The Department understands that the prohibition on using Federal funds for radio, television, and billboard advertisements may negatively impact information sharing in Alaskan, Native American, and other vulnerable communities, as well as other rural areas where radio, television, and billboard advertisements are effective methods of communication. The Department will continue to conduct allowable outreach and communication activities appropriate to various types of vulnerable communities served by SNAP, including technical assistance and regular Tribal consultation. However, the Department has no discretion to allow appropriations authorized under the FNA to fund television, radio, and billboard advertisements to promote program benefits and enrollment in these targeted communities. Consequently, as proposed, the regulation at new 7 CFR 277.4(b)(5)(ii), continues to prohibit States or other entities from using Federal funds for television, radio, or billboard advertisements that promote program benefits and enrollment, with the exception that Federal funds may be used to provide factual information identifying retailers that accept SNAP benefits.

Disaster SNAP

Pursuant to the Agricultural Act of 2014, the prohibition on the use of funding authorized to be appropriated under the FNA for television, radio, or billboard advertisements does not apply to Disaster SNAP. Accordingly, the proposed rule stated that the advertising restriction would not apply to Disaster SNAP. Eleven commenters supported the proposed rule language exempting Disaster SNAP from the ban on Federal funding for radio, television, and billboard advertisements. There were no comments opposing the exemption for Disaster SNAP. Therefore, in the final rule the Department maintains that the prohibition on the use of Federal funding authorized to be appropriated in the FNA for television, radio, and billboard advertisements that promote SNAP benefits and enrollment does not apply to Disaster SNAP.

Social Media

Section 4018 of the Agricultural Act of 2014 does not address the use of social media in promotion activities. As a result, in the proposed rule, the use of social media like Twitter, Facebook, YouTube, or other internet sites was not prohibited, so long as the content was not recruitment activity designed to persuade an individual to apply for SNAP benefits through coercion, pressure, or incentives. The majority of commenters (n = 71) supported the language in the proposed rule exempting social media from the ban on Federal funding for radio, television, and billboard advertisements that promote SNAP benefits and enrollment. No comments were received seeking a change or clarification in the proposed rule language. Therefore, the use of social media, such as Twitter, Facebook and YouTube is not prohibited in the final rule, so long as the content is not designed to persuade an individual to apply for SNAP benefits through persuasive practices.

Ban on Outreach With Foreign Governments

Section 4018 of the Agricultural Act of 2014 prohibits the use of funds appropriated under the FNA from being used for any agreements with foreign governments designed to promote SNAP benefits and enrollment. Accordingly, under the proposed rule, agreements with foreign governments that are designed to promote SNAP benefits and enrollment were proposed to be prohibited. The ban on outreach with foreign governments contained in the proposed rule was only addressed by two commenters. They both supported the ban on the use of Federal funding for SNAP outreach with foreign countries. No commenters requested a change or clarification to this provision. As a result, the Department maintains the language from the proposed rule, to state that the Federal funds authorized to be appropriated under the Act shall not be used to support agreements with foreign governments that are designed to promote SNAP benefits and enrollment.

Worker Compensation

Section 4018 of the Agricultural Act of 2014 also states that any entity that receives funds under the FNA is banned from compensating any person for conducting outreach activities relating to participation in, or for recruiting individuals to apply to receive benefits under SNAP, if the amount of the compensation would be based on the number of individuals who apply to receive benefits. Pursuant to this provision, the proposed rule banned tying outreach worker compensation to the number of individuals who apply for SNAP as a result of that worker's efforts in any organization that receives funding under the FNA. In other words, the proposed rule would have prohibited organizations who receive any funding from the FNA from requiring a worker to meet a quota of SNAP applicants in order to receive their full compensation or performance bonus; however, the preamble to the proposed rule stated that organizations would be allowed to compensate outreach workers based on the number of hours an outreach worker dedicates to assisting individuals applying for SNAP benefits. For example, an outreach worker may be compensated at an hourly rate of “X” dollars for each hour the worker spends providing SNAP application assistance. Lastly, the preamble in the proposed rule also stated this prohibition would apply even if the organization used funds from a source other than those authorized to be appropriated in the FNA to pay outreach workers on a per application basis, so long as that organization received any funds under the FNA.

Several commenters (n = 16) supported the language in the proposed rule prohibiting compensation of workers based on the number of individuals who apply for benefits by entities that receive funds under the FNA. However, these same commenters recommended clarifying that State agencies and their partners are allowed to set outreach and application goals as part of their State outreach plan contracts. These commenters explained that State agencies should be able to hold outreach partners accountable for effective use of State and Federal resources, and be able to track submitted applications that result from educational or informational activities. Another commenter expressed a similar sentiment in explaining that the final rule should confirm that the prohibition on tying outreach worker compensation to the number of SNAP applications completed by a worker applies only to the compensation of individuals and not to the compensation of organizations.

In addition, an advocacy organization stated that the worker compensation regulation raised serious concerns about unwarranted control of independent organizations by the government, including possible constitutional violations by the government. At the very least, this commenter felt that the policy was overbroad and unfairly intruded into the lawful activity of important organizations over which the government cannot, and should not, exert such control.

The Department understands the importance of setting outreach goals for organizations involved in allowable SNAP outreach activities to ensure accountability for taxpayer dollars. The Department encourages States to establish performance metrics in their agreements with community partners as part of their State outreach plans to ensure State and Federal resources are used efficiently and effectively. Accordingly, the Department does not intend to ban the setting of outreach goals, but seeks to prevent the tying of compensation of individual workers, by any organization that receives funding under the FNA, to the number of individuals who apply for SNAP as a result of that particular worker's efforts as required by the Agricultural Act of 2014. The Department is hereby clarifying that the ban does not apply to the setting of outreach goals at the level of the individual or the organization, so long as those goals are not tied to individual worker compensation. The Department believes the regulatory text is sufficiently clear in this regard and maintains the language from the proposed rule.

Regarding the comment on potential government overreach, the Department has little discretion in how this provision of the Agricultural Act of 2014 is implemented. If an organization does not receive funding under the FNA, then this regulation would not apply to them. However, for organizations that do receive funding under the FNA, the final rule maintains the restriction on the spending of funds received from any source.

Other Impacted FNS Programs

The FNA provides authorization of funds for SNAP, and also for food purchases and administrative costs for the Food Distribution Program on Indian Reservations (FDPIR) (7 U.S.C. 2013b) and for food purchases for The Emergency Food Assistance Program (TEFAP) (7 U.S.C. 2036). Under the proposed rule, FDPIR and TEFAP funds, as authorized under the FNA, would not be permitted for use in banned recruitment activities as described above.

No comments were received regarding the impact of the proposed rule on programs other than SNAP. As a result, the Department will proceed, as discussed in the proposed rule, to amend current 7 CFR 251.10(i), to prohibit entities funded by TEFAP from compensating staff engaged in SNAP outreach activities based on the number who apply to receive SNAP benefits. FDPIR regulations, at Section 253.11 of Title 7, currently require that funds must be expended and accounted for in accordance with the SNAP regulations at Part 277. Because the SNAP regulations at Part 277 have been amended to account for the changes mandated by the Agricultural Act of 2014, FDPIR funds, as authorized under FNA, would not be permitted for use in SNAP recruitment and promotion activities.

III. Procedural Matters Executive Order 12866 and 13563

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 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 determined to be not significant and was not reviewed by the Office of Management and Budget (OMB) in conformance with Executive Order 12866.

Regulatory Impact Analysis

This rule has been designated as not significant by the Office of Management and Budget, therefore, no Regulatory Impact Analysis is required.

Regulatory Flexibility Act

The Regulatory Flexibility Act (5 U.S.C. 601-612) requires Agencies to analyze the impact of rulemaking on small entities and consider alternatives that would minimize any significant impacts on a substantial number of small entities. Pursuant to that review, it has been certified that this rule would not have a significant impact on a substantial number of small entities.

This final rule would not have an impact on small entities because, while the rule would restrict the types of recruitment and promotion activities eligible for Federal reimbursement and the types of activities for which funds authorized to be appropriated under the FNA may be spent, it does not change the type of entities that may receive administrative reimbursement or the rate at which they may be reimbursed for allowable activities. In addition, the rule would prohibit entities that receive funds under the FNA from compensating any person engaged in outreach or recruitment activities based on the number of individuals who apply to receive SNAP benefits; however, this is not expected to limit the ability of small entities, or any entity, from using other methods of compensating persons engaged in outreach or recruitment activities.

Unfunded Mandates Reform Act

Title II of the Unfunded Mandates Reform Act of 1995 (UMRA), Public Law 104-4, establishes requirements for Federal agencies to assess the effects of their regulatory actions on State, local and tribal governments and the private sector. Under Section 202 of the UMRA, the Department generally must prepare a written statement, including a cost benefit analysis, for proposed and final rules with “Federal mandates” that may result in expenditures by State, local or Tribal governments, in the aggregate, or the private sector, of $146 million or more (when adjusted for 2016 inflation; GDP deflator source: Table 1.1.9 at http://www.bea.gov/iTable) in any one year. When such a statement is needed for a rule, Section 205 of the UMRA generally requires the Department to identify and consider a reasonable number of regulatory alternatives and adopt the most cost effective or least burdensome alternative that achieves the objectives of the rule.

This final rule does not contain Federal mandates (under the regulatory provisions of Title II of the UMRA) for State, local and Tribal governments or the private sector of $146 million or more in any one year. Thus, the rule is not subject to the requirements of Sections 202 and 205 of the UMRA.

Executive Order 12372

The State Administrative Matching Grants for the Supplemental Nutrition Assistance Program is listed in the Catalog of Federal Domestic Assistance Programs under 10.561. For the reasons set forth in the final rule in 2 CFR chapter IV, and related Notice (48 FR 29114, June 24, 1983), this program is included in the scope of Executive Order 12372, which requires intergovernmental consultation with State and local officials. FNS has consulted with State and local officials regarding the changes set forth in this rule by issuing to SNAP State agencies on March 21, 2014, an Implementation Memorandum for the 2014 Farm Bill which included guidance on implementing the changes in Section 4018 and on May 5, 2014, issuing a Question and Answer Memorandum responding to implementation questions from the State SNAP agencies and their partners. In addition, FNS hosted a stakeholder meeting on September 4, 2014, to consult with State and local representatives on the provisions of Section 4018.

Federalism Summary Impact Statement

Executive Order 13132 requires Federal agencies to consider the impact of their regulatory actions on State and local governments. Where such actions have federalism implications, agencies are directed to provide a statement for inclusion in the preamble to the regulations describing the agency's considerations in terms of the three categories called for under Section (6)(b)(2)(B) of Executive Order 13121. The Department has determined that this final rule does not have federalism implications. This rule does not impose substantial or direct compliance costs on State and local governments. Therefore, under Section 6(b) of the Executive Order, a federalism summary impact statement is not required.

Executive Order 12988, Civil Justice Reform

This final rule has been reviewed under Executive Order 12988, Civil Justice Reform. This final rule is intended to have preemptive effect with respect to any State or local laws, regulations or policies which conflict with its provisions or which would otherwise impede its full and timely implementation.

This final rule is not intended to have retroactive effect unless so specified in the Effective Dates section of the final rule. Prior to any judicial challenge to the provisions of the final rule, all applicable administrative procedures must be exhausted.

Civil Rights Impact Analysis

FNS has reviewed this final rule in accordance with USDA Regulation 4300-4, “Civil Rights Impact Analysis,” to identify any major civil rights impacts the rule might have on program participants on the basis of age, race, color, national origin, sex, or disability. After a careful review of the rule's intent and provisions, FNS has determined that this rule is not expected to affect the participation of protected individuals in the Supplemental Nutrition Assistance Program.

Executive Order 13175

This final rule has been reviewed in accordance with the requirements of Executive Order 13175, “Consultation and Coordination with Indian Tribal Governments.” Executive Order 13175 requires Federal agencies to consult and coordinate with tribes on a government-to-government basis on policies that have tribal implications, including regulations, legislative comments or proposed legislation, and other policy statements or actions that have substantial direct effects on one or more Indian tribes, on the relationship between the Federal Government and Indian tribes or on the distribution of power and responsibilities between the Federal Government and Indian tribes.

FNS has assessed the impact of this rule on Indian tribes and determined that while this rule may have tribal implications as discussed in the summary of comments in the preamble, FNS has no discretion to change the implementation of the final rule, and for that reason no tribal consultation under Executive Order 13175 is required. If a Tribe requests consultation, FNS will work with the USDA Office of Tribal Relations to ensure meaningful consultation is provided where changes, additions, and modifications identified herein are not expressly mandated by Congress.

Paperwork Reduction Act

The Paperwork Reduction Act of 1995 (44 U.S.C. Chap. 35; 5 CFR part 1320) requires Office of Management and Budget (OMB) approval of all covered collections of information by a Federal agency before such collections can be implemented. Respondents are not required to respond to any such collection of information unless it displays a current valid OMB control number. This rule does not contain information collection requirements subject to approval by the Office of Management and Budget under the Paperwork Reduction Act of 1994.

E-Government Act Compliance

The Department 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.

List of Subjects 7 CFR Part 251

The Emergency Food Assistance Program, Miscellaneous provisions.

7 CFR Part 271

Supplemental Nutrition Assistance Program, Promotional activities.

7 CFR Part 272

Supplemental Nutrition Assistance Program, Program informational activities.

7 CFR Part 277

Supplemental Nutrition Assistance Program, Funding.

Accordingly, 7 CFR parts 251, 271, 272 and 277 are amended as follows:

PART 251—THE EMERGENCY FOOD ASSISTANCE PROGRAM 1. The authority citation for 7 CFR part 251 is revised to read as follows: Authority:

7 U.S.C. 2011-2036.

2. Revise § 251.10 (i) to read as follows:
§ 251.10 Miscellaneous provisions.

(i) Recruitment activities related to the Supplemental Nutrition Assistance Program (SNAP). Any entity that receives donated foods identified in this section must adhere to regulations set forth under § 277.4(b)(6) of this chapter.

PART 271—GENERAL INFORMATION AND DEFINITIONS 3. The authority citation for 7 CFR part 271 continues to read as follows: Authority:

7 U.S.C. 2011-2036.

4. Add § 271.9 to read as follows:
§ 271.9 Promotional activities.

No funds authorized to be appropriated under the Food and Nutrition Act of 2008, as amended, shall be used for recruitment or promotion activities as described in § 277.4(b)(5). No entity receiving funds under the Food and Nutrition Act of 2008, as amended, shall be permitted to perform activities described in § 277.4(b)(6) of this chapter.

PART 272—REQUIREMENTS FOR PARTICIPATING STATE AGENCIES 5. The authority citation for 7 CFR part 272 continues to read as follows: Authority:

7 U.S.C. 2011-2036.

6. Revise § 272.5(c) to read as follows:
§ 272.5 Program informational activities.

(c) Program informational activities for low-income households. At their option, State agencies may carry out and claim associated costs for Program informational activities designed to inform low-income households about the availability, eligibility requirements, application procedures, and benefits of SNAP. Allowable informational activities shall not include recruitment activities as described in § 277.4(b)(5) of this chapter. Program informational materials used in such activities shall be subject to § 272.4(b), which pertains to bilingual requirements. Before FNS considers costs for allowable informational activities eligible for reimbursement at the fifty percent rate under part 277 of this chapter, State agencies shall obtain FNS approval for the attachment to their Plans of Operation as specified in § 272.2(d)(1)(ix). In such attachments, State agencies shall describe the subject activities with respect to the socio-economic and demographic characteristics of the target population, types of media used, geographic areas warranting attention, and outside organizations which would be involved. State agencies shall update this attachment to their Plans of Operation when significant changes occur and shall report projected costs for this Program activity in accordance with § 272.2(c), (e), and (f).

PART 277—PAYMENTS OF CERTAIN ADMINISTRATIVE COSTS OF STATE AGENCIES 7. The authority citation for 7 CFR part 277 continues to read as follows: Authority:

7 U.S.C. 2011-2036.

8. In § 277.4: a. Remove the phrase “Food Stamp Program” wherever it appears and add in its place “SNAP”. b. Amend paragraph (b) introductory text by removing the last two sentences; and c. Add paragraphs (b)(5) and (b)(6).

The additions read as follows:

§ 277.4 Funding.

(b) * * *

(5) The Federal reimbursement rate shall include reimbursement for SNAP informational activities, but shall not include the following:

(i) Recruitment activities designed to persuade an individual to apply for SNAP benefits through the use of persuasive practices. Persuasive practices constitute coercing or pressuring an individual to apply, or providing incentives to fill out an application for SNAP benefits. Communicating factual information pertaining to SNAP so that an individual can make an informed choice is not a recruitment activity designed to persuade an individual to apply for SNAP benefits.

(ii) Television, radio or billboard advertisements that are designed to promote SNAP benefits and enrollment, excepting the use of such advertisements for programmatic activities undertaken with respect to benefits provided under § 280.1 of this chapter. This restriction does not apply to radio, television, or billboard advertisements that are not designed to promote SNAP benefits and enrollment and that provide factual information identifying retail food stores where SNAP benefits are accepted.

(iii) Agreements with foreign governments that are designed to promote SNAP benefits and enrollment.

(6) Any entity that receives funding from the programs identified by this section and § 251.4 of this chapter is prohibited from compensating any person for conducting outreach activities relating to participation in, or for recruiting individuals to apply to receive benefits under, the Supplemental Nutrition Assistance Program, if the amount of the compensation would be based on the number of individuals who apply to receive the benefits.

Dated: December 13, 2016. Audrey Rowe, Administrator, Food and Nutrition Service.
[FR Doc. 2016-30621 Filed 12-19-16; 8:45 am] BILLING CODE 3410-30-P
DEPARTMENT OF AGRICULTURE Agricultural Marketing Service 7 CFR Part 923 [Doc. No. AMS-SC-16-0077; SC16-923-1 FR] Cherries Grown in Designated Counties in Washington; Increased Assessment Rate AGENCY:

Agricultural Marketing Service, USDA.

ACTION:

Final rule.

SUMMARY:

This rule implements a recommendation from the Washington Cherry Marketing Committee (Committee) to increase the assessment rate established for the 2016-2017 and subsequent fiscal periods from $0.15 to $0.25 per ton of Washington cherries handled. The Committee locally administers the marketing order and is comprised of growers and handlers of cherries operating within the production area. Assessments upon cherry handlers are used by the Committee to fund reasonable and necessary expenses of the marketing order. The fiscal period begins April 1 and ends March 31. The assessment rate will remain in effect indefinitely unless modified, suspended or terminated.

DATES:

Effective December 21, 2016.

FOR FURTHER INFORMATION CONTACT:

Teresa Hutchinson or Gary D. Olson, Northwest Marketing Field Office, Marketing Order and Agreement Division, Specialty Crops Program, AMS, USDA; Telephone: (503) 326-2724, Fax: (503) 326-7440, or Email: [email protected] or [email protected]

Small businesses may request information on complying with this regulation by contacting Richard Lower, Marketing Order and Agreement Division, Specialty Crops Program, AMS, USDA, 1400 Independence Avenue SW., STOP 0237, Washington, DC 20250-0237; Telephone: (202) 720-2491, Fax: (202) 720-8938, or Email: [email protected]

SUPPLEMENTARY INFORMATION:

This rule is issued under Marketing Order No. 923, as amended (7 CFR part 923), regulating the handling of cherries grown in designated counties in Washington, 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, Washington cherry 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 Washington cherries beginning April 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 2016-2017 and subsequent fiscal periods from $0.15 to $0.25 per ton of Washington cherries handled.

The order provides authority for the Committee, with the approval of USDA, to formulate an annual budget of expenses and collect assessments from handlers to administer the program. The members of the Committee are growers and handlers of Washington cherries. They are familiar with the Committee'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 2013-2014 and subsequent fiscal periods, the Committee recommended, and the USDA approved, an assessment rate of $0.15 per ton of Washington cherries that would continue in effect from fiscal period to fiscal period unless modified, suspended, or terminated by USDA upon recommendation and information submitted by the Committee or other information available to USDA.

The Committee met on May 18, 2016, and unanimously recommended expenditures of $57,150 for the 2016-2017 fiscal period. In comparison, the previous fiscal period's budgeted expenditures were $59,750. The Committee also unanimously recommended an assessment rate of $0.25 per ton of Washington cherries. The recommended assessment rate of $0.25 is $0.10 higher than the rate currently in effect.

The expenditures recommended by the Committee for the 2016-2017 fiscal period include $25,000 for the management fee; $7,000 for compliance; $5,000 for the data management fee; $5,000 for accounting administration; $5,000 for research; $4,000 for Committee travel; $3,000 for an audit; and $3,150 for other miscellaneous expenses. In comparison, expenditures for the 2015-2016 fiscal period were $25,000 for the management fee; $7,000 for compliance; $5,000 for the data management fee; $7,000 for accounting administration; $5,000 for research; $4,000 for Committee travel; $4,000 for an audit; and $2,750 for other miscellaneous expenses.

Committee members estimated the 2016 fresh cherry production to be approximately 150,000 tons, which would be less than the 2015 production of 165,358 tons by 15,358 tons. However, cherry production tends to fluctuate due to the effects of weather, pollination, and tree health. The Committee's recommended assessment rate was derived by dividing the 2016-2017 anticipated expenses by the expected shipments of Washington cherries, while also taking into account the Committee's monetary reserve. The recommended assessment rate of $0.25 per ton, when multiplied by the 150,000 tons of estimated 2016 Washington cherry shipments, is expected to generate $37,500 in handler assessments. The projected revenue from handler assessments, together with funds from the Committee's monetary reserve, should be adequate to cover the 2016-2017 budgeted expenses of $57,150. The Committee expects its monetary reserve to decrease from $49,661 at the beginning of the 2016-2017 fiscal period to approximately $30,011 at the end of the 2016-2017 fiscal period. That amount will be within the provisions of the order and will provide the Committee with greater ability to absorb fluctuations in assessment income and expenses into the future.

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 Committee or other available information.

Although this assessment rate will be in effect for an indefinite period, the Committee will continue to meet prior to or during each fiscal period to recommend a budget of expenses and consider recommendations for modification of the assessment rate. The dates and times of Committee meetings are available from the Committee and USDA. Committee meetings are open to the public and interested persons may express their views at these meetings. USDA will evaluate Committee recommendations and other available information to determine whether modification of the assessment rate is needed. Further rulemaking will be undertaken as necessary. The Committee's 2016-2017 budget and those for subsequent fiscal periods will be reviewed and, as appropriate, approved by USDA.

Final Regulatory Flexibility Analysis

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 53 handlers of Washington sweet cherries subject to regulation under the order and approximately 1,500 growers in the regulated production area. Small agricultural service firms are defined by the Small Business Administration (13 CFR 121.201) as those having annual receipts of less than $7,500,000, and small agricultural growers are defined as those having annual receipts of less than $750,000.

National Agricultural Statistics Service has prepared a preliminary report for the 2015 shipping season showing that prices for the 171,600 tons of sweet cherries that entered the fresh market averaged $2,380 per ton. Based on the number of growers in the production area (1,500), the average grower revenue from the sale of sweet cherries in 2015 can therefore be estimated at approximately $272,272 per year. In addition, the Committee reports that most of the industry's 53 handlers reported gross receipts of less than $7,500,000 from the sale of fresh sweet cherries last fiscal period. Thus, the majority of growers and handlers of Washington sweet cherries may be classified as small entities.

This action increases the assessment rate established for the Committee and collected from handlers for the 2016-2017 and subsequent fiscal periods from $0.15 to $0.25 per ton of Washington cherries handled. The Committee unanimously recommended 2016-2017 expenditures of $57,150 and an assessment rate of $0.25 per ton. The assessment rate of $0.25 is $0.10 higher than the rate established for the 2013-2014 fiscal period.

The 2016-2017 Washington cherry crop is estimated at 150,000 tons. At the $0.25 per ton assessment rate, the Committee anticipates that assessment income of approximately $37,500, along with reserve funds, should be adequate to cover budgeted expenses for the 2016-2017 fiscal period. With the increased assessment rate and budgeted expense level, the Committee anticipates that $19,650 will need to be deducted from the monetary reserve. As such, reserve funds are estimated to be at $30,011 on March 31, 2017. That reserve level is within the maximum permitted by the order of approximately one fiscal period's operational expenses (§ 923.42(a)(2)).

The expenditures recommended by the Committee for the 2016-2017 fiscal period include $25,000 for the management fee; $7,000 for compliance; $5,000 for the data management fee; $5,000 for accounting administration; $5,000 for research; $4,000 for Committee travel; $3,000 for the audit; and $3,150 for other miscellaneous expenses.

In comparison, expenditures for the 2015-2016 fiscal period were $25,000 for the management fee; $7,000 for compliance; $5,000 for the data management fee; $7,000 for accounting administration; $5,000 for research; $4,000 for Committee travel; $4,000 for the audit; and $2,750 for other miscellaneous expenses.

The Committee discussed alternatives to this action, including recommending alternative expenditure levels and assessment rates. Although lower assessment rates were considered, none were selected because they would not have generated sufficient income to administer the order.

A review of historical data and preliminary information pertaining to the upcoming fiscal period indicates that the grower price for the 2016-2017 fiscal period could average $2,380 per ton of sweet cherries. Therefore, the estimated assessment revenue for the 2016-2017 fiscal period, as a percentage of total grower revenue, is approximately 0.01 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. Some of the additional costs may be passed on to growers. However, these costs are offset by the benefits derived by the operation of the order.

In addition, the Committee's meeting was widely publicized throughout the Washington cherry industry and all interested persons were invited to attend the meeting and participate in Committee deliberations on all issues. Like all Committee meetings, the May 18, 2016, meeting was a public meeting and all entities, both large and small, were able 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. 0581-0189 (Marketing Orders for Fruit Crops). No changes in those requirements are necessary as a result of this action. 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 Washington cherry 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. As noted in the initial regulatory flexibility analysis, USDA has not identified any relevant Federal rules that duplicate, overlap, or conflict with this final rule.

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 21, 2016 (81 FR 64785). Copies of the proposed rule were also emailed to all commodity handlers. Finally, the proposal was made available through the Internet by USDA and the Office of the Federal Register. A 15-day comment period ending October 6, 2016, was provided for interested persons to respond to the proposal.

One comment was received during the comment period in response to the proposal. The commenter was concerned about the impact that the increased assessment rate would have on growers. The commenter also questioned why the assessment is only applied to certain counties in Washington, and not others. In addition, the commenter stated that the opinions of sweet cherry growers and handlers should be taken into consideration when establishing assessment rates, and that there should be flexibility during the transitional period when a new assessment rate is implemented. Lastly, the commenter offered recommendations with regards to the assessment rate establishment process and took exception to the indefinite period that assessment rates are in effect.

Under the order, it is handlers that are assessed, not growers. As such, growers will not be directly impacted by this action. However, as mentioned previously in this rule, some of the additional costs to handlers as a result of this action may be passed on to growers. Nevertheless, USDA believes that such additional costs will be offset by the benefits derived by the operation of the order.

Furthermore, the commenter's request for clarity with regards to why only certain counties are covered by this regulatory change is addressed in the order's provisions. Section 923.4 defines the order's production area as the counties of Okanogan, Chelan, Kittitas, Yakima, Klickitat in the State of Washington and all of the counties in Washington lying east thereof. Only handlers who handle cherries grown within the specific production area are subject to assessment.

Lastly, the commenter's thoughts regarding the assessment rate establishment process and effective period have been previously addressed in this rule. The Committee meets prior to, or during, each fiscal period to recommend a budget of expenses and consider recommendations for modification of the assessment rate. The dates and times of Committee meetings are available from the Committee or USDA. Committee meetings are open to the public and interested persons may express their views at these meetings.

Meetings are widely publicized throughout the Washington cherry industry and all interested persons are invited to attend the meetings and participate in Committee deliberations on all issues. In addition, interested persons are invited to submit comments on any proposed assessment rules. All comments are considered prior to finalization of a proposed rule. Once established, assessment rates remain in effect until modified by USDA upon the recommendation of the Committee.

Accordingly, no changes will be made to the rule as proposed, based on the comment 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 Committee 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 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: (1) The 2016-2017 fiscal period began on April 1, 2016, and the order requires that the assessment rate for each fiscal period apply to all assessable Washington cherries handled during such fiscal period; (2) the Committee needs to have sufficient funds to pay its expenses, which are incurred on a continuous basis; (3) handlers have already shipped Washington cherries from the 2016 crop; and (4) handlers are aware of this action, which was unanimously recommended by the Committee at a public meeting and is similar to other assessment rate actions issued in past years.

List of Subjects in 7 CFR Part 923

Cherries, Marketing agreements, Reporting and recordkeeping requirements.

For the reasons set forth in the preamble, 7 CFR part 923 is amended as follows:

PART 923—CHERRIES GROWN IN DESIGNATED COUNTIES IN WASHINGTON 1. The authority citation for 7 CFR part 923 continues to read as follows: Authority:

7 U.S.C. 601-674.

2. Section 923.236 is revised to read as follows:
§ 923.236 Assessment rate.

On and after April 1, 2016, an assessment rate of $0.25 per ton is established for the Washington Cherry Marketing Committee.

Dated: December 12, 2016. Bruce Summers, Associate Administrator, Agricultural Marketing Service.
[FR Doc. 2016-30302 Filed 12-19-16; 8:45 am] BILLING CODE 3410-02-P
DEPARTMENT OF AGRICULTURE Agricultural Marketing Service 7 CFR Part 981 [Doc. No. AMS-SC-16-0045; SC16-981-2 FR] Almonds Grown in California; Increased Assessment Rate AGENCY:

Agricultural Marketing Service, USDA.

ACTION:

Final rule.

SUMMARY:

This rule implements a recommendation from the Almond Board of California (Board) for an increase of the assessment rate established for the 2016-17 through the 2018-19 crop years from $0.03 to $0.04 per pound of almonds handled under the marketing order (order). Of the $0.04 per pound assessment, 60 percent (or $0.024 per pound) is available as credit-back for handlers who conduct their own promotional activities. The assessment rate will return to $0.03 for the 2019-20 and subsequent crop years, and the amount available for handler credit-back will return to $0.018 per pound (60 percent). The Board locally administers the order and is comprised of growers and handlers of almonds grown in California. Assessments upon almond handlers are used by the Board to fund reasonable and necessary expenses of the program. The crop year began on August 1 and ends on July 31. The $0.04 assessment rate will remain in effect until July 31, 2019. Beginning August 1, 2019, the assessment rate will return to $0.03 and will remain in effect indefinitely unless modified, suspended, or terminated. Two comments period were provided to interested individuals. Comments will be addressed later in this document.

DATES:

Effective December 21, 2016.

FOR FURTHER INFORMATION CONTACT:

Marketing Specialist Andrea Ricci, or Regional Director Jeffrey Smutny, California Marketing Field Office, Marketing Order and Agreement Division, Specialty Crops Program, AMS, USDA; Telephone: (559) 487-5901, Fax: (559) 487-5906, or Email: with [email protected] or [email protected]

Small businesses may request information on complying with this regulation by contacting Richard Lower, Marketing Order and Agreement Division, Specialty Crops Program, AMS, USDA, 1400 Independence Avenue SW., STOP 0237, Washington, DC 20250-0237; Telephone: (202) 720-2491, Fax: (202) 720-8938, or Email: [email protected]

SUPPLEMENTARY INFORMATION:

This rule is issued under Marketing Order No. 981, as amended (7 CFR part 981), regulating the handling of almonds 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 marketing order now in effect, California almond 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 almonds beginning on August 1, 2016, through July 31, 2019. Beginning August 1, 2019, the assessment rate will return to $0.03 and will remain in effect indefinitely unless modified, 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 established for the Board for the 2016-17 through 2018-19 crop years from $0.03 to $0.04 per pound of almonds received. Of the $0.04 per pound assessment, 60 percent (or $0.024 per pound) is available as credit-back for handlers who conduct their own promotional activities. The assessment rate will return to $0.03 for the 2019-20 and subsequent crop years, and the amount available for handler credit-back will return to $0.018 per pound (60 percent).

The California almond marketing 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. The members of the Board are growers and handlers of California almonds. They are familiar with the Board's needs and with the costs for goods and services in their local area and thus are in a position to formulate an appropriate budget and assessment rate. The assessment rate is formulated and discussed in a public meeting. Therefore, all directly affected persons have an opportunity to participate and provide input.

For the 2005-06 and subsequent crop years, the Board recommended, and USDA approved, an assessment rate of $0.03 per pound that would continue in effect from crop year to crop year unless modified, suspended, or terminated by USDA upon recommendation and information submitted by the Board or other information available to USDA. Of the $0.03 per pound assessment, 60 percent ($0.018) per pound was made available as credit-back for handlers who conducted their own promotional activities.

The Board met on April 12, 2016, and unanimously recommended 2016-17 expenditures of $69,897,626 and an assessment rate of $0.04 per pound of almonds received. In comparison, last year's budgeted expenditures were $58,998,976. The assessment rate of $0.04 is $0.01 higher than the rate currently in effect, and the credit-back portion of the assessment rate ($0.024 per pound) is $0.006 more than the credit-back portion currently in effect.

The Board estimates a production increase of thirty percent, or 600 million pounds, by the 2019-20 crop year. This increase is nearly as much as is consumed by the industry's largest market. Due to the size of the increase in forecasted production, the Board believes that increased market development projects and new marketing programs are required to successfully market the additional supply. Accordingly, the Board has recommended a new “Nut of Choice” marketing program.

The Board also anticipates needing additional funding for the industry's new “Crop of Choice” research program, as well as additional research to address concerns such as changing water supply and quality systems; air quality and how it relates to harvesting, pesticide, and energy use; and bee health.

The three-year higher assessment rate is needed to fund the increase in marketing and research activities. The Board anticipates that by the 2019-20 crop year, the increase in production assessed at the reinstated $0.03 per pound rate should generate sufficient revenue to cover the anticipated expenditures at that time. Therefore, beginning August 1, 2019, the assessment rate will return to $0.03 per pound.

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

Budget expense categories 2015-16 2016-17 Operations Expenses $ 7,904,000 $ 8,404,000 Board Accelerated Innovation Management (AIM) Initiatives 1,500,000 1,000,000 Crop of Choice Initiatives 0 5,625,000 Reputation Management 1,826,350 2,000,000 Production Research 1,843,331 1,843,331 Environmental Research 1,039,790 1,039,790 Scientific Affairs/Nutrition 1,640,000 1,640,000 Global Market Development 38,583,756 38,583,756 Nut of Choice Initiatives 0 5,100,000 Technical & Regulatory Affairs 1,045,500 1,045,500 Industry Services 2,436,220 2,436,220 Almond Quality & Food Safety 790,800 790,800 Corporate Technology 389,229 389,229

The assessment rate recommended by the Board was derived by considering the anticipated 30-percent production increase in the next three years, anticipated expenditures plus additional program expenses, current production level, and maintaining adequate operating reserve funds. In its recommendation, the Board utilized an estimate of 1,835,290,000 pounds of assessable almonds for the 2016-17 crop year. If realized, this should provide estimated assessment revenue of $62,262,213, which reflects credit-back reimbursements and organic exemptions. In addition, it is anticipated that $20,907,722 will be provided by other sources, including interest income, Market Access Program (MAP) funds, and operating reserve funds. When combined, revenue from these sources should be adequate to cover budgeted expenses.

Section 981.81 of the order authorizes the Board to maintain operating reserve funds consisting of an administrative-research portion and a marketing promotion portion, and states that the amount allocated to each portion shall not exceed six months' budgeted expenses for that activity area. Funds in the reserve at the end of the 2016-17 crop year are estimated to be approximately $16,581,222, well within the amount permitted by the order.

A proposed rule concerning this action was published in the Federal Register on July 18, 2016 (81 FR 46616). A 15-day comment period ending August 2, 2016, was provided for interested persons to respond to the proposal. One commenter raised concern that notification of the proposal was not promptly circulated within industry and asked for an extension of the comment period. After reviewing the request, USDA published a notice reopening the comment period for an additional 30 days in the Federal Register on September 12, 2016 (81 FR 62668). All comments will be addressed further in this document.

The assessment rate established in this rule will continue in effect until July 31, 2019. Beginning August 1, 2019, the assessment rate will return to $0.03 and 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 in effect for a specified period, the Board will continue to meet prior to or during each crop 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 would evaluate Board recommendations and other available information to determine whether modification of the assessment rate is needed. Further rulemaking would be undertaken as necessary. The Board's 2016-17 budget and those for subsequent crop years would be reviewed and, as appropriate, approved by USDA.

Final Regulatory Flexibility Analysis

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 6,800 almond growers in the production area and approximately 100 handlers subject to regulation under the marketing order. Small agricultural producers are defined by the Small Business Administration (SBA) as those having annual receipts of less than $750,000, and small agricultural service firms are defined as those whose annual receipts are less than $7,500,000 (13 CFR 121.201).

The National Agricultural Statistics Service (NASS) reported in its 2012 Agricultural Census that there were 6,841 almond farms in the production area (California), of which 6,204 had bearing acres. The following computation provides an estimate of the proportion of producers (farms) and agricultural service firms (handlers) that would be considered small under the SBA definitions.

The NASS Census data indicates that out of the 6,204 California farms with bearing acres of almonds, 4,471 (72 percent) have fewer than 100-bearing acres.

In its most recently reported crop year (2015), NASS reported an average yield of 2,130 pounds per acre and a season average grower price of $2.84 per pound. A 100-acre farm with an average yield of 2,130 pounds per acre would produce about 213,000 pounds of almonds. At $2.84 per pound, that farm's production would be valued at $604,920.

Because the Census of Agriculture indicates that the majority of California's almond farms are smaller than 100 acres, it could be concluded that the majority of growers had annual receipts from the sale of almonds in 2015 of less than $604,920, well below the SBA threshold of $750,000. Thus, over 70 percent of California's almond growers would be considered small growers according to SBA's definition.

According to information supplied by the Board, approximately 30 percent of California's almond handlers shipped almonds valued under $7,500,000 during the 2014-15 crop year and would therefore be considered small handlers according to the SBA definition.

This rule increases the assessment rate collected from handlers for the 2016-17 through the 2018-19 crop years from $0.03 to $0.04 per pound of almonds received. Of the $0.04 per pound assessment, 60 percent (or $0.024 per pound) is available as credit-back for handlers who conduct their own promotional activities, consistent with § 981.441 of the order's regulations and subject to Board approval. The Board unanimously recommended 2016-17 expenditures of $69,897,626 and an assessment rate of $0.04 per pound of almonds received. The assessment rate of $0.04 is $0.01 higher than the 2015-16 rate, and the credit-back portion of $0.024 per pound is $0.006 higher than the current credit-back portion of $0.018. The quantity of assessable almonds for the 2016-17 crop year is estimated at 1,835,290,000 pounds. This should provide estimated assessment revenue of $62,262,213, which reflects credit-back reimbursements and organic exemptions. In addition, it is anticipated that $20,907,722 will be provided by other sources, including interest income, MAP funds, and operating reserve funds. When combined, revenue from these sources should be adequate to cover budgeted expenses.

The major expenditures recommended by the Board for the 2016-17 crop year include $8,404,000 for Operations Expenses, $1,000,000 for Board AIM Initiatives, $5,625,000 for Crop of Choice Initiatives, $2,000,000 for Reputation Management, $1,843,331 for Production Research, $1,039,790 for Environmental Research, $1,640,000 for Scientific Affairs/Nutrition, $38,583,756 for Global Market Development, $5,100,000 for Nut of Choice Initiatives, $1,045,500 for Technical & Regulatory Affairs, $2,436,220 for Industry Services, $790,800 for Almond Quality & Food Safety, and $389,229 for Corporate Technology.

Budgeted expenses for these items in 2015-16 were $7,904,000 for Operations Expenses, $1,500,000 for Board AIM Initiatives, $0 for Crop of Choice Initiatives, $1,826,350 for Reputation Management, $1,843,331 for Production Research, $1,039,790 for Environmental Research, $1,640,000 for Scientific Affairs/Nutrition, $38,583,756 for Global Market Development, $0 for Nut of Choice Initiatives, $1,045,500 for Technical & Regulatory Affairs, $2,436,220 for Industry Services, $790,800 for Almond Quality & Food Safety, and $389,229 for Corporate Technology.

The Board estimates a production increase of 30 percent, or 600 million pounds, by the 2019-20 crop year. This increase is nearly as large as the current consumption of the industry's largest market. Increased market development investment as well as new marketing programs will be required to successfully market the additional supply. Additional investment in research is also needed to address concerns such as changing water supply and quality systems; air quality and how it relates to harvesting, pesticide, and energy use; and bee health. Accordingly, the three-year higher assessment rate is needed to fund the Board's new Nut of Choice marketing program and Crop of Choice research activities. The Board anticipates that by the 2019-20 crop year, the increased production assessed at the reinstated $0.03 per pound rate should generate sufficient revenue to cover the anticipated expenditures at that time.

Prior to arriving at this budget and assessment rate, the Board held a strategic planning session in February 2016. The Board also considered recommendations made from its various committees, including the Global Market Development Committee, Production Research Committee, and Environmental Committee. Alternative expenditure levels were discussed, based upon the relative value of various activities to the almond industry. Ultimately, the Board unanimously determined that 2016-17 expenditures of $69,897,626 were appropriate and that the recommended assessment rate, plus income from other sources and operation reverse funds, would generate sufficient revenue to meet its expenses.

A review of historical information and preliminary information pertaining to the upcoming crop year indicates that the grower price for the 2016-17 season could range between $4.00 and $2.84 per pound of almonds. Therefore, the estimated assessment revenue for the 2016-17 crop year (disregarding any amounts credited pursuant to § 981.41 and § 981.441) as a percentage of total grower revenue could range between 1.00 and 1.41 percent, respectively.

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. Some of the additional costs may be passed on to growers. However, these costs would be offset by the benefits derived by the operation of the marketing order. In addition, the Board's meeting was widely publicized throughout the California almond industry, and all interested persons were invited to attend the meeting and participate in Board deliberations on all issues. Like all Board meetings, the April 12, 2016, meeting was a public meeting, and all entities, both large and small, were able 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 Crops.) 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 almond 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.

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.

As previously noted, a proposed rule concerning this action was published providing a 15-day comment period for interested persons to respond to the proposal. In addition, on September 12, 2016, the comment period was reopened for an additional 30 days. Copies of the proposed rule were provided to all almond handlers. Finally, the proposal was made available through the internet by USDA and the Office of the Federal Register. A total of forty-six comments were received. Twenty-eight supported and eighteen opposed the proposal. Of the eighteen in opposition, three were grower/handlers, eleven were growers, two individuals were from outside of the production area, and two individuals did not identify themselves.

Of those who supported the proposal, twenty-three were growers.

The majority of the commenters in support of the proposal stated that increasing the assessment rate now was necessary to fund market development programs and new marketing and promotion activities to create demand prior to the onset of the increased production. Commenters noted that the industry is aware of the increasing almond acreage and the need to invest prior to the larger crop materializing. The commenters also noted that the three-year “sunset” feature will ensure that once the additional 30 percent increase in production is realized, the assessment rate will return to the current $0.03 rate. One commenter noted the need to develop demand for the increased supplies to ensure the carry-over inventory is kept near zero each year, which will help stabilize prices at the grower level and negate the effect of the increased assessment. Another commenter noted that the recent volatility in almond prices illustrates how critically important it is to make investments now. Several commenters stated the Board has had proven success in the areas of marketing and promotion; nutrition, environmental, and production research; and grower outreach; and they are pleased overall with the work of the Board. Commenters also expressed the need for continued investment in research, specifically in areas that will provide resources for growers to continue to remain profitable in the face of continued challenges. One commenter stated that programs such as the almond order are a good example of a public/private partnership which has worked for the consumer, farmer, and food safety while expanding markets around the world.

The majority of commenters in opposition of the proposal stated the increase of production over the next several years should generate adequate income to fund Board programs. In the development of the budget, the Board contemplated the production forecast of a 30 percent increase in the next three years. The Board anticipates the 2016-17 crop year production at 1.835 billion pounds, 2017-18 crop year production at 2.184 billion pounds, 2018-19 crop year production at 2.277 billion pounds, and 2019-20 crop year production at 2.354 billion pounds. The Board discussed the need to build demand before this increased production is realized. The Board strongly believes not doing so in advance will negatively impact prices. The Board is concerned that without market expansion and new market development programs, the anticipated 600 million pounds' increase in production will lead to oversupply. This year, after Committee input and Board strategic planning, the Board decided an increase in the assessment rate was necessary. The increase in revenue will be used to fund new marketing programs and increase the budgets of existing market research and development projects. At the $0.03 assessment rate, the Board determined funding generated would not be adequate to cover anticipated expenses necessary to establish outlets for the increased production. In its recommendation to have the assessment rate revert back to $0.03 after three years, the Board considered current program needs at the current production level against the anticipated production in the next three years, while recognizing that the increased production will generate adequate income once realized.

In its discussion, the Board also considered the time and resources needed to develop new marketing and promotion programs. The Global Market Demand Committee developed a comprehensive marketing plan, which includes the Nut of Choice program. The plan encompasses expanding the Germany and Japan markets by increasing funding in order to increase impressions; accelerating momentum by increasing budgets and impressions for the U.S./Canada, France, United Kingdom, India, and South Korea markets; maintaining budget levels in the China market and Global Initiative; and allocating spending for one to two additional exploratory markets (i.e., Mexico, Indonesia, and Saudi Arabia regions). Prior to the Committee recommending the marketing plan, it reviewed key factors for each market, including market attractiveness, total market demand forecast, market outlook, opportunities and challenges, historical spending data, and low-end and high-end demand potential. The Board also determined that with the current environment of the agriculture industry, investing in new and innovative techniques would be key to the viability of the almond industry moving forward. Key areas of focus are water management, food safety, production, pest management, pollination, biomass, and soil health.

Additionally, several commenters stated that for growers, with the decline in prices and the rising production costs, it is difficult to remain profitable. The Board has had considerable strategic discussions about the continued challenges facing growers, including rising production costs, water availability, and regulatory impacts, and ways to address the issues. As a result, a substantial portion of the revenue generated by the increased assessment rate is designated for research. More specifically, the newly established nine capabilities of the Crop of Choice Program will fund research at a level of $5.625 million. Areas of focus include Irrigation and Nutrients; Orchard, Tree, Rootstock; Harvesting; Value-Added Orchard Utilization; Soil Health Management; Pest Management; Food Safety; Pollination; Energy; and the Sustainability Program update and outreach. This investment is intended to develop new and innovative techniques to help the almond industry continue to remain profitable. In addition, the increased investment in market development and new marketing programs is intended to create demand to absorb the anticipated increase in production. In turn, these activities should stabilize prices.

Three commenters raised concern that only 23 percent of the additional funding generated is allocated to direct marketing. The commenters further stated that if at least 80 percent of the additional funding was not allocated to direct marketing and promotion activities, they were opposed to the increase. The Board utilizes a comprehensive strategy that includes a balanced approach for research and marketing and promotion activities to sustain and develop market outlets. The Board-funded research plays an integral part in supporting the almond industry, which continues to face new challenges as the landscape of agriculture changes. The Board triennially holds strategic planning retreats to develop tactics that directly address the needs of the almond industry as well as ever-changing market demands. The Board recommends a budget each year utilizing recommendations made by each Committee. Committees are comprised of industry members and meet regularly to deliberate and prioritize programs. Marketing and promotion has been set as a priority, and recommendations have been made to increase spending. Along with the marketing activities, the Board has a robust research program. Nutrition, production, environmental, and food safety research has been utilized by the marketing programs to better position almonds in the marketplace. Specifically, in the past several years with the drought in California, the almond industry came under media fire for its water use. Through the research programs funded by the Board, the marketing team was able to provide data regarding almonds and water use. This research was pivotal in transitioning the conversation from negative to neutral or positive. Additionally, almonds have a qualified heart-healthy claim, which can be directly linked to the research funded as part of the nutrition research program. The almond industry's ability to utilize the heart-health claim is a vital part of the marketing program. Further, the Board is celebrating the tenth year of its California Almond Sustainability Program. As consumer demand continues to shift towards products that are sustainable, the Sustainability Program has been a great resource to the marketing program to provide data regarding the sustainability of the almond industry. The research and marketing and promotion activities work interdependently, ensuring the viability of the industry.

Two commenters stated an assessment rate increase should be approved by growers prior to implementation. Two of the commenters questioned the outreach to the growing community, stating growers should have a larger role in the discussion. One of the commenters requested a grower referendum prior to implementation of an assessment rate change. All Board and Committee meetings are open to the public, allowing directly affected persons and other interested parties an opportunity to participate and provide input. On April 14, 2016, the Board sent a memo to almond handlers and growers as part of its mailer, providing notice of the Board's unanimous recommendation to increase the assessment rate. The Board also included an article regarding the recommendation in the April California Almonds Outlook e-newsletter. In addition, two comment periods were provided, which gave interested parties the opportunity to comment on the recommended proposal. The Board included notice of the comment periods in its industry e-newsletters, on its Web site (specifically, on the grower site), on its social media platforms, and announced this information at its Committee and Board meetings. Notices of the comment periods were also made available on the USDA Web site. In response to the request to hold a grower referendum, under the California almond marketing order, referenda are conducted every five years to ascertain whether continuation of the order is favored by growers. The last continuance referendum was held in 2014, and results indicated continued grower support for the order. Furthermore, annual budget and assessment rate recommendations are among the many duties the Board, which is comprised of grower and handler members, is required to perform as authorized under the order.

One commenter raised concern that the additional funding will be used to increase the size and salaries of the organization, which will lead to the continuation of increasing the assessment rate year after year. Also, the commenter expressed concerns about transparency and availability of financial information. The majority of the funds generated by the increased assessment are allotted to research programs and marketing and promotion activities. For the past several years, operating expenses have fluctuated between 12 percent and 15 percent of the total budget. In the recommended budget for the 2016-17 crop year, operating expenses are approximately 12 percent of the total budget. In addition, in its unanimous recommendation, the Board stipulated that the increased assessment rate continue only through the 2018-19 crop year. The assessment rate will revert to the current $0.03 rate beginning August 1, 2019. All Board and Committee meetings are open to the public. On a quarterly basis, the Board reviews and approves financial statements at its public meetings. Those documents are made available to the public, and interested persons are encouraged to participate in all meetings.

One commenter expressed concern about the order's credit-back program and that it is not advantageous to non-branded handlers. While credit-back is associated with the assessment rate, the Board did not discuss the program as part of this proposal. This rule does not modify the percentage rate available for handler credit-back.

One commenter raised concern that the Nut of Choice and Crop of Choice programs appear to be an effort to improve the image of almonds at the expense of other California commodities. USDA has a strict policy against any marketing order boards, committees, or councils disparaging other commodities. USDA reviews all marketing and communication materials prior to publication to ensure that policy is being followed.

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.

It is further found that good cause exists for not postponing the effective date of this rule until 30 days after publication in the Federal Register (5 U.S.C. 553) because the 2016-17 crop year began August 1, 2016, and the marketing order requires that the rate of assessment for each crop year apply to all assessable almonds handled during such crop year. Further, handlers are aware of this rule, which was recommended at a public meeting. Also, a 15-day comment period was provided for in the proposed rule, followed by an additional 30-day comment period.

List of Subjects in 7 CFR Part 981

Almonds, Marketing agreements, Nuts, Reporting and recordkeeping requirements.

For the reasons set forth in the preamble, 7 CFR part 981 is amended as follows:

PART 981—ALMONDS GROWN IN CALIFORNIA 1. The authority citation for 7 CFR part 981 continues to read as follows: Authority:

7 U.S.C. 601-674.

2. Section 981.343 is revised to read as follows:
§ 981.343 Assessment rate.

For the period August 1, 2016, through July 31, 2019, the assessment rate shall be $0.04 per pound for California almonds. Of the $0.04 assessment rate, 60 percent per assessable pound is available for handler credit-back. On and after August 1, 2019, an assessment rate of $0.03 per pound is established for California almonds. Of the $0.03 assessment rate, 60 percent per assessable pound is available for handler credit-back.

Dated: November 12, 2016. Elanor Starmer, Administrator, Agricultural Marketing Service.
[FR Doc. 2016-30264 Filed 12-19-16; 8:45 am] BILLING CODE P
DEPARTMENT OF AGRICULTURE Agricultural Marketing Service 7 CFR Part 987 [Doc. No. AMS-SC-16-0084; SC16-987-1 FIR] Domestic Dates Produced or Packed in Riverside County, California; Decreased Assessment Rate AGENCY:

Agricultural Marketing Service, USDA.

ACTION:

Affirmation of interim rule as final rule.

SUMMARY:

The Department of Agriculture (USDA) is adopting, as a final rule, without change, an interim rule that implemented a recommendation from the California Date Administrative Committee (committee) to decrease the assessment rate established for the committee for the 2016-17 and subsequent crop years from $0.10 to $0.05 per hundredweight of dates handled under the marketing order (order). The committee locally administers the order and is comprised of producers and handlers of dates operating within the area of production. The interim rule was necessary to allow the committee to reduce its financial reserve while still providing adequate funding to meet program expenses.

DATES:

Effective December 21, 2016.

FOR FURTHER INFORMATION CONTACT:

Terry Vawter, Senior Marketing Specialist Jeffrey Smutny, Regional Director, California Marketing Field Office, Marketing Order and Agreement Division, Specialty Crops Program, AMS, USDA; Telephone: (559) 487-5901, Fax: (559) 487-5906, or Email: [email protected] or [email protected]

Small businesses may obtain information on complying with this regulation by viewing a guide at the following Web site: http://www.ams.usda.gov/rules-regulations/moa/small-businesses; or by contacting Richard Lower, Marketing Order and Agreement Division, Specialty Crops Program, AMS, USDA, 1400 Independence Avenue SW., STOP 0237, Washington, DC 20250-0237; Telephone: (202) 720-2491, Fax: (202) 720-8938, or Email: [email protected]

SUPPLEMENTARY INFORMATION:

This rule is issued under Marketing Agreement and Order No. 987, both as amended (7 CFR part 987), regulating the handling of domestic dates produced or packed in Riverside County, 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.

Under the order, California date handlers are subject to assessments, which provide funds to administer the order. Assessment rates issued under the order are intended to be applicable to all assessable domestic dates produced or packed in Riverside County, California, for the entire crop year and continue indefinitely until amended, suspended, or terminated. The committee's crop year began October 1, 2016, and ends on September 30, 2017.

In an interim rule published in the Federal Register on September 21, 2016, and effective on September 22, 2016, (81 FR 64759, Doc. No. AMS-SC-16-0084, SC16-987-1 IR), § 997.339 was amended by decreasing the assessment rate established for California dates for the 2016-17 and subsequent crop years from $0.10 to $0.05 per hundredweight. The decrease in the per hundredweight assessment rate allows the committee to reduce its financial reserve while still providing adequate funding to meet program expenses.

Final Regulatory Flexibility Analysis

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 70 date producers in the production area, and 11 date handlers subject to regulation under the order. The Small Business Administration (SBA) defines small agricultural producers as those having annual receipts of less than $750,000 and small agricultural service firms as those whose annual receipts are less than $7,500,000 (13 CFR 121.201).

According to the National Agricultural Statistics Service (NASS), data for the most recently completed crop year (2015) shows that about 4.36 tons, or 8,720 pounds, of dates were produced per acre. The 2015 producer price published by NASS was $1,560 per ton. Thus, the value of date production per acre in 2014-15 averaged about $6,802 (4.36 tons times $1,560 per ton, rounded to the nearest dollar). At that average price, a producer would have to farm over 110 acres to receive an annual income from dates of $750,000 ($750,000 divided by $6,802 per acre equals 110.26 acres). According to committee staff, the majority of California date producers farm less than 110 acres. Thus, it can be concluded that the majority of date producers could be considered small entities.

In addition, according to data from the committee staff, the majority of California date handlers have receipts of less than $7,500,000 and may also be considered small entities under SBA's definition.

This rule continues in effect the action that decreased the assessment rate established for the committee and collected from handlers for the 2016-17 and subsequent crop years from $0.10 to $0.05 per hundredweight of dates. The committee unanimously recommended 2016-17 expenditures of $52,500 and an assessment rate of $0.05 per hundredweight of dates. The assessment rate of $0.05 is $0.05 lower than the rate previously in effect. Applying the $0.05 per hundredweight assessment rate to the committee's 29,000,000 pounds (290,000 hundredweight) crop estimate should provide $14,500 in assessment income. Thus, income derived from handler assessments, along with interest income and funds from the committee's monetary reserve, will be adequate to cover the budgeted expenses. This action will allow the committee to reduce its financial reserve while still providing adequate funding to meet program expenses.

This rule continues in effect the action that decreased the assessment obligation imposed on handlers. Assessments are applied uniformly on all handlers, and some of the costs may be passed on to producers. However, decreasing the assessment rate reduces the burden on handlers and may reduce the burden on producers.

In addition, the committee's meeting was widely publicized throughout the California date industry, and all interested persons were invited to attend the meeting and encouraged to participate in committee deliberations on all issues. Like all committee meetings, the June 22, 2016, meeting was a public meeting, and all entities, both large and small, were able 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 Crops 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 action imposes no additional reporting or recordkeeping requirements on either small or large California date 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 rule.

Comments on the interim rule were required to be received on or before November 21, 2016. No comments were received. Therefore, for reasons given in the interim rule, we are adopting the interim rule as a final rule, without change.

To view the interim rule, go to: https://www.regulations.gov/document?D=AMS-SC-16-0084-0001.

This action also affirms information contained in the interim rule concerning Executive Orders 12866, 12988, 13175, and 13563; the Paperwork Reduction Act (44 U.S.C. Chapter 35); and the E-Gov Act (44 U.S.C. 101).

After consideration of all relevant material presented, it is found that finalizing the interim rule, without change, as published in the Federal Register (81 FR 64759, September 21, 2016) will tend to effectuate the declared policy of the Act.

List of Subjects in 7 CFR Part 987

Dates, Marketing agreements, Reporting and recordkeeping requirements.

PART 987—DOMESTIC DATES PRODUCED OR PACKED IN RIVERSIDE COUNTY, CALIFORNIA [AMENDED] Accordingly, the interim rule amending 7 CFR part 987, which was published at 81 FR 64759 on September 21, 2016, is adopted as a final rule, without change. Dated: December 12, 2016. Bruce Summers, Associate Administrator, Agricultural Marketing Service.
[FR Doc. 2016-30303 Filed 12-19-16; 8:45 am] BILLING CODE 3410-02-P
DEPARTMENT OF AGRICULTURE Grain Inspection, Packers and Stockyards Administration 9 CFR Part 201 RIN 0580-AB25 Scope of Sections 202(a) and (b) of the Packers and Stockyards Act AGENCY:

Grain Inspection, Packers and Stockyards Administration, USDA.

ACTION:

Interim final rule; request for comments.

SUMMARY:

The Department of Agriculture's (USDA) Grain Inspection, Packers and Stockyards Administration (GIPSA), Packers and Stockyards Program (P&SP) is amending the regulations issued under the Packers and Stockyards Act, 1921, as amended and supplemented (P&S Act). GIPSA is adding a paragraph addressing the scope of sections 202(a) and (b) of the P&S Act. This interim final rule clarifies that conduct or action may violate sections 202(a) and (b) of the P&S Act without adversely affecting, or having a likelihood of adversely affecting, competition. This interim final rule reiterates USDA's longstanding interpretation that not all violations of the P&S Act require a showing of harm or likely harm to competition. The regulations would specifically provide that the scope of section 202(a) and (b) encompasses conduct or action that, depending on their nature and the circumstances, can be found to violate the P&S Act without a finding of harm or likely harm to competition. This interim final rule finalizes a proposed amendment that GIPSA published on June 22, 2010. GIPSA is now publishing as an interim final rule what was proposed on June 22, 2010, with slight modifications, in order to allow additional comment on these provisions.

DATES:

This interim final rule is February 21, 2017. Interested persons are invited to submit written comments on this interim final rule on or before February 21, 2017.

ADDRESSES:

We invite you to submit comments on this interim final rule. You may submit comments by any of the following methods:

Mail: M. Irene Omade, GIPSA, USDA, 1400 Independence Avenue SW., Room 2542A-S, Washington, DC 20250-3613.

Hand Delivery or Courier: M. Irene Omade, GIPSA, USDA, 1400 Independence Avenue SW., Room 2530-S, Washington, DC 20250-3613.

Internet: http://www.regulations.gov. Follow the on-line instructions for submitting comments.

Instructions: All comments should make reference to the date and page number of this issue of the Federal Register. All comments received will be included in the public docket without change, including any personal information provided. Regulatory analyses and other documents relating to this rulemaking will be available for public inspection in Room 2542A-S, 1400 Independence Avenue SW., Washington, DC 20250-3613 during regular business hours. All comments will be available for public inspection in the above office during regular business hours (7 CFR 1.27(b)). Please call the Management and Budget Services staff of GIPSA at (202) 720-8479 to arrange a public inspection of comments or other documents related to this rulemaking.

FOR FURTHER INFORMATION CONTACT:

S. Brett Offutt, Director, Litigation and Economic Analysis Division, P&SP, GIPSA, 1400 Independence Ave, SW., Washington, DC 20250, (202) 720-7051, [email protected]

SUPPLEMENTARY INFORMATION:

The first section that follows provides background and a summary of the regulatory text for § 201.3(a) and (b) in this interim final rule as compared to the regulatory wording for § 201.3(c) and (d) in the 2010 proposed rule. The second section provides background information about this rule. The third section provides a summary of the public comments received on the proposed rule and at the relevant USDA/Department of Justice Joint Competition Workshops that occurred during the comment period. The fourth section discusses the proposal of new §§ 201.210, 201.211, and 201.214, in this issue of the Federal Register. The last section provides the required impact analyses including the Regulatory Flexibility Act, the Paperwork Reduction Act, Civil Rights Analysis, and the relevant Executive Orders.

I. Summary of Changes From the 2010 Proposed Rule Section 201.3 as Proposed in June 2010

In the proposed rule published in the Federal Register on June 22, 2010 [75 FR 35338], GIPSA proposed a new § 201.3, “Applicability of regulations in this part,” providing four (4) subsections to describe, in certain respects, the application of the regulations in 9 CFR part 201. These subsections were designated § 201.3(a) through § 201.3(d). Subsection 201.3(c) described the appropriate application of sections 202(a) and (b) of the P&S Act (7 U.S.C. 192(a) and (b)).

In this current rule, GIPSA is re-designating the existing undesignated paragraph in § 201.3 as § 201.3(b), and is adding back the subject heading, “Effective dates” to this paragraph.

GIPSA is amending § 201.3 with the addition of proposed § 201.3(c), with slight modifications. Because this provision is of primary importance, GIPSA is designating it as the first of two paragraphs in § 201.3 and changing its designation from (c) to (a). GIPSA has made slight modifications including a grammatical edit and also modified a few words to make the language internally consistent and also consistent with the language in new proposed §§ 201.210, 201.211, and 201.214, published concurrently in this issue of the Federal Register as separate proposed rules.

II. Background A. Development of the Rule

Prior to issuing the initial proposed regulations in 2010, GIPSA held three public meetings in October 2008, in Arkansas, Iowa, and Georgia to gather comments, information, and recommendations from interested parties. Attendees at these meetings were asked to give input on the elements of the 2008 Farm Bill and other issues of concern under the P&S Act. In 2010, USDA and the Department of Justice held five joint public workshops to explore competition issues affecting agricultural industries in the 21st century and the appropriate role for antitrust and regulatory enforcement in those industries. These workshops were held in Ankeny, Iowa (Issues of Concern to Farmers, March 12, 2010); Normal, Alabama (Poultry Industry, May 21, 2010); Madison, Wisconsin (Dairy Industry, June 25, 2010); Fort Collins, Colorado (Livestock Industry, August 27, 2010); and Washington, District of Columbia (Margins, December 8, 2010). The Secretary informed attendees of the workshop in Fort Collins, Colorado that their comments provided that day would be considered in the development of this rulemaking. The Fort Collins workshop addressed issues in the cattle, hog, and other animal sectors. Attendees provided comments on concentration in livestock markets, buyer power, and enforcement of the P&S Act. GIPSA incorporated relevant comments from the Madison, Wisconsin and Fort Collins, Colorado workshops into the text of the wording of the final rule published on December 9, 2011.

The regulations in this current interim final rule also reflect comments, information, and recommendations received in all those meetings.

On June 22, 2010, GIPSA published the proposed rule [75 FR 35338] upon which this interim final rule is based. The background information presented in the proposed rule remains pertinent to this interim final rule. Some of this background information is presented again here.

In that proposed rule, GIPSA proposed a multi-faceted rule and sought public input. During a 5-month comment period, GIPSA received over 61,000 comments from a wide variety of stakeholders. Some commenters addressed issues associated with this interim final rule. GIPSA published a final rule in 2011 that included modifications to address concerns expressed by commenters. The final rule addressed most, but not all, of the requirements of the Food, Conservation, and Energy Act of 2008 (Pub. L. 110-246) (2008 Farm Bill); however, for the reasons described in further detail below, GIPSA never implemented a final § 201.3(c) following the 2010 public notice and comment period. The 2010 proposed rule also proposed three other regulations, §§ 201.210, 201.211, and 201.214, that GIPSA has restructured and rewritten and is publishing as two separate proposed rules concurrent with this rule. Proposed § 201.210, “Unfair, unjustly discriminatory and deceptive practices or devices by packers, swine contractors, or live poultry dealers,” and § 201.211, “Undue or unreasonable preferences or advantages” further clarify and define the provisions of § 201.3(a). Proposed § 201.214, “Poultry Grower Ranking Systems” provides criteria which would be used in considering whether a live poultry dealer has used a poultry grower ranking system in an unfair, unjustly discriminatory, or deceptive manner or in a way that gives an undue or unreasonable preference or advantage to any poultry grower or subjects any poultry grower to an undue or unreasonable prejudice or disadvantage.

Beginning with the fiscal year (FY) 2012 appropriations act, USDA was precluded from finalizing some of the regulations as proposed in June 2010. Section 201.3(c), “Scope of Sections 202(a) and (b) of the Act,” §§ 201.210, 201.211, and 201.214, published as part of the June 22, 2010, proposed rule, were included in the restrictions in the appropriations acts. Until FY 2016, appropriations acts continued to preclude the finalization of §§ 201.3(c), 201.210, 201.211, and 201.214.

Section 201.3(a), “Applicability to live poultry dealers,” and § 201.3(d), “Effective dates,” proposed in June 2010, were published on December 9, 2011 [76 FR 76874], as a final rule with some changes. At that time, the designation of proposed paragraph (d) was changed to (b).

Section 731, Division A, of the Consolidated and Further Continuing Appropriations Act, 2015 (Pub. L. 113-235), required the Secretary to rescind what was then § 201.3(a), “Applicability to live poultry dealers,” leaving paragraph (b) as the only paragraph in § 201.3. As a result, GIPSA removed the designation for this paragraph as paragraph (b) and also removed its subject heading, “Effective dates.” This was accomplished by a final rule published on February 5, 2015 [80 FR 6430].

Neither the FY 2016 appropriations act nor the FY 2017 continuing appropriations act precludes GIPSA from publishing §§ 201.3(c), 201.210, 201.211, or 201.214 as final rules.

B. Purpose of the Regulatory Action

Section 202 of the P&S Act provides that “[i]t shall be unlawful for any packer or swine contractor with respect to livestock, meats, meat food products, or livestock products in unmanufactured form, or for any live poultry dealer with respect to live poultry” to engage in certain prohibited conduct. Section 202(a) prohibits “any unfair, unjustly discriminatory, or deceptive practice or device.” Section 202(b) prohibits “any undue or unreasonable preference or advantage” or “any undue or unreasonable prejudice or disadvantage.” USDA has consistently taken the position that, in some cases, a violation of section 202(a) or (b) can be proven without proof of predatory intent, competitive injury, or likelihood of competitive injury.1 At the same time, USDA has always understood that an act or practice's effect on competition can be relevant 2 and, in certain circumstances, even dispositive 3 with respect to whether that act or practice violates sections 202(a) and/or (b).

1In re Ozark County Cattle Co., 49 Agric. Dec. 336, 365 (1990); 1 John H. Davidson et al., Agricultural Law section 3.47, at 244 (1981).

2See, In re Sterling Colo. Beef Co., 39 Agric. Dec. 184, 235 (1980) (considering and rejecting respondent packer's business justification for challenged conduct).

3See, Armour & Co. v. United States, 402 F.2d 712, 717 (7th Cir. 1968) (a coupon promotion plan (here coupons for fifty cents off specified packages of bacon) is not per se unfair and violates section 202(a) if it is implemented with some predatory intent or carries some likelihood of competitive injury); In re IBP, Inc., 57 Agric. Dec. 1353, 1356 (1998) (contractual right of first refusal at issue violated section 202 “because it has the effect or potential of reducing competition”).

As we explained in the proposed rule, the longstanding agency position that, in some cases, a violation of section 202(a) or (b) can be proven without proof of likelihood of competitive injury is consistent with the language and structure of the P&S Act, as well as its legislative history and purposes. Neither section 202(a) nor section 202(b) contains any language limiting the application of those sections to acts or practices that have an adverse effect on competition, such as acts “restraining commerce.” Instead, these provisions use terms including “deceptive,” “unfair,” “unjust,” “undue,” and “unreasonable”—which are commonly understood to encompass more than anticompetitive conduct.4 This is in direct contrast to subsections (c), (d), and (e), which expressly prohibit only those acts that have the effect of “restraining commerce,” “creating a monopoly,” or producing another type of antitrust injury. The fact that Congress expressly included these limitations in subsections (c), (d), and (e), but not in subsections (a) and (b), is a strong indication that Congress did not intend subsections (a) and (b) to be limited to instances in which there was harm to competition. And Congress confirmed the agency's position by amending the P&S Act to specify specific instances of conduct prohibited as unfair that do not involve any inherent likelihood of competitive injury.5

4 When the P&S Act was enacted, Webster's New International Dictionary defined “deceptive” as “[t]ending to deceive; having power to mislead, or impress with false opinions”; “unfair” as “[n]ot fair in act or character; disingenuous; using or involving trick or artifice; dishonest; unjust; inequitable” (2d. definition); and “unjust” as “[c]haracterized by injustice; contrary to justice and right; wrongful.” Webster's New International Dictionary 578, 2237, 2238, 2245, 2248 (1st ed. 1917). This is the same understanding of the terms today.

5See sections 409(c) and 410(b).

USDA's interpretation of sections 202(a) and (b) is also consistent with the interpretation of other sections of the P&S Act using similar language—sections 307 and 312 (7 U.S.C. 208 and 213). Courts have recognized that the proper analysis under these provisions depends on “the facts of each case,” 6 and that these sections may apply in the absence of harm to competition or competitors.7

6Capitol Packing Co. v. United States, 350 F.2d 67, 76 (10th Cir. 1965); see also, Spencer Livestock Comm'n Co. v. USDA, 841 F.2d 1451, 1454 (9th Cir. 1988).

7See, e.g., Spencer, 841 F.2d at 1455 (Section 312 covers “a deceptive practice, whether or not it harmed consumers or competitors.”).

The legislative history and purposes of the P&S Act also support USDA's position. The P&S Act “is a most comprehensive measure and extends farther than any previous law in the regulation of private business, in time of peace, except possibly the interstate commerce act.” 8 In amending the P&S Act, Congress made clear that its goals for the statute extended beyond the protection of competition. In 1935, for instance, when Congress first subjected live poultry dealers to sections 202(a) and (b), Congress explained in the statute itself that “[t]he handling of the great volume of live poultry . . . is attendant with various unfair, deceptive, and fraudulent practices and devices, resulting in the producers sustaining sundry losses and receiving prices far below the reasonable value of their live poultry. . . .” 9 Similarly, the House Committee Report regarding the 1958 amendments stated that “[t]he primary purpose of [the P&S Act] is to assure fair competition and fair trade practices” and “to safeguard farmers . . . against receiving less than the true market value of their livestock.” 10 The Report further observed that protection extends to “unfair, deceptive, unjustly discriminatory” practices by “small” companies in addition to “monopolistic practices.” 11 In accordance with this legislative history, courts and commentators have recognized that the purposes of the P&S Act are not limited to protecting competition.12

8 H.R. Rep. 67-77, at 2 (1921); see also, Swift & Co. v. United States, 308 F.2d 849, 853 (7th Cir. 1962) (“The legislative history showed Congress understood the sections of the [P&S Act] under consideration were broader in scope than antecedent legislation such as the Sherman Antitrust Act, sec. 2 of the Clayton Act, 15 U.S.C. 13, sec. 5 of the Federal Trade Commission Act, 15 U.S.C. 45 and sec. 3 of the Interstate Commerce Act, 49 U.S.C. 3.”).

9 Public Law 74-272, 49 Stat. 648, 648 (1935).

10 H.R. Rep. No. 85-1048 (1957), reprinted in 1958 U.S.C.C.A.N. 5212, 5213 (emphasis added).

11Id. at 5213.

12See, e.g., Stafford v. Wallace, 258 U.S. 495, 513-14 (1922); Spencer, 841 F.2d at 1455: United States v. Perdue Farms, Inc., 680 F.2d 277, 280 (2d Cir. 1982); Bruhn's Freezer Meats of Chicago, Inc. v. USDA, 438 F.2d 1332, 1336 (8th Cir. 1971); Bowman v. USDA, 363 F.2d 81, 85 (5th Cir. 1966); United States v. Donahue Bros., 59 F.2d 1019, 1023 (8th Cir. 1932).

Four courts of appeals have disagreed with USDA's interpretation of the P&S Act and have concluded (in cases to which the United States was not a party) that plaintiffs could not prove their claims under sections 202(a) and/or (b) without proving harm to competition or likely harm to competition.13 After carefully considering the analyses in these opinions, USDA continues to believe that its longstanding interpretation of the P&S Act is correct. These court of appeals opinions (two of which were issued over vigorous dissents) 14 are inconsistent with the plain language of the statute; they incorrectly assume that harm to competition was the only evil Congress sought to prevent by enacting the P&S Act; and they fail to defer to the Secretary of Agriculture's longstanding and consistent interpretation of a statute administered by the Secretary. To the extent that these courts failed to defer to USDA's interpretation of the statute because that interpretation had not previously been enshrined in a regulation,15 this new regulation may constitute a material change in circumstances that warrants judicial reexamination of the issue.16

13Terry v. Tyson Farms, Inc. 604 F.3d 272, 280 (6th Cir. 2010) (“[I]n order to succeed on a claim under §§ 192(a) and (b) of the [P&S Act], a plaintiff must show an adverse effect on competition.”); Wheeler v. Pilgrim's Pride Corp., 591 F.3d 355, 363 (5th Cir. 2009) (en banc) (“To support a claim that a practice violates subsection (a) or (b) of § 192 [of the P&S Act] there must be proof of injury, or likelihood of injury, to competition.”); Been v. O.K. Indus., Inc., 495 F.3d 1217,1238 (10th Cir. 2007) (An “unfair practice” under section 202(a) of the P&S Act is one that injures or is likely to injure competition); London v. Fieldale Farms Corp., 410 F.3d 1295, 1303 (11th Cir. 2005) (P&S Act prohibits only those unfair, discriminatory, or deceptive practices that adversely affect or are likely to adversely affect competition).

14Wheeler, 591 F.3d at 371-85 (Garza, J., dissenting); Been, 495 F.3d at 1238-43 (Hartz, J., concurring in part and dissenting in part).

15See Been, 495 F.3d at 1226-27.

16See Nat'l Cable & Telecomm. Ass'n v. Brand X Internet Servs., 545 U.S. 967, 982-84 (2005).

Although it is not necessary in every case to demonstrate competitive injury in order to show a violation of sections 202(a) and/or (b), any act that harms competition or is likely to harm competition may violate the statute. How a competitive injury or the likelihood of a competitive injury manifests itself depends critically on whether the target of the act or practice is a competitor (e.g., a packer harms other packers), or whether the target of the act or practice operates at a different level of the livestock or poultry production process (e.g., a packer harms a livestock producer). Competitive injury or the likelihood of competitive injury may occur when an act or practice improperly forecloses competition in a large share of the market through exclusive dealing, restrains competition among packers, live poultry dealers or swine contractors or otherwise represents a use of market power to distort competition.17 Competitive injury or the likelihood of competitive injury also may occur when a packer, swine contractor, or live poultry dealer wrongfully depresses prices paid to a livestock producer, swine production contract grower, or poultry grower below market value or impairs the livestock producer, swine production contract grower, or poultry grower's ability to compete with other producers or growers.

17See, e.g., Thomas G. Krattenmaker & Steven C. Salop, Anticompetitive Exclusion: Raising Rivals' Costs to Achieve Power over Price, 96 Yale L.J. 209 (1986); 11 Philip E. Areeda & Herbert Hovenkamp, Antitrust Law 1821 (2d ed. 2005).

To establish an actual or likely competitive injury, it is not necessary to show that a challenged act or practice had a likely effect on resale price levels. Even the antitrust laws do not require such a showing. The P&S Act is broader than the antitrust laws and, therefore, such a requirement of showing effect on resale price levels is not necessary to establish competitive injury under section 202 of the P&S Act (though such a showing would suffice).

III. Discussion of Comments

The proposed rule published on June 22, 2010, (75 FR 35338) provided a 60-day comment period to end on August 23, 2010. In response to requests for an extension of time to file comments, on July 28, 2010, GIPSA extended the comment period to end on November 22, 2010 (75 FR 44163). Commenters covered the spectrum of those affected by the rule, including livestock producers and poultry growers, packers and live poultry dealers, trade associations representing both production and processing, plant workers, and consumers. GIPSA considered all comments postmarked or electronically submitted by November 22, 2010. GIPSA received over 61,000 comments, which addressed the rule generally as well as specific provisions. GIPSA considered written comments as well as comments received at two public meetings, on June 25, 2010, and August 27, 2010, conducted jointly by USDA and the Department of Justice. Because these “Workshops on Competition in Agriculture” were held during the comment period for the proposed rule, the Secretary announced that any comments made in those forums would be considered comments on the proposed rule.

Comments on proposed § 201.3(c) were sharply divided with respect to harm to competition. Those supporting the proposal pointed out it would provide legal relief for farmers and ranchers who suffer because of unfair actions, such as false weighing and retaliatory behavior, without having to show competitive harm to the industry. Opposing comments relied heavily on the fact that several of the United States Courts of Appeals have ruled that harm to competition (or the likelihood of harm to competition) is a required element to find a violation of sections 202(a) and (b) of the P&S Act.

Those supporting proposed § 201.3(c) included numerous livestock producers and poultry growers and organizations representing the interests of farmers and ranchers. Commenters supporting proposed § 201.3(c) pointed out that it would reduce the costs of litigation for poultry growers and livestock producers who suffer because of unfair actions, such as false weighing and retaliation. Proposed § 201.3(c), according to some commenters, corrects the analytical framework of the P&S Act and ensures that the courts grant a higher level of deference to USDA's interpretation of the P&S Act. They believed it was wrong to require a demonstration of harm to competition to the whole industry stemming from an unfair practice targeting an individual grower or producer in order to violate section 202(a) of the P&S Act, and that proposed § 201.3(c) would remove an undue barrier to relief.

Commenters in favor of proposed § 201.3(c) further pointed out the imbalance in power between livestock producers and packers and noted that without this provision, the packers are inoculated against recourse by a livestock producer because the livestock producer is small and overmatched relative to the much larger and more well-resourced packer. A common theme among supporters was that proposed § 201.3(c) allowed farmers and ranchers to seek redress by showing that they were individually harmed in cases such as false weighing or retaliatory behavior, rather than requiring a showing of harm to competition in the industry. Commenters felt that the packers and poultry companies were given a free pass to act unfairly toward livestock producers, swine production contract growers, and poultry growers knowing that proving harm to competition to the industry would be difficult, if not impossible, in many situations.

Many of the supporting comments also addressed the plain language and intent of section 202 of the P&S Act and opined that the recent court decisions were based on incorrect interpretations of the law. Commenters wrote that proposed § 201.3(c) correctly interpreted the plain language of section 202 and the legislative history of the P&S Act.

Commenters opposing proposed § 201.3(c) included many meat packers, live poultry dealers, and organizations representing packers and poultry companies. The opposing comments stated that the P&S Act had always been considered an antitrust statute and therefore, GIPSA should be required to show competitive harm to allege a violation of section 202(a). They also expressed concern that a flood of litigation would ensue if the scope of section 202(a) did not remain closely aligned with case law. Commenters opposed to the rulemaking asserted that allowing allegations of section 202(a) violations without a showing of harm or likely harm to competition would enable swine production contract growers, poultry growers, or livestock producers to sue a swine contractor, live poultry dealer, or packer for aa broad range of adverse circumstances affecting them. The comments went on to say that this would guarantee swine production contract growers, poultry growers, and livestock producers a profit on every transaction, a standard afforded in no other industry. In turn, this would reduce the number of swine production contract growers, poultry growers, and livestock producers with whom companies would do business.

Opposing comments relied heavily on the fact that several United States Courts of Appeals have ruled that harm to competition (or the likelihood of harm to competition) is a required element to find a violation of sections 202(a) and (b) of the P&S Act. These commenters stated that because of the decisions in these circuit courts, GIPSA lacked authority to implement proposed § 201.3(c). Several large packers and poultry companies wrote that the proposed § 201.3(c), if implemented, would be in direct conflict with circuit court decisions in the geographic regions in which they do business. One packer commented that livestock producers would bear the cost of determining the legality of an expanded scope of sections 202(a) and 202(b).

Many opposing commenters felt that proposed § 201.3(c) would lead to a large increase in frivolous litigation and greatly increase operational costs for packers and poultry companies. Commenters felt that an increase in frivolous litigation would lead to a decrease in the use of the value-based pricing. Commenters opposed allowing livestock producers to file lawsuits based on their thoughts of what is unfair. Some commenters believed that proposed § 201.3(c) would eliminate the requirement to show any harm at all. A common concern presented by those in opposition to the proposed change to § 201.3 was that while section 202(a) prohibits unfair, unjustly discriminatory, or deceptive practices, the P&S Act does not define what types of conduct would be classified as such. Of particular concern to these commenters was the prospect that GIPSA may bring actions under section 202(a) without a finding of harm to competition which would encourage livestock producers to sue firms subject to the P&S Act for any conduct having an adverse effect on livestock producer interests. While most of the comments focused on unfair conduct that could violate section 202(a), a few comments mentioned section 202(b) as well. These comments set forth concerns calling for regulatory guidance as to what conduct GIPSA would deem as unfair, unjustly discriminatory, or deceptive, and an undue preference or advantage in violation of the P&S Act, especially when there was no showing of harm to competition.

Agency response: GIPSA did not make the specific changes to proposed § 201.3(c) requested by comments. However, GIPSA is proposing new rule language in proposed rules §§ 201.210, 201.211, and 201.214, that provide the guidance commenters were seeking. GIPSA also modified a few words in § 201.3(c) to make the language internally consistent and to make it consistent with the language in new proposed §§ 201.210, 201.211, and 201.214, published concurrently in this issue of the Federal Register as two separate proposed rules. Specifically, proposed §§ 201.210 and 201.211 discuss “conduct or action” and GIPSA has modified the references to “conduct” in proposed § 201.3(c) to “conduct or action.” GIPSA also changed the reference to “challenged act or practice” to “challenged conduct or action,” again for consistency with proposed §§ 201.210 and 201.211 and to make the language in § 201.3(a) internally consistent. In the proposed rule for § 201.214 in this issue of the Federal Register, GIPSA proposes listing the failure to use a poultry grower ranking system in a fair manner after applying the criteria in § 201.214 as a tenth type of “challenged conduct or action” under § 201.210(b). GIPSA also made a minor grammatical edit and changed all references to “section” to “sections.” GIPSA believes the paragraph proposed on June 22, 2010, as § 201.3(c) (“Scope of Sections 202(a) and (b) of the Act.”) is of primary importance. As a result, the paragraph is designated as paragraph (a) and the current text in § 201.3 is designated as paragraph (b).

It is the longstanding position of the Secretary of Agriculture that a violation of section 202(a) or (b) can be proven without evidence of competitive injury or the likelihood of competitive injury. The Secretary's position is consistent with the language and structure of the P&S Act, as well as its legislative history and purposes. Sections 202(c), 202(d), and 202(e) of the P&S Act include “restraint” and “monopoly” language, some of which resembles language in the Clayton Act, 15 U.S.C. 12-27. Neither section 202(a) nor section 202(b) contains language limiting the application to conduct or action that has an adverse effect, or the likelihood of an adverse effect, on competition, such as acts “restraining commerce.” Sections 202(a) and 202(b) are tort-like provisions that are concerned with unfair practices, discrimination, and preferential treatment, but not with restraint of trade or monopolistic activities.

Analysis of the Federal Trade Commission Act, 15 U.S.C. 41-58, as amended, (FTC Act) is helpful in illustrating the Secretary's position on the scope of sections 202(a) and 202(b) of the P&S Act. Congress considered the FTC Act in drafting the P&S Act as it incorporated portions of the FTC Act by reference into the P&S Act. Section 5 of the FTC Act, now codified at 15 U.S.C. 45, states, “[u]nfair methods of competition in or affecting commerce, and unfair or deceptive acts or practices in or affecting commerce, are hereby declared unlawful.” Thus, in the FTC Act, Congress makes a distinction between “unfair methods of competition” and “unfair or deceptive acts or practices.” In drafting the P&S Act, Congress chose to prohibit any “unfair, unjustly discriminatory, or deceptive practice or device,” and the making or giving of “any undue or unreasonable preference or advantage . . .,” without limiting the unfair practices or devices, discrimination, or preferential treatment to only those involving competition. The Supreme Court of the United States has examined the scope of Section 5 of the FTC Act, noting that unfair practices are not limited to those likely to have anticompetitive consequences after the manner of the antitrust laws, nor are unfair practices in commerce confined to purely competitive behavior.18 The FTC Act's phrase, “`unfair or deceptive acts or practices' ” makes the consumer, who may be injured by an unfair trade practice, of equal concern, before the law, with the merchant or manufacturer injured by the unfair methods of a dishonest competitor.” 19 The Court also noted, upon consideration of legislative and judicial authorities, that the Federal Trade Commission considers public values beyond simply those enshrined in the letter or encompassed in the spirit of the antitrust laws.20

Recent circuit court decisions have found that a showing of competitive harm, or a likelihood of competitive harm, is required to substantiate a violation of sections 202(a) and 202(b) of the P&S Act. In one of these cases, Wheeler v. Pilgrim's Pride Corp., 21 while the majority opinion required a finding of harm to competition, the dissenting opinion agreed with the district court's ruling that sections (a) and (b) of 202 do not contain language limiting their application to actions which have an adverse effect on competition.22 The court in another case, Been v. O.K. Indus., Inc., 23 declined to defer to USDA's interpretation of “unfair” practices under section 202(a) of the P&S Act, in part, because “the Secretary has not promulgated a regulation applicable to the practices the Growers allege violate § 202(a).” 24 The court, however, stated that “[r]egulations promulgated by an agency exercising its congressionally granted rule-making authority” are entitled to deference,25 implying that such regulation, once enacted by USDA, would be entitled to deference. Therefore, while decisions of the courts of appeals support comments in opposition to amending § 201.3, these same decisions have also pointed to a need for the very rulemaking the addition of paragraph (a) to § 201.3 provides.

18FTC v. Sperry & Hutchinson Co., 405 U.S. 233 (1972).

19Id., at 244. (quoting H.R.Rep.No.1613, 75th Cong., 1st Sess., 3 (1937).

20Id., at 244.

21 591 F. 3d 355 (5th Cir. 2009).

22Id. at 377 (Garza, J., dissenting).

23 495 F. 3d 1217 (10th Cir. 2007).

24Id. at 1226-27.

25Id. at 1226.

An initial increase in litigation costs is a likely result of this rule, as the industry and the courts are setting precedents for the interpretation of § 201.3. However, the litigation costs and the number of lawsuits are expected to decrease after precedent setting decisions are established. In order to place some parameters on conduct or action that constitutes unfair, unjustly discriminatory, and deceptive practices or devices under section 202(a), and on conduct or action that constitutes undue or unreasonable preferences or advantages under section 202(b), and to address concerns raised by commenters about what those terms mean, GIPSA is publishing concurrently with this interim final rule, proposed rules that will include revised §§ 201.210,201.211, and 201.214, which will help clarify the conduct or action GIPSA considers violations of sections 202(a) and 202(b) of the P&S Act.

Contrary to some comments, § 201.3(a) does not stand for the proposition that GIPSA never has to demonstrate that the challenged conduct or action adversely affects competition. Instead, § 201.3(a) solely reiterates GIPSA's longstanding position that a finding that the challenged conduct or action adversely affects or is likely to adversely affect competition is not necessary in all cases. Certain conduct is prohibited because it is unfair, unjustly discriminatory or deceptive even though there may be no harm, or likelihood of harm, to competition. Likewise, certain conduct is prohibited because it creates an unfair preference or advantage even though there may be no harm, or likelihood of harm, to competition. This rule, combined with the specific examples of prohibited conduct in proposed § 201.210 and the criteria the Secretary will consider as set forth in proposed § 201.211, will assist industry participants in understanding which behaviors violate sections 202(a) and 202(b) of the P&S Act.

IV. Interim Final Rule and Request for Comments

As previously discussed, GIPSA published a notice of proposed rulemaking in June, 2010, that, inter alia, proposed regulatory text relating to the scope of the P&S Act. GIPSA solicited comments over a 5 month period and received thousands of comments on this aspect of the proposed rule. Accordingly, the agency has fulfilled the notice and comment requirements of the Administrative Procedure Act. However, given the significant level of stakeholder interest in this regulatory provision, the intervening six years, and in the interests of open and transparent government, the agency has decided to promulgate the rule as an interim final rule and provide an additional opportunity for public comment. The agency will consider all comments received by the date indicated in the DATES section of this interim final rule with request for comments. After the comment period closes, the agency intends to publish another document in the Federal Register. The document will include a discussion of any comments received and whether any amendments will be made to the rule.

V. Concurrent Publication of Proposed §§ 201.210, 201.211, and 201.214

While some appellate courts have determined that a showing of competitive injury, or likelihood of competitive injury, is required to allege a violation of sections 202(a) or 202(b), some dissenting opinions agreed with USDA's interpretation of sections 202(a) and 202(b) 26 and at least one dissenting opinion stated that if GIPSA developed regulation explaining whether a showing of competitive injury was required in a given circumstance, that regulation would entitle USDA to deference.27 Amending § 201.3 with the addition of § 201.3(a) provides a structural foundation for the development of more specific regulations containing examples or criteria GIPSA may then use to determine if given conduct or action requires a showing of competitive injury or the potential for competitive injury to allege a violation of section 202(a) or section 202(b). As mentioned in the summary of comments, implementation of these specific regulations may lower costs to some livestock producers, swine production contract growers and poultry growers should they bring legal action for an alleged violation of section 202(a) or section 202(b). GIPSA acknowledges that § 201.3(a) may initially encourage litigation, temporarily driving up overall costs for stakeholders. While this interim rule is a standalone rulemaking, it is worth noting that GIPSA's current thinking is also expressed in separate proposed rules published concurrently in this edition of the Federal Register. GIPSA is proposing § 201.210, which clarifies the conduct or action by packers, swine contractors, or live poultry dealers that GIPSA considers unfair, unjustly discriminatory, or deceptive and a violation of section 202(a), and clarifies whether a showing of harm to competition or likelihood of harm to competition is required. GIPSA is also proposing § 201.211, which identifies criteria the Secretary will consider in determining whether conduct or action by packers, swine contractors, or live poultry dealers constitutes an undue or unreasonable preference or advantage and a violation of section 202(b). Section 201.214, as proposed in this edition of the Federal Register, lists criteria the Secretary will consider in determining whether a live poultry dealer has used a poultry grower ranking system to compensate poultry growers in an unfair, unjustly discriminatory, or deceptive manner in violation of section 202(a), or in a way that gives an undue or unreasonable preference or advantage to any poultry grower or subjects any poultry grower to an undue or unreasonable prejudice or disadvantage in violation of section 202(b). GIPSA believes §§ 201.210, 201.211, and 201.214, once published as final rules, will mitigate potential costs associated with § 201.3(a) by clarifying what conduct or action would violate section 202(a) and section 202(b). Listing examples and criteria to explain the boundaries for compliance with section 202 of the P&S Act will promote compliance and reduce the number of disputes associated with section 202. Even while proposed §§ 201.210, 201.211, and 201.214 are being considered through the rulemaking process, amending § 201.3 with the addition of § 201.3(a) provides sufficient clarity to obtain deference from the courts.

26Wheeler v. Pilgrim's Pride Corp., 591 F.3d 355(5th Cir. 2009) (9-7 decision en banc) (Judge Garza dissenting, joined by Judges Jolly, Barksdale, Dennis, Prado, Elrod and Haynes).

27Been v. O.K. Indus., Inc., 495 F.3d 1217, 1238 (10th Cir. 2007).

VI. Required Impact Analyses A. Executive Order 12866 and Regulatory Flexibility Act

This rulemaking has been determined to be “economically significant” for the purposes of Executive Order 12866 and, therefore, has been reviewed by the Office of Management and Budget. GIPSA is issuing this interim final rule under the P&S Act, in part, to formalize USDA's position that, in some cases, a violation of section 202(a) or (b) can be proven without proof of competitive injury or likelihood of competitive injury. As a required part of the regulatory process, GIPSA prepared an economic analysis of § 201.3(a). The first section of the analysis is an introduction and a discussion of the prevalence of contracting in the cattle, hog, and poultry industries as well as a discussion of potential market failures. Next, GIPSA discusses three regulatory alternatives it considered and presents a summary cost-benefit analysis of each alternative. GIPSA then discusses the impact on small businesses.

Introduction

GIPSA issued a proposed rule on June 22, 2010, which included §§ 201.3, 201.210, 201.211, 201.214. GIPSA is issuing amendments to § 201.3 as an interim final rule and is proposing new versions of §§ 201.210 and 201.211 in a separate proposed rule published concurrently in this issue of the Federal Register. Likewise, 201.214 is being proposed in a separate rulemaking. Section 201.3(a) formalizes GIPSA's longstanding position that conduct or action can be found to violate sections 202(a) and/or 202(b) of the P&S Act without a finding of harm or likely harm to competition. GIPSA believes the interim final § 201.3(a) will serve to strengthen the protection afforded the nation's livestock producers and poultry growers.

Section 201.3(a) states that a finding that the challenged conduct or action adversely affects or is likely to adversely affect competition is not necessary in all cases . . . Some unfair, unjustly discriminatory, or deceptive practices do not result in competitive harm to the industry but still result in significant harm to individual livestock producers, swine production contract growers, and poultry growers. If, for example, a livestock producer, swine production contract grower, or poultry grower filed a complaint related to a matter that does not result in competitive harm, such as retaliatory conduct, use of inaccurate scales, or providing a poultry grower sick birds, the livestock producer, swine production contract grower, or poultry grower will be able to prevail without proof of harm to competition or the likelihood of harm to competition. GIPSA believes the standard articulated in § 201.3(a) is consistent with its mission, which is to “protect fair trade practices, financial integrity and competitive markets for livestock, meats and poultry.” 28 By removing the burden to prove harm or likely harm to competition in all cases, this interim final rule promotes fairness and equity in the livestock and poultry industries.

28https://www.gipsa.usda.gov/laws/law/PS_act.pdf. Accessed on September 19, 2016.

Section 201.3(a) may lower the costs to some livestock producers, swine production contract growers, and poultry growers should they bring legal action for an alleged violation of sections 202(a) and/or 202(b). However, § 201.3(a) may initially increase litigation costs for the livestock and poultry industries while precedent setting decisions are established. While this interim rule is a standalone rulemaking, it is worth noting that GIPSA's current thinking is also expressed in separate proposed rules, which will clarify to the industry the types of conduct and criteria that GIPSA believes violate section 202(a) and section 202(b) of the P&S Act.

Proposed § 201.210(a) specifies that any conduct or action by a packer, swine contractor, or live poultry dealer that is explicitly deemed to be an “unfair,” “unjustly discriminatory,” or “deceptive” practice or device by the P&S Act is a per se violation of section 202(a). Section 201.210(b) provides examples of conduct or action that, absent demonstration of a legitimate business justification, are “unfair,” “unjustly discriminatory,” or “deceptive” and a violation of section 202(a) regardless of whether the conduct or action harms or is likely to harm competition. Section 201.210(c) specifies that any conduct or action that harms or is likely to harm competition is an “unfair,” “unjustly discriminatory,” or “deceptive” practice or device and a violation of section 202(a). Many of the examples provided in § 201.210(b) relate to conduct or action that limits, by contract, the legal rights and remedies afforded by law to poultry growers, swine production contract growers, and livestock producers. Other examples specify conduct or actions that violate section 202(a).

As required by the 2008 Farm Bill, proposed § 201.211 specifies criteria the Secretary will consider when determining whether an undue or unreasonable preference or advantage has occurred in violation of section 202(b). The first four (4) criteria require the Secretary to consider whether one or more livestock producers, swine production contract growers, or poultry growers is treated more favorably as compared to other similarly situated livestock producers, swine production contract growers, or poultry growers. The fifth criterion in § 201.211 requires the Secretary to consider whether the packer, swine contractor, or live poultry dealer has demonstrated a legitimate business justification for conduct or action that may otherwise be an undue or unreasonable preference or advantage.

Proposed §§ 201.210 and 201.211 will thus limit the application of § 201.3(a) by placing some parameters on conduct or action that constitutes unfair, unjustly discriminatory, and deceptive practices or devices under section 202(a), and on conduct or action that constitutes undue or unreasonable preferences or advantages under section 202(b). Proposed §§ 201.210 and 201.211 focus heavily on contracts between livestock producers and packers, swine production contract growers and swine contractors, and poultry growers and live poultry dealers.

While proposed §§ 201.210 and 201.211 focus heavily on contracts, § 201.3(a) is broad in nature. It applies to the use of all types of livestock and poultry procurement and growing arrangements by packers, swine contractors, and live poultry dealers, including packers' use of negotiated cash purchases of livestock. As discussed below, contracting broadly defined, is the primary method by which livestock are procured (especially for hogs) and the almost exclusive arrangement under which poultry are produced. A discussion of contracting in these industries is, therefore, useful in explaining the need for § 201.3(a) and laying the foundation for the economic analysis of 201.3(a).

Prevalence of Contracting in Cattle, Hog, and Poultry Industries

Contracting is an important and prevalent feature in the production and marketing of livestock and poultry. Although § 201.3(a) applies to the livestock and poultry industries in general, proposed §§ 201.210 and 201.211 primarily affect livestock and poultry grown or marketed under contract. For example, under § 201.210(b)(2), absent demonstration of a legitimate business justification, GIPSA considers conduct or action by packers, swine contractors, or live poultry dealers that limit or attempt to limit, by contract, the legal rights and remedies of livestock producers, swine production contract growers, or poultry growers as unfair, unjustly discriminatory, or deceptive and a violation of section 202(a) regardless of whether the conduct or action harms or is likely to harm competition. Section 201.211 defines criteria for section 202(b) violations with respect to providing undue or unreasonable preferences or advantages to one or more livestock producers or contract growers as compared to other livestock producers or contract growers.

The type of contracting varies among cattle, hogs, and poultry. Broilers, the largest segment of poultry, are almost exclusively grown under production contracts, while a small percentage of cattle are custom fed and shipped directly for slaughter this activity is not subject to the jurisdiction of the P&S Act. Hog production falls between these two extremes. As shown in Table 1 below, over 96 percent of all broilers are grown under contractual arrangements and over 40 percent of all hogs are grown under contractual arrangements. Live poultry dealers typically own the broilers and provide the growers with feed and medications. Contract growers provide the housing, labor, water, electricity and fuel to grow the birds. Similarly, swine contractors typically own the slaughter hogs and sell the finished hogs to pork packers. The swine contractors typically provide feed and medication to the contract growers who own the growing facilities and provide growing services. With the exception of turkey production, the use of contract growing arrangements has remained relatively stable over the years that the Census of Agriculture has published data on commodities raised and delivered under production contracts as Table 1 shows.

29 Agricultural Census, 2007 and 2012. https://www.agcensus.usda.gov/Publications/2012/Full_Report/Volume_1,_Chapter_1_US/ and https://www.agcensus.usda.gov/Publications/2007/Full_Report/Volume_1,_Chapter_1_US/.

Table 1—Percentage of Poultry and Hogs Raised and Delivered Under Production Contracts  29 Species 2002 2007 2012 Broilers 98.0 96.5 96.4 Turkeys 41.7 67.7 68.5 Hogs 42.9 43.3 43.5

Another contract category is marketing contracts, where producers market their livestock to a packer for slaughter under a verbal or written agreement. These are commonly referred to as Alternative Marketing Arrangements (AMAs). Pricing mechanisms vary across AMAs. Some AMAs rely on a spot market for at least one aspect of its price, while others involve complicated pricing formulas with premiums and discounts based on carcass merits. The livestock seller and packer agree on a pricing mechanism under AMAs, but usually not on a specific price.

USDA's Agricultural Marketing Service (AMS) reports the number of cattle sold to packers under formula, forward contract, and negotiated pricing mechanisms. The following table illustrates the prevalence of contracting in the marketing of fed cattle.

Table 2—Percentage of Fed Cattle Sold by Type of Purchase 30 Year Formula Forward
  • contract
  • Negotiated
    2005 30.4 5.0 64.6 2006 31.5 6.8 61.7 2007 33.2 8.3 58.5 2008 37.4 9.9 52.7 2009 43.7 7.0 49.3 2010 44.9 9.5 45.6 2011 48.4 10.9 40.7 2012 54.7 11.4 33.8 2013 60.0 10.2 29.8 2014 58.1 14.2 27.6 2015 58.2 16.5 25.3

    GIPSA considers cattle sold under formula pricing methods as sold under AMA contracts. Thus, the first two columns in the above table are cattle marketed under contract and the third column represents the spot market for fed cattle. The data in the table above show that the contracting of cattle has increased significantly since 2005. Approximately 35 percent of fed cattle were marketed under contracts in 2005. By 2015, the percentage of fed cattle marketed to packers under contracts had increased to almost 75 percent, while negotiated spot market transactions have decreased to about 25 percent of all transactions.

    30 USDA's Agricultural Marketing Service. https://mpr.datamart.ams.usda.gov/menu.do?path=Products\Cattle\Weekly. Accessed on September 9, 2016

    As discussed above, over 40 percent of hogs are grown under production contracts. These hogs are then sold by swine contractors to packers under marketing contracts. The prevalence of marketing contracts in the sale of finished hogs, which includes production contract and non-production contract hogs, to packers is even more prevalent as shown in the table below.

    Table 3—Percentage of Hogs Sold by Type of Purchase 31 Year Other
  • marketing
  • arrangements 32
  • Formula 33 Negotiated
    2005 39.3 49.7 11.0 2006 44.0 46.4 9.6 2007 44.8 46.5 8.7 2008 43.9 47.6 8.5 2009 42.8 50.4 6.8 2010 45.4 49.4 5.2 2011 47.6 48.2 4.2 2012 47.7 48.6 3.6 2013 48.3 48.4 3.2 2014 45.9 51.4 2.7 2015 46.0 51.4 2.6

    Similar to cattle, the percentage of hogs sold under marketing contracts has increased since 2005 to over 97 percent in 2015. The spot market for hogs has declined to 2.6 percent in 2015. As these data demonstrate, almost all hogs are marketed under some type of marketing contract.

    31 USDA's Agricultural Marketing Service.

    32 Includes Packer Owned and Packer Sold, Other Purchase Arrangements.

    33 Includes Swine Pork Market Formula, Other Market Formula.

    Benefits of Contracting in Cattle, Hog, and Poultry Industries

    Contracts have many benefits. They help farmers and livestock producers manage price and production risks, elicit the production of products with specific quality attributes by tying prices to those attributes, and smooth the flows of commodities to processing plants encouraging more efficient use of farm and processing capacities. Agricultural contracts can also lead to improvements in efficiency throughout the supply chain for products by providing farmers with incentives to deliver products consumers desire and produce products in ways that reduce processing costs and, ultimately, retail prices.

    In 2007, RTI International conducted a comprehensive study of marketing practices in the livestock and red meat industries from farmers to retailers (the RTI Study).34 The RTI Study analyzed the extent of use, price relationships, and costs and benefits of contracting, including AMAs. The RTI Study found that AMAs increased the economic efficiency of the livestock markets and yielded economic benefits to consumers, producers and packers.

    34 RTI International, 2007, GIPSA Livestock and Meat Marketing Study, Prepared for GIPSA.

    The RTI Study found that efficiencies come from less volatility in volume and more intensive use of production and processing facilities, meaning less capital, labor, feed, and materials per pound of meat produced. Efficiencies also come from reduced transaction costs and from sending price signals to better match the meat attributes to consumer demand. Consumers benefit from lower meat prices and meat with desired attributes. In turn, the consumer benefits increase livestock demand, which provides benefits to producers.

    Structural Issues in the Cattle, Hog, and Poultry Industries

    As the above discussion highlights, there are important benefits associated with the use of agriculture contracts in the cattle, hog, and poultry industries. However, if there are large disparities in the bargaining power among contracting parties resulting from size differences between contracting parties or the use of market power by one of the contracting parties, the contracts may have detrimental effects on one of the contracting parties and may result in inefficiencies in the marketplace.

    For example, a contract that ties a grower to a single purchaser of a specialized commodity or service, even if the contract provides for fair compensation to the grower, still leaves the grower subject to default risks should the contractor fail. Another example is a contract that covers a shorter term than the life of the capital (a poultry house, for example). The grower may face the hold-up risk that the contractor may require additional capital investments or may impose lower returns at the time of contract renewal. Hold-up risk is a potential market failure and is discussed in detail in the next section. These risks may be heightened when there are no alternative buyers for the grower to switch to, or when the capital investment is specific to the original buyer.35 Some growers make substantial long-term capital investments as part of livestock or poultry production contracts, including land, poultry or hog houses, and equipment. Those investments may tie the grower to a single contractor or integrator. Costs associated with default risks and hold-up risks are important to many growers in the industry. The table below shows the number of integrators that broiler growers have in their local areas by percent of total farms and by total production.

    35 See Vukina and Leegomonchai, Oligopsony Power, Asset Specificity, and Hold-Up: Evidence From The Broiler Industry, American Journal of Agricultural Economics, 88(3): 589-605 (August 2006).

    36 MacDonald, James M. Technology, Organization, and Financial Performance in U.S. Broiler Production. USDA, Economic Research Service, June 2014.

    37 Percentages were determined from the USDA Agricultural Resource Management Survey (ARMS), 2011. “Respondents were asked the number of integrators in their area. They were also asked if they could change to another integrator if they stopped raising broilers for their current integrator.” Ibid. p. 30

    Table 4—Integrator Choice for Broiler Growers 36 Integrators in grower's area 37 Percent of total Farms Birds Production Can change to
  • another integrator
  • (percent of farms)
  • Number: 1 21.7 23.4 24.5 7 2 30.2 31.9 31.7 52 3 20.4 20.4 19.7 62 4 16.1 14.9 14.8 71 >4 7.8 6.7 6.6 77 No Response 3.8 2.7 2.7 Na

    The data in the table show that 52 percent of broiler growers, accounting for 56 percent of total production, report having only one or two integrators in their local areas. This limited integrator choice may accentuate the contract risks. A 2006 survey indicated that growers facing a single integrator received 7 to 8 percent less compensation, on average, than farmers located in areas with 4 or more integrators.38 If live poultry dealers already possess some market power to force prices for poultry growing services below competitive levels, some contracts can extend that power by raising the costs of entry for new competitors, or allowing for price discrimination.39

    38 MacDonald, J. and N. Key. “Market Power in Poultry Production Contracting? Evidence from a Farm Survey.” Journal of Agricultural and Applied Economics. 44(4) (November 2012): 477-490.

    39 See, for example, Williamson, Oliver E. Markets and Hierarchies: Analysis and Antitrust Implications, New York: The Free Press (1975); Edlin, Aaron S. & Stefan Reichelstein (1996) “Holdups, Standard Breach Remedies, and Optimal Investment,” The American Economic Review 86(3): 478-501 (June 1996).

    Many beef, pork, and poultry processing markets face barriers to entry, including; (1) Economies of scale; (2) high asset-specific capital costs with few alternative uses of the capital; (3) brand loyalty of consumers, customer loyalty to the incumbent processors, and high customer switching costs; and (4) governmental food safety, bio-hazard, and environmental regulations. Consistent with these barriers, there has been limited new entry.

    However, an area where entry has been successful is in developing and niche markets, such as organic meat and free-range chicken. Developing and niche markets have a relatively small consumer market that is willing to pay higher prices, which supports smaller plant sizes. Niche processors are generally small, however, and do not offer opportunities to many producers or growers.

    Economies of scale have resulted in large processing plants in the beef, pork, and poultry processing industries. The barriers to entry discussed above may have limited the entry of new processors, which limits the expansion of choice of processors to which livestock producers market their livestock. Barriers to entry also limit the expansion of choice for poultry growers who have only one or two integrators in their local areas with no potential entrants on the horizon. The limited expansion of choice of processors by livestock producers, swine production contract growers, and poultry growers may limit contract choices and the bargaining power of producers and growers in negotiating contracts.

    One indication of potential market power is industry concentration.40 The following table shows the level of concentration in the livestock and poultry slaughtering industries for 2005-2015.

    40 For additional discussion see MacDonald, J.M. 2016 “Concentration, contracting, and competition policy in U.S. agribusiness,” Competition Law Review, No. 1-2016: 3-8.

    41 The data on cattle and hogs were compiled from USDA's NASS data of federally inspected slaughter plants. Data on broilers and turkeys were compiled from Packers and Stockyards industry annual reports. Both data sources are proprietary.

    Table 5—Four-Firm Concentration in Livestock and Poultry Slaughter 41 Year Steers &
  • heifers
  • (%)
  • Hogs
  • (%)
  • Broilers
  • (%)
  • Turkeys
  • (%)
  • 2005 80 64 n.a. n.a. 2006 81 61 n.a. n.a. 2007 80 65 57 52 2008 79 65 57 51 2009 86 63 53 58 2010 85 65 51 56 2011 85 64 52 55 2012 85 64 51 53 2013 85 64 54 53 2014 83 62 51 58 2015 85 66 51 57

    The table above shows the concentration of the four largest steer and heifer slaughterers has remained relatively stable between 79 and 86 percent since 2005. Hog and broiler slaughter concentration has also remained relatively steady at over 60 percent and 50 percent, respectively.

    The data in Table 5 are estimates of national concentration and the size differences discussed below are also at the national level, but the economic markets for livestock and poultry may be regional or local, and concentration in regional or local areas may be higher than national measures. For example, while poultry markets may appear to be the least concentrated in terms of the four-firm concentration ratios presented above, economic markets for poultry growing services are more localized than markets for fed cattle or hogs, and local concentration in poultry markets is greater than in hog and other livestock markets.42 The data presented earlier in Table 4 highlight this issue by showing the limited ability a poultry grower has to switch to a different integrator. As a result, national concentration may not demonstrate accurately the options poultry growers in a particular region actually face.

    42 MacDonald and Key (2012) Op. Cit. and Vukina and Leegomonchai (2006) Op. Cit.

    Empirical evidence does not show a strong or simple relationship between increases in concentration and increases in market power. Other factors matter, including the ease of entry by new producers into a concentrated industry and the ease with which retail food buyers or agricultural commodity sellers can change their buying or marketing strategies in response to attempts to exploit market power.

    For example, in 2009, the Government Accountability Office (GAO) reviewed 33 studies published since 1990 that were relevant for assessing the effect of concentration on commodity or food prices in the beef, pork, or dairy sectors.43 Most of the studies found no evidence of market power, or found that the efficiency gains from concentration were larger than the market power effects. Efficiency gains would be larger if increased concentration led to reduced processing costs (likely to occur if there are scale economies 44 in processing), and if the reduced costs led to a larger effect on prices than the opposing impact of fewer firms. For example, with respect to beef processing, the GAO report concluded that concentration in the beef processing sector has been, overall, beneficial because the efficiency effects dominated the market power effects, thereby reducing farm-to-wholesale beef margins.

    43 United States Government Accountability Office. Concentration in Agriculture. GAO-09-746R. Enclosure II: Potential Effects of Concentration on Agricultural Commodity and Retail Food Prices.

    44 Scale economies are present when average production costs decrease as output increases.

    Several studies reviewed by the GAO did find evidence of market power in the retail sector, in that food prices exceeded competitive levels or that commodity prices fell below competitive levels. However, the GAO study also concluded that it was not clear whether market power was caused by concentration or some other factor. In interviews with experts, the GAO report concluded that increases in concentration may raise greater concerns in the future about the potential for market power and the manipulation of commodity or food prices.

    Another factor GIPSA considered in proposing §§ 201.210 and 201.211 is the contrast in size and scale between livestock producers, swine production contract growers, and poultry growers and the packers, swine contractors, and live poultry dealers they supply. The disparity in size between large oligopsonistic buyers and atomistic sellers may lead to market power and asymmetric information. The 2012 Census of Agriculture reported 740,978 cattle and calf farms with 69.76 million head of cattle for an average of 94 head per operation. Ninety-one percent of these were family or individually-owned operations.45 The largest one percent of cattle farms sold about 51 percent of the cattle sold by all cattle farms.

    45 Census of Agriculture, 2012.

    There were 33,880 cattle feeding operations in 2012 that sold 25.47 million head of fed cattle for an average of 752 head per feedlot. The 607 largest feedlots sold about 75 percent of the fed cattle, and averaged 32,111 head sold. About 80 percent of feedlots were family or individually owned.46 As Table 5 shows, the four largest cattle packers processed about 85 percent, 25.47 million head, for an average of 5.41 million head per cattle packer. This means the average top four cattle packers had 57,574 times the volume of the average cattle farm, and 1,054 times the volume of the largest one percent of cattle farms. It also means the average top four cattle packers had 7,197 times the volume of the average feedlot, and 169 times the volume of the very largest feedlots.

    46 Ibid.

    The USDA, National Agricultural Statistics Service 2012 livestock slaughter summary reported that in 2012, 113.16 million head of hogs were commercially slaughtered in the United States.47 Table 5 shows that the top four hog packers processed about 64 percent of those hogs, which comes to an average of about 18.1 million head of hogs per top four packer. The 2012 Census of Agriculture reported 55,882 farms with hog and pig sales.48 About 83 percent of the farms were family or individually owned. Of the 55,882 farms with hog and pig sales, 47,336 farms were independent growers raising hogs and pigs for themselves (sold an average of 1,931 head), 8,031 were swine production contract growers raising hogs and pigs for someone else (an average of 10,970 head per swine production contract grower), and 515 were swine contractors (sold an average of 38,058 head per swine contractor).49

    47 Ibid.

    48 A pig is a generic term for a young hog.

    49 Agricultural Census, 2012.

    The National Chicken Council states that in 2016, approximately 35 companies were involved in the business of raising, processing, and marketing chicken on a vertically integrated basis, while about 25,000 family farmers had production contracts with those companies.50 That comes to about 714 family-growers per company. Collectively, the family-growers produced about 95 percent of the nearly 9 billion broilers produced in the United States in 2015. The other 5 percent were grown on company-owned farms. That means the average family-grower produced about 342,000 broilers. As Table 5 shows, the four largest poultry companies in the United States accounted for 51 percent of the broilers processed. That means the average volume processed by the four largest poultry companies was about 1.15 billion head, which was 3,357 times the average family grower's volume.

    50http://www.nationalchickencouncil.org/about-the-industry/statistics/broiler-chicken-industry-key-facts/.

    As the above discussion highlights, there are large size differences between livestock producers and meat packers. There are also large size differences between poultry growers and the live poultry dealers which they supply. These size differences may contribute to unequal bargaining power due to monopsony market power or oligopsony market power, or asymmetric information. The result is that the contracts bargained between the parties may have detrimental effects on livestock producers, swine production contract growers, and poultry growers due to the structural issues discussed above and may result in inefficiencies in the marketplace.

    Hold-Up as a Potential Market Failure

    Integrators demand investment in fixed assets from the growers. One example is specific types of poultry houses and equipment the integrator may require the grower to utilize in their growing operations. These investments may improve efficiency by more than the cost of installation. Typically, the improved efficiency would accrue to both the integrator and the grower. The integrator has lower feed costs, and the grower performs better relative to other poultry growers in a settlement group. If the grower bears the entire cost of installation, then the grower should be further compensated for the feed conversion gains that accrue to the integrator. The risk is that after the assets are installed, the cost to the grower is “sunk.” This means that if the integrator reneges on paying compensation for the additional capital investments, and insists on maintaining the lower price, the grower will accept that lower price rather than receive nothing. This allows the integrator to get the benefit of the efficiency gains, at no expense to them, with the grower bearing all of the cost. This reneging is termed “hold-up” in the economic literature.51

    51 See for example, Benjamin Klein, Robert G. Crawford, and Armen A. Alchian, “Vertical Integration, Appropriable Rents, and the Competitive Contracting Process,” The Journal of Law and Economics 21, no. 2 (Oct., 1978): 297-326.

    Hold-up can have two consequences that result in a misallocation of resources. If the growers do not anticipate hold-up, then growers will spend too much on investments because the integrator who demands them is not incurring any cost. That is inefficient. If the grower does anticipate hold-up, they will act as if the integrator were going to renege even when they were not, resulting in too little investment and a loss of potential efficiency gains.

    Hold-up can be resolved with increased competition. If an integrator developed a reputation for reneging, and growers could go elsewhere, the initial integrator would be punished and disincentivized from reneging in the future. Unfortunately, in practice, many growers do not have the option of going elsewhere.

    Data shown above in Table 4 indicate that there are few integrators in these markets, and that growers have limited choice. Table 5, above, indicates the level of concentration in the livestock and poultry slaughtering industries and shows that integrators and livestock packers operate in concentrated markets.

    This rule would allow growers to file complaints against integrators that renege, giving some of the incentive benefit of competition, without compromising the efficiency of having a few large processors.

    Contracting, Industry Structure, and Market Failure: Summary of the Need for Regulation

    There are benefits of contracting in the livestock and poultry industries, as well as structural issues that may result in unequal bargaining power and market failures. These structural issues and market failures will be mitigated by relieving plaintiffs from the requirement to demonstrate competitive injury. For instance, contracting parties can alleviate hold-up problems if they are able to write complete contracts, and are able to litigate to enforce the terms of those contracts when there is an attempt to engage in ex-post hold-up. Because proving competitive injury is difficult and costly, removing that burden will facilitate the use of litigation by producers and growers to address violations of the Packers and Stockyards Act. If growers are able to seek legal remedies, then their contracts are easier to enforce. This will incentivize packers, swine contractors, and integrators to avoid exploitation of market power and asymmetric information, as well as behaviors that result in the market failure of hold-up. The result will be improved efficiency in the livestock and poultry markets.

    GIPSA has a clear role to ensure that market failures are mitigated so that livestock and poultry markets remain fair and competitive. Section 201.3(a) seeks to fulfill that role by promoting fairness and equity for livestock producers, swine production contract growers, and poultry growers.

    Costs of the Regulations Proposed on June 22, 2010

    GIPSA issued a proposed rule on June 22, 2010, which included §§ 201.3, 201.210, and 201.211. GIPSA received and considered thousands of comments before finalizing § 201.3(a) and before proposing the current versions of §§ 201.210, and 201.211. The following provisions were proposed in 2010 but are not in § 201.3 or currently proposed §§ 201.210 and 201.211.

    • Applicability to all stages of a live poultry dealer's poultry production, including pullets, laying hens, breeders, and broilers (§ 201.3(a)).

    • Applicability to all swine production contracts, poultry growing arrangements and livestock production and marketing contracts, including formula and forward contracts (§ 201.3(b)).

    • Requirement that packers, live poultry dealers, and swine contractors maintain records justifying differences in prices (§ 201.210(a)(5)).

    • Provision prohibiting packers from purchasing livestock from other packers (§ 201.212(c)).

    • Requirement that packers offer the same terms to groups of small producers as offered to large producers when the group can collectively meet the same quantity commitments (§ 201.211(a)).

    • Requirement that packers refrain from entering into exclusive agreements with livestock dealers (§ 201.212(b)).

    • Requirements that packers and live poultry dealers submit sample contracts to GIPSA for posting to the public (§ 201.213).

    Although many thousands of the comments submitted contained general qualitative assessments of either the costs or benefits of the proposed rule, only two comments systematically described quantitative costs across the rule provisions. Comments from the National Meat Association (NMA) included cost estimates by Informa Economics (the Informa Study). The Informa Study projected costs of $880 million, $401 million, and $362 million for U.S. cattle and beef, hogs and pork, and poultry industries respectively.52 However, these cost estimates were for all of the 2010 proposed changes, many of which do not apply. The Informa Study estimated $133.3 million to be one-time direct costs resulting from rewriting contracts, additional record keeping, etc.53 The majority of the costs would be indirect costs. The Informa Study estimated $880.9 million in costs due to efficiency losses and $459.9 million in costs due to reduced demand caused by a reduction in meat quality resulting from fewer AMAs.

    52 Informa Economics, Inc. “An Estimate of the Economic Impact of GIPSA's Proposed Rules,” prepared for the National Meat Association, 2010, Table 10, Page 53.

    53 Ibid. Page 53.

    Comments from the National Chicken Council (NCC) included cost estimates prepared by Dr. Thomas E. Elam, President, FarmEcon LLC (the Elam Study).54 The Elam Study estimated that the entire 2010 proposed rule would cost the chicken industry $84 million in the first year increasing to $337 million in the fifth year, with a total cost of $1.03 billion over the first five years.55 The Elam Study identified $6 million as one-time administrative costs. Most of the costs would be indirect costs resulting from efficiency losses.56 More than half of the costs would be due to a reduced rate of improvement in feed efficiency. Again, these cost estimates were for all of the 2010 proposed changes, many of which do not apply.

    54 See Elam, Dr. Thomas E. “Proposed GIPSA Rules Relating to the Chicken Industry: Economic Impact.” FarmEcon LLC, 2010.

    55 Ibid. Page 24

    56 Ibid. Page 24.

    The Informa Study estimated that the proposed provision requiring packers to refrain from entering into exclusive agreements with livestock dealers would cost livestock auctions as much as $85.5 million.57 Because GIPSA has no current plans to propose the “exclusive agreements” rule, those costs no longer apply. The Informa Study did not directly specify how much the estimates in the study attributed to each of the other provisions, but GIPSA expects that their omission will substantially reduce the cost of § 201.3(a).

    57 Ibid. Page 49.

    Estimates of the costs in the Informa Study and the Elam Study were largely due to projections that packers, swine contractors, and live poultry dealers, would alter business practices in reaction to the proposed rule. For example, the Informa Study projected that packers would reduce the number and types of AMAs to avoid potential litigation,58 and the Elam Study expected live poultry dealers to evaluate each load of feed delivered to growers to avoid litigation.59

    58 Informa, page 30.

    59 Elam, page 18.

    The estimates from the Informa Study and the Elam Study may overstate costs because the studies relied on interviews of packers, swine contractors, live poultry dealers, and other stakeholders for much of the basis for the estimates of the willingness of packers, swine contractors, and live poultry dealers to alter their business practices. Moreover, neither study considered benefits from the proposed rule.

    The Informa Study projected that the regulations proposed in 2010 would cause beef and pork packers to limit their involvement in vertical arrangements, and without those arrangements, they would not be able to produce the branded products they currently offer. The Informa Study projected that, as a result, beef and pork markets would lose $460 million, which is about half of the value added from branded products.60

    60 Informa, pages 51 and 52.

    GIPSA does not expect that the current § 201.3(a) would cause beef and pork markets to abandon half of the value added from branded products. Current § 201.3(a) does not prevent packers from offering quality incentives to hog or cattle feeders, and any vertical coordination among feeders and producers would be outside of GIPSA's jurisdiction.

    Given the differences from the rule proposed in 2010, the estimates from the Elam Study likely overstated the costs of compliance to the poultry industry with current § 201.3(a) by at least $115 million over five years. The Informa Study estimates would overstate costs of compliance to the cattle, hog, and poultry industries with current § 201.3(a) by at least $500 million. If packers, swine contractors, and live poultry dealers overstated their willingness to alter their business practices, then the estimates could be overstated that much more.

    Cost-Benefit Analysis of § 201.3(a) Regulatory Alternatives Considered

    Executive Order 12866 requires an assessment of costs and benefits of potentially effective and reasonably feasible alternatives to the planned regulation and an explanation of why the planned regulatory action is preferable to the potential alternatives.61 GIPSA considered three regulatory alternatives. The first alternative that GIPSA considered is the baseline to maintain the status quo and not finalize § 201.3(a). The second alternative that GIPSA considered is to issue § 201.3(a) as an interim final regulation. This is GIPSA's preferred alternative as will be explained below. The third alternative that GIPSA considered is issuing § 201.3(a) as an interim final regulation, but exempting small businesses, as defined by the Small Business Administration, from having to comply with the regulation.

    61 See Section 6(a)(3)(C) of Executive Order 12866.

    Regulatory Option 1: Status Quo

    If § 201.3(a) is never finalized, there are no marginal costs and marginal benefits as industry participants will not alter their conduct. From a cost standpoint, this is the least cost alternative compared to the other two alternatives. This alternative also has no marginal benefits. Since there are no changes from the status quo under this regulatory alternative, it will serve as the baseline against which to measure the other two alternatives.

    Regulatory Alternative 2: The Preferred Alternative

    Section 201.3(a) states that conduct or action can be found to violate sections 202(a) and/or 202(b) of the P&S Act without a finding of harm or likely harm to competition. Given the applicability of the regulation to the entire livestock and poultry industries, it is difficult to predict how the industries will respond. Therefore, GIPSA believes that assigning a range to the expected costs of the regulation is appropriate.

    At the lower boundary of the cost spectrum, GIPSA considers the scenario where the only costs are increased litigation costs and there are no adjustments by the livestock and poultry industries to reduce their use of AMAs or incentive pay systems, such as poultry grower ranking systems, and there are no changes to existing marketing or production contracts. For the upper boundary of the cost spectrum, GIPSA considers the scenario in which the livestock and poultry industries adjust their use of AMAs and incentive pay systems and makes systematic changes in its marketing and production contracts to reduce the threat of litigation.

    A. Regulatory Alternative 2: Lower Boundary of Cost Spectrum—Litigation Costs of Preferred Alternative

    GIPSA modeled the litigation costs by estimating the total cost of litigating a case filed under the jurisdiction of the P&S Act. The main costs are attorney fees to litigate a case in a court of law. Limited empirical data on actual historical litigation costs required GIPSA to use a cost engineering approach to estimate litigation costs. In considering the costs of the 2010 proposed rule, GIPSA, based on its expertise, assumed a cost of $3.5 million to litigate a case. GIPSA uses the same starting point here. The cost of litigating a case includes the costs to all parties including the respondent and the USDA in a case brought by the USDA and the costs of the plaintiff and the defendant in the case of private litigation.

    GIPSA then examined the actual number of cases decided under the P&S Act from 1926 to 2014. The listing of court decisions and the court in which the decision was reached came from the National Agricultural Law Center at the University of Arkansas.62 GIPSA then reviewed each case and classified it as either competition, financial, or trade practice cases. This is an internal classification system corresponding to the types of violations GIPSA investigates.

    62http://nationalaglawcenter.org/aglaw-reporter/case-law-index/packers-and-stockyards. We note that this list is not exhaustive, but it is extensive.

    All of the cases were assigned a specific attorney fee based on a random sample from a normal distribution ranging between $250 thousand and $3.5 million for trade practice cases, $250 thousand to $3 million for financial cases, and $1.5 million to $5 million for competition cases. These ranges are based on GIPSA's expertise and the complexity of each type of case, with competition being the most complex and therefore the most costly to litigate. This expertise comes from GIPSA's experience litigating each type of case and monitoring private litigation under the P&S Act. GIPSA estimated the cost of litigating each case from 1926 to 2014 using the cost ranges outlined above.

    GIPSA scaled the initial cost up or down based on the court making the decision and based on GIPSA's assumption that Supreme Court cases are more expensive than District court cases, which are more expensive than state court cases. For Supreme Court cases, GIPSA scaled up the cost by a factor of three. For District court cases, GIPSA left the costs unchanged except for the sole case litigated in the United States District Court for the District of Columbia, which GIPSA scaled up by a factor of 1.1. GIPSA scaled state courts down by a factor of 0.7.

    After estimating the cost of each case, by case type, GIPSA averaged all cases decided each year to obtain an estimated annual average cost of litigation. GIPSA then conducted a Monte Carlo simulation by sampling from a normal distribution of estimated average annual litigation costs for each type of case to arrive at the final estimated annual average cost of litigating cases filed under the P&S Act.63

    63 Monte Carlo simulation is a statistical technique that relies on repeated random sampling from a distribution to obtain numerical results.

    GIPSA recognizes the uncertainty in estimating litigation costs and conducted sensitivity analysis using a Monte Carlo simulation on the estimated average annual litigation costs. GIPSA used a normal distribution of estimated litigation costs and calculated estimated litigation costs at the 2.5th percentile (lower percentile) of the distribution, the mean (average), and the 97.5th percentile (upper percentile).

    GIPSA then estimated a linear trend line through the data using the Ordinary Least Squares (OLS) linear regression technique and used the trend line to project the litigation costs for 2015-2017.64 These are baseline litigation costs that GIPSA expects to occur without the regulation. The table below shows the estimated and projected baseline litigation costs for 2007-2017.65

    64 Ordinary least squares regression technique is a method for estimating the unknown parameters using an established statistical model based on existing data observations.

    65 The baseline litigation costs are those costs GIPSA expects to occur without implementation of § 201.3(a).

    Table 6—Estimated and Projected Baseline Litigation Costs for 2007-2017 66 Year Lower
  • percentile
  • ($ millions)
  • Average
  • ($ millions)
  • Upper
  • percentile
  • ($ millions)
  • 2007 4.98 8.88 12.77 2008 2.16 5.12 8.08 2009 8.45 13.00 17.46 2010 6.82 11.25 15.60 2011 10.52 15.28 20.02 2012 6.49 10.10 13.81 2013 1.94 4.14 6.42 2014 3.56 6.74 10.03 2015 4.32 8.13 12.10 2016 4.45 8.28 12.31 2017 4.58 8.42 12.52

    GIPSA then reviewed the complete history of all investigations conducted by its Packers and Stockyards Program since 2009 and separated out the investigations involving alleged violations of sections 202(a) and 202(b) of the P&S Act for cattle, hogs, and poultry because § 201.3(a) only applies to alleged violations of sections 202(a) and 202(b). The GIPSA investigation data are more robust, with more observations than the case data. There were never many cases in any given year. In addition, the data since 2009 are better predictors of the next ten years than cases that took place as far back as 1926.

    66 The litigation costs for 2007-2014 are estimated using Monte Carlo simulation at the lower percentile, the average, and the upper percentile and 2015-2017 are projected using the estimated trend lines using OLS and historical estimates. The cost of each case is measured using 2016 dollars.

    Based on the history of investigations, GIPSA then allocated all of the projected baseline litigation costs for 2017 into section 202(a) and 202(b) violations for each species at the lower percentile, the average, and the upper percentile. These allocations appear in the tables below.

    Table 7—Allocation of § 201.3(a) Baseline Litigation Costs for 2017 at the Lower Percentile P&S Act section Cattle
  • ($ millions)
  • Hog
  • ($ millions)
  • Poultry
  • ($ millions)
  • Total
  • ($ millions)
  • 202(a) 1.00 0.65 2.01 3.66 202(b) 0.10 0.11 0.71 0.92 Total 1.10 0.76 2.72 4.58
    Table 8—Allocation of § 201.3(a) Baseline Litigation Costs for 2017 at the Average P&S Act section Cattle
  • ($ millions)
  • Hog
  • ($ millions)
  • Poultry
  • ($ millions)
  • Total
  • ($ millions)
  • 202(a) 1.84 1.20 3.70 6.73 202(b) 0.19 0.21 1.30 1.69 Total 2.02 1.41 4.99 8.42
    Table 9—Allocation of § 201.3(a) Baseline Litigation Costs for 2017 at the Upper Percentile P&S Act section Cattle
  • ($ millions)
  • Hog
  • ($ millions)
  • Poultry
  • ($ millions)
  • Total
  • ($ millions)
  • 202(a) 2.73 1.78 5.50 10.00 202(b) 0.28 0.31 1.93 2.52 Total 3.00 2.09 7.42 12.52

    These allocations assume that all projected baseline litigation costs for 2017 will come only from section 202(a) and 202(b) violations. GIPSA then estimated the additional litigation costs the first full year the regulation is in place.

    In order to estimate the additional expected litigation costs in 2017 assuming § 201.3(a) becomes effective in early 2017, GIPSA again utilized the complete history of all investigations conducted by its Packers and Stockyards Program since 2009. GIPSA based the additional litigation costs on the difference between the number of complaints received in 2015 on alleged conduct that may violate sections 202(a) and 202(b), by species, and the highest number of complaints GIPSA received in any year since 2009. By 2015, court decisions had established the requirement to demonstrate harm to competition, which likely resulted in fewer complaints of Section 202(a) and 202(b) violations, particularly in the poultry industry, than in previous years when this requirement was not fully realized by industry participants. GIPSA expects § 201.3(a) will result in additional new complaints filed with GIPSA that will be at the levels experienced between 2009 and 2015 before the requirement of harm to competition was fully realized. GIPSA tracks the number of complaints received through a complaint tracking system initiated in 2009. Thus, this difference, by species, is the increase in complaints GIPSA expects when the regulations are finalized. GIPSA then used these differences as scaling factors to estimate the litigation that GIPSA expects to occur in 2017, the first full year that § 201.3(a) becomes effective. The scaling factors appear in the table below:

    Table 10—Scaling Factors for Litigation From § 201.3(a) P&S Act section Cattle Hog Poultry 202(a) 2.30 1.40 2.15 202(b) 2.30 1.20 2.15

    The scaling factors run from 1.20 for hogs to 2.30 for cattle.

    To finalize the estimated increase in litigation costs, GIPSA multiplied the scaling factors in the above table by the projected 2017 baseline litigation costs at the lower percentile, the average, and the upper percentile to arrive at the expected litigation costs in 2017. GIPSA then subtracted out the projected baseline litigation costs to arrive at the estimated additional litigation costs that GIPSA expects to occur assuming § 201.3(a) become effective in early 2017. These estimated litigation costs appear in the following tables.

    Table 11—Projected § 201.3(a) Litigation Costs for 2017 at the Lower Percentile P&S Act section Cattle
  • ($ millions)
  • Hog
  • ($ millions)
  • Poultry
  • ($ millions)
  • Total
  • ($ millions)
  • 202(a) 1.30 0.26 2.31 3.87 202(b) 0.13 0.02 0.81 0.97 Total 1.43 0.28 3.12 4.84
    Table 12—Projected § 201.3(a) Litigation Costs for 2017 at the Average P&S Act section Cattle
  • ($ millions)
  • Hog
  • ($ millions)
  • Poultry
  • ($ millions)
  • Total
  • ($ millions)
  • 202(a) 2.39 0.48 4.25 7.12 202(b) 0.24 0.04 1.49 1.77 Total 2.63 0.52 5.74 8.89
    Table 13—Projected § 201.3(a) Litigation Costs for 2017 at the Upper Percentile P&S Act section Cattle
  • ($ millions)
  • Hog
  • ($ millions)
  • Poultry
  • ($ millions)
  • Total
  • ($ millions)
  • 202(a) 3.55 0.71 6.32 10.58 202(b) 0.36 0.06 2.22 2.64 Total 3.91 0.77 8.54 13.22

    GIPSA expects § 201.3(a) to result in an additional $4.84 million in litigation in 2017 at the lower percentile, $8.89 million in litigation in 2017 at the average, and $13.22 million in litigation in 2017 at the upper percentile. GIPSA also expects the majority of additional litigation to come from the poultry industry based on investigations GIPSA conducted from 2009 to 2015, many of which were based on industry complaints.

    As discussed above, GIPSA considers the lower boundary of costs from § 201.3(a) to be increased litigation costs with no adjustments by the livestock and poultry industries to reduce their use of AMAs or incentive pay systems and no changes to existing marketing or production contracts. GIPSA also recognizes the uncertainty in estimating litigation costs and conducted a sensitivity analysis of litigation costs at the lower percentile, the average percentile, and the upper percentile. The sensitivity analysis shows that litigation may vary by as much as $8.38 million (upper percentile minus lower percentile). GIPSA believes the average litigation costs is the best available estimate of litigation costs and uses it as the lower boundary for the estimated litigation costs of § 201.3(a). The lower boundary cost estimates appear in the table below.

    Table 14—Lower Boundary Projected § 201.3(a) Costs—Preferred Alternative P&S Act section Cattle
  • ($ millions)
  • Hog
  • ($ millions)
  • Poultry
  • ($ millions)
  • Total
  • ($ millions)
  • 202(a) 2.39 0.48 4.25 7.12 202(b) 0.24 0.04 1.49 1.77 Total 2.63 0.52 5.74 8.89

    GIPSA estimates that § 201.3(a) will result in an additional $8.89 million in additional litigation in the livestock and poultry industries with $2.63 million in litigation in the cattle industry, $0.52 million in the hog industry, and $5.74 million in the poultry industry in the first full year § 201.3(a) would be in place.

    B. Regulatory Alternative 2: Lower Boundary—Ten-Year Total Costs of the Preferred Alternative

    To arrive at the estimated ten-year costs of § 201.3(a), GIPSA expects the litigation costs to be constant for the first five years while courts are setting precedents for the interpretation of § 201.3(a). GIPSA expects that case law with respect to the regulation will be settled after five years and by then, industry participants will know how GIPSA will enforce the regulation and how courts will interpret the regulation. The effect of courts establishing precedents is that litigation costs will decline after five years as the livestock and poultry industries understand how the courts interpret the regulation.

    To arrive at the estimated ten-year costs of § 201.3(a), GIPSA estimates that litigation costs for the first five years will occur at the same rate and at the same cost as in 2017. In the second five years, GIPSA estimates that litigation costs will decrease each year and return to the baseline in the sixth year after the courts have established precedents. GIPSA estimates this decrease in litigation costs to the baseline to be linear with the same decrease in costs each year. The total ten-year costs of § 201.3(a) at the lower boundary appears in the table below.

    Table 15—Lower Boundary of Ten-Year Total Costs of § 201.3(a) Year Cattle
  • ($ millions)
  • Hog
  • ($ millions)
  • Poultry
  • ($ millions)
  • Total
  • ($ millions)
  • 2017 2.63 0.52 5.74 8.89 2018 2.63 0.52 5.74 8.89 2019 2.63 0.52 5.74 8.89 2020 2.63 0.52 5.74 8.89 2021 2.63 0.52 5.74 8.89 2022 2.19 0.43 4.79 7.41 2023 1.75 0.35 3.83 5.93 2024 1.31 0.26 2.87 4.44 2025 0.88 0.17 1.91 2.96 2026 0.44 0.09 0.96 1.48 Totals 19.70 3.90 43.07 66.67

    Based on the analysis, GIPSA expects the lower boundary of the ten-year total costs of § 201.3(a) to be $66.67 million.

    C. Regulatory Alternative 2: Lower Boundary—Net Present Value of Ten-Year Total Costs of the Preferred Alternative

    The lower boundary ten-year total costs of § 201.3(a) in the table above show that the costs are constant in the first five years and then gradually decrease over the next five years. Costs to be incurred in the future are less expensive than the same costs to be incurred today. This is because the money that will be used to pay the costs in the future can be invested today and earn interest until the time period in which the cost is incurred. After the cost has been incurred, the interest earned will still be available.

    To account for the time value of money, the costs of the regulation to be incurred in the future is discounted back to today's dollars using a discount rate. The sum of all costs discounted back to the present is called the net present value (NPV) of total costs. GIPSA relied on both a three percent and seven percent discount rate as discussed in Circular A-4.67 GIPSA measured all costs using constant 2016 dollars.

    67https://www.whitehouse.gov/sites/default/files/omb/assets/regulatory_matters_pdf/a-4.pdf. Accessed on September 19, 2016.

    GIPSA calculated the NPV of the ten-year total costs of the regulation using both a three percent and seven percent discount rate and the NPVs appear in the following table.

    Table 16—NPV of Lower Boundary of Ten-Year Total Cost of § 201.3(a)—Preferred Alternative Discount rate Preferred
  • alternative
  • ($ millions)
  • 3 Percent 58.62 7 Percent 50.03

    GIPSA expects the NPV of the lower boundary of the ten-year total costs of § 201.3(a) to be $58.62 million at a three percent discount rate and $50.03 million at a seven percent discount rate.

    D. Regulatory Alternative 2: Lower Boundary—Annualized NPV of Ten-Year Total Costs of the Preferred Alternative

    GIPSA then annualized the NPV of the ten-year total costs (referred to as annualized costs) of § 201.3(a) at the lower boundary using both a three percent and seven percent discount rate as required by Circular A-4 and the results appear in the following table.68

    68 Ibid.

    Table 17—Annualized Costs of § 201.3(a)—Preferred Option Discount rate Preferred
  • alternative
  • ($ millions)
  • 3 Percent 6.87 7 Percent 7.12

    GIPSA expects the annualized costs of § 201.3(a) at the lower boundary to be $6.87 million at a three percent discount rate and $7.12 million at a seven percent discount rate.

    E. Regulatory Alternative 2: Upper Boundary of Cost Spectrum—Preferred Alternative

    As discussed above, the upper boundary of the cost spectrum occurs if the cattle, hog, and poultry industries adjust their use of AMAs and incentive pay systems and make systematic changes in their marketing and production contracts to reduce the threat of litigation. For the upper boundary cost estimate, GIPSA relied on the Informa Study and Elam Study. The Informa Study was prepared for the NMA and the Elam Study was prepared for the NCC. Both of these groups were opposed to the rule proposed on June 22, 2010 and GIPSA considers their studies to be upper boundary scenarios for meat and livestock industries and poultry industry costs.

    GIPSA reviewed the Informa Study and the Elam Study and compared the provisions in the multiple proposed regulations in the June 22, 2010 rule against § 201.3(a). The Informa Study estimated both direct and indirect costs of the 2010 proposed rule. The Informa Study direct costs are estimates of actual costs of complying with all of the regulations proposed in 2010, such as new computer software and additional staff. The Informa Study estimated both direct one-time costs and on-going direct costs that would be incurred by the livestock industry each year. The Informa Study also estimated indirect costs to capture livestock and poultry industry adjustments to the 2010 regulations. The Informa Study also included litigation costs.

    The sources of indirect costs that the Informa Study estimated for the cattle industry are a reduction in production efficiencies due to a reduction in the use of AMAs and the corresponding reduction in premiums paid in branded beef programs and a reduction in beef quality. The RTI Study also found that hypothetical reductions in AMAs would reduce beef and cattle supplies, reduce the quality of beef, and increase retail and wholesale beef prices.69

    69 RTI International, 2007, GIPSA Livestock and Meat Marketing Study. Prepared for Grain Inspection, Packers and Stockyard Administration.

    For the hog industry, the Informa Study estimated the indirect costs as the reduction in operational efficiency from operating slaughter plants at less than full optimal utilization as well as revenue losses due to reductions in quality from reductions in premiums paid for higher quality hogs procured under AMAs.

    For the poultry industry, the Informa Study estimated indirect costs resulting from a slowdown in the adoption of new technology that increases efficiency as integrators are unwilling to provide monetary incentives for growers to invest in new technology due to the threat of litigation for unfair, unjustly discriminatory, or deceptive payment practices.

    The Informa Study recognized that the economic costs of the 2010 rule would take time to materialize. The Informa Study estimated that only the direct, one-time costs would occur shortly after implementation of the regulations in the 2010 rule and the more significant impacts, such as declining efficiency and quality degradation, would happen more slowly and might not reach the full impact until three or four years after the rule became effective.70 The Informa Study further recognized that companies would find ways to adapt to the provisions of the regulation in the rule and the impact of the rule would be lessened over time.71 The following table summarizes the full-impact of the Informa Study cost estimates on the impact of the June 22, 2010 proposed rule.

    70 Informa Economics, Inc. “An Estimate of the Economic Impact of GIPSA's Proposed Rules,” prepared for the National Meat Association, 2010, Page 66.

    71 Ibid, Page 67.

    72 Ibid, Tables 7, 8, and 9.

    Table 18—Total Informa Study Costs for the Full-Impact Year 72 Cattle
  • ($ millions)
  • Hogs
  • ($ millions)
  • Poultry
  • ($ millions)
  • Total
  • ($ millions)
  • One-Time Direct Costs 38.7 68.7 26.0 133.4 Ongoing Direct Costs 61.5 73.8 33.4 168.7 Cost Increase Due to Efficiency Loss 401.9 176.7 302.2 880.8 Revenue Lost Due to Quality/Demand Impact 377.7 82.2 0.0 459.9 Total Informa Costs 879.8 401.4 361.6 1,642.8

    At the full impact level, the Informa Study estimated the highest cost to be borne by the cattle industry at almost $880 million, followed by the hog and poultry industries. The Informa Study estimated that the total costs of the regulations proposed in 2010 could be as high as $1.64 billion and that this cost would not be fully borne until three or four years after implementation of the regulations.

    The Elam Study estimated a similar impact on the poultry industry as the Informa Study. The Elam Study estimated that the costs of the 2010 proposed rule would increase over time and would cost the chicken industry $200.64 million in the third year after implementation, $266.94 in the fourth year, and $336.67 million in the fifth year, with a total cost of $1.03 billion over the first five years.73 The Elam Study estimated $6 million as one-time administrative costs from re-drafting poultry grower contracts, additional record keeping, and submission of contracts to GIPSA.74 The remainder of the costs estimated in the Elam Study were indirect costs resulting from efficiency losses and costs of testing and evaluating feed.

    73 Elam, Dr. Thomas E. “Proposed GIPSA Rules Relating to the Chicken Industry: Economic Impact.” FarmEcon LLC, 2010, Table on Page 25.

    74 Ibid. Page 21.

    GIPSA expects the livestock and poultry industries to adapt to § 201.3(a) after a period of five years when the courts have presumably settled the case law and the livestock and poultry industries know how courts will interpret the regulation. This will cause the costs of § 201.3(a) to decline after a period of five years. GIPSA expects the livestock and poultry industries to adjust their business practices in a way to maximize profits and lessen the impact of the regulation over time.

    GIPSA also compared the estimated impact on the poultry industry in the first five years as estimated in the Informa Study and the Elam Study. In the first four years, the poultry costs estimated in the Informa Study are higher than those estimated in the Elam Study. The Elam study has higher cost estimates in year five. Because the Informa Study cost estimates are higher than the Elam Study cost estimates and the Informa Study cost estimates decline in the later years as GIPSA expects, GIPSA relies on the Informa Study cost estimates to estimate the upper boundary of the costs of § 201.3(a).

    1. Regulatory Alternative 2: Upper Boundary-Informa Study Estimates—Adjustment 1

    In order to arrive at the upper boundary estimate of the costs of § 201.3(a), GIPSA made several downward adjustments to the Informa Study estimates presented in Table 18 above. The first adjustment is to reduce the Informa Study cost estimates by 25 percent. The Informa Study implicitly asserted that 75 percent of the total costs of the 2010 rule were caused by relieving the plaintiff of the burden of proving competitive injury.75 Thus, the Informa Study implicitly asserted that provisions in regulations in the 2010 proposed rule other than § 201.3(a) are responsible for 25 percent of the total costs. Because GIPSA is only concerned with costs attributable to § 201.3(a), GIPSA is reducing the Informa Study cost estimates by 25 percent.

    75 Informa Economics, Inc. “An Estimate of the Economic Impact of GIPSA's Proposed Rules,” prepared for the National Meat Association, 2010, Page 71.

    2. Regulatory Alternative 2: Upper Boundary-Informa Study Estimates—Adjustment 2

    The second downward adjustment that GIPSA made is to scale the Informa Study's estimates according to the timing of the economic impact the Informa Study estimated. The Informa Study expected the costs to increase in the first three years, peak in years three or four, and then decline through year ten. In order to simulate the costs that the Informa Study assigned to each year, GIPSA adjusted the costs in the full impact year in Table 18 above by the percentages listed in Table 19.

    76 The Informa Study estimates are for years one through ten beginning with the first year of the implementation of the rule and are not specific to any one year. GIPSA uses 2017 as year one and 2026 as year ten. The Informa Study stated that in particular, the decline in beef and pork quality and subsequent damage to consumer demand will take time to materialize, while the efficiency losses in poultry would likely happen sooner, but will still be delayed. This is presumably because the breeding cycle for hogs and especially for cattle is longer than that for poultry.

    Table 19—Impact Level of Informa Study Costs 76 Year Cattle
  • (%)
  • Hog
  • (%)
  • Poultry
  • (%)
  • 2017 40 29 49 2018 69 59 79 2019 100 79 100 2020 100 100 100 2021 100 96 81 2022 91 75 60 2023 75 54 30 2024 51 53 9 2025 38 29 9 2026 38 29 9

    GIPSA then weighted the Informa Study's full-impact cost estimate for each year and each industry by the impact level from the table above.

    3. Regulatory Alternative 2: Upper Boundary-Informa Study Estimates—Adjustment 3

    The final downward adjustment GIPSA made is based on two factors. The first factor is that GIPSA expects the language in § 201.3(a) to result in limited industry adjustments and a continued role for the courts to interpret when a showing of harm or likelihood of harm to competition is necessary in order to prove a violation of section 202(a) or (b) of the P&S Act. The second factor is the fact that the courts have historically not required a showing of harm or likelihood of harm to competition in all livestock and poultry cases and GIPSA expects that trend to continue. GIPSA discusses the factors in turn and then estimates the third and final adjustment to the Informa Study estimates.

    The first factor is that § 201.3(a) states that a finding that the challenged conduct or action adversely affects or is likely to adversely affect competition is not necessary in all cases. However, § 201.3(a) does not provide any guidance regarding the types of conduct or action where a finding of harm or likelihood of harm would or would not be necessary to prove a violation of section 202(a) or (b) of the P&S Act.77 It is possible that without the guidance in the proposed regulations, courts will continue to exercise judicial discretion in determining when a finding of harm or likelihood of harm to competition is necessary in order to prove a violation of sections 202(a) and/or (b). However, this rule will provide the longstanding position of the Department of Agriculture for the courts to consider. Because some of the U.S. Courts of Appeals in areas of heavy agricultural production have ruled that GIPSA must demonstrate competitive injury or the likelihood of competitive injury in order to prove that certain conduct or action violates section 202(a) and (b), GIPSA anticipates that the federal district courts in those circuits will continue to apply this binding case law.

    77 Proposed regulations 201.210 and 201.211 provide conduct and criteria for 202(a) and 202(b) violations.

    GIPSA acknowledges that final § 201.3(a) may motivate some private plaintiffs to file new lawsuits under sections 202(a) and/or 202(b) to test its parameters in an attempt to move courts to find in selected cases that harm or likely harm to competition need not be proven. If a U.S. Court of Appeals upholds a district court ruling that competitive harm or likelihood of competitive harm must be demonstrated in order to prove a violation of section 202(a) or (b), that result would not involve any change from the status quo of section 202(a) and 202(b) litigation. Packers, swine contractors, and live poultry dealers would have no reason to adjust their contracts or business practices with the result of few additional indirect costs being borne by the livestock and poultry industries. Similarly, plaintiffs would then need to consider the high costs (in terms of discovery of large amounts of data and the hiring of economic and statistical experts) to proceed to trial and may opt not to proceed with additional litigation.78

    78 In the Been v. O.K. Indus., Inc. litigation, the plaintiffs' economic expert billed for more than 3,000 hours spent on economic analysis of data, building a monopsony case in accordance with the Tenth Circuit's 2007 opinion, writing reports, consulting with attorneys, and testifying at depositions and during the jury trial. The defendant's two economic experts presumably billed for a similarly significant amount of time.

    GIPSA expects the effects of § 201.3(a) on livestock and poultry industry participants to be mixed. A small number of livestock producers, swine production contract growers, and poultry growers may seek judicial enforcement of their rights under the P&S Act without showing harm or likely harm to competition. However, due to the uncertain outcome of litigation under sections 202(a) and/or 202 (b), GIPSA expects packers, swine contractors, and live poultry dealers will likely take a “wait and see” approach prior to making any significant changes in their business models, marketing arrangements, or other practices. Concerned with net profit and reports to stockholders or owners, such firms will rationally forego any large changes in their operations until it is clear that such changes are legally required. If such changes are not required, due to status quo rulings by courts requiring proof of competitive injury or the likelihood of competitive injury, as GIPSA anticipates, then GIPSA expects that few changes will be made as a result of § 201.3(a).

    GIPSA expects the status quo enforcement outcome of § 201.3(a) discussed above to be most likely in the cattle and hog industries. GIPSA has enforced the P&S Act and regulations against packers without proving harm or likelihood of harm to competition for decades, and the courts have upheld successful enforcement actions. It is primarily in the poultry industry that, the courts have declined to enforce, sections 202(a) and (b) of the P&S Act and regulations without a finding of harm or likelihood of harm to competition.

    Therefore, due to the likelihood of status quo rulings, GIPSA estimates that the upper boundary cost estimate of the overall impact of § 201.3(a) on the cattle and hog industries will be considerably less than the Informa Study estimates after applying the first two adjustments.

    The second factor is the recent outcome of cases decided under the P&S Act since 2000 and whether courts have required demonstration of harm or likely harm to competition. GIPSA examined the actual number of cases decided under the P&S Act from 2000 to 2014. This is the same listing of cases as in the estimation of litigation costs presented earlier, except that GIPSA only considered cases decided after 2000 to reflect the most current decisions reached by the courts. The listing of court decisions and the court in which the decision was reached came from the National Agricultural Law Center at the University of Arkansas.79 GIPSA then reviewed each case since 2000 and classified it as either a competition, financial, or trade practice case. GIPSA then examined each case to determine which cases involved alleged violations of sections 202(a) and 202(b) and which of those cases the court required demonstration of harm or likelihood of harm to competition.

    79http://nationalaglawcenter.org/aglaw-reporter/case-law-index/packers-and-stockyards.

    GIPSA found 22 cases which involved alleged violations of sections 202(a) and 202(b) and addressed the issue of demonstrating harm or likelihood of harm to competition. Of those 22 cases, GIPSA found that the courts required demonstration of harm or likelihood of harm to competition in eight cases and did not require demonstration of a harm or likelihood of harm to competition in 14 cases. However, these 14 cases where demonstration of harm or likelihood of harm to competition was not required were not evenly distributed among the cattle, hog, and poultry industries. Courts have only required a demonstration of harm or likelihood of harm to competition in 20 percent of the cases alleging violations of sections 202(a) and 202(b) in the cattle and hog industries since 2000. GIPSA found that the courts have required a demonstration of harm or likelihood of harm to competition in 50 percent of the cases alleging violations of sections 202(a) and 202(b) in the poultry industry since 2000. The fact that demonstration of harm or likelihood of harm to competition was not required in every case is consistent with § 201.3(a), which states that demonstration of harm or likelihood of harm to competition is not required in all cases. As these cases have all involved livestock packers, swine contractors, and live poultry dealers and are a matter of public record, GIPSA believes that packers, swine contractors, and live poultry dealers are already aware that courts have not required demonstration of a harm or likelihood of harm to competition in all cases. This is another reason why GIPSA expects packers, swine contractors, and live poultry dealers to likely take a “wait and see” approach.

    Therefore, due to the likelihood of status quo rulings by courts and the rationality of livestock packers, swine contractors, and live poultry dealers to tend toward a “wait and see” approach, GIPSA estimates the upper boundary estimate to be between 20 percent of the Informa Study cattle and hog industry estimates, 50 percent of the Informa Study poultry industry estimate and zero percent of the Informa Study estimates after applying the first two adjustments. Zero percent would mean that there are no industry adjustments from § 201.3(a).

    Given the uncertainty in how the industry will respond to § 201.3(a), GIPSA selected one half of 20 percent of the Informa Study estimates for cattle and hogs, one half of 50 percent of the poultry industry estimate from the Informa Study estimates as its point estimate. Thus, GIPSA applied ten percent of the cattle and hog Informa Study estimates and 25 percent of the poultry Informa Study estimates as its point estimate after applying the first two adjustments. The following table shows the estimated upper boundary costs for § 201.3(a) on an annual and ten-year cost basis based on the adjusted Informa Study cost estimates.

    Table 20—Upper Boundary Annual Costs of § 201.3(a)—Preferred Alternative Year Cattle
  • ($ millions)
  • Hog
  • ($ millions)
  • Poultry
  • ($ millions)
  • Total
  • ($ millions)
  • 2017 28.14 12.49 35.87 76.49 2018 43.67 14.68 49.78 108.13 2019 63.08 19.82 62.93 145.82 2020 63.08 24.95 62.93 150.96 2021 63.08 23.85 50.72 137.65 2022 57.26 18.71 37.57 113.54 2023 47.55 13.58 18.78 79.92 2024 32.03 13.21 5.64 50.87 2025 24.26 7.34 5.64 37.24 2026 24.26 7.34 5.64 37.24 Totals 446.42 155.97 335.47 937.86

    At the upper boundary in the first full year after implementation, GIPSA estimates that § 201.3(a) will result in an additional $76.49 million in direct and indirect costs in the livestock and poultry industries, with $28.14 million in the cattle industry, $12.49 million in the hog industry, and $35.87 million in the poultry industry. GIPSA expects the upper boundary of the ten-year total cost of § 201.3(a) to be $937.86 million.

    F. Regulatory Alternative 2: Upper Boundary—NPV of Ten-Year Total Costs of the Preferred Alternative

    GIPSA calculated the NPV of the ten-year total costs of the regulation using both a three percent and seven percent discount rate and the NPVs appear in the following table.

    Table 21—NPV of Upper Boundary of Ten-Year Total Cost of § 201.3(a)—Preferred Alternative Discount rate Preferred
  • option
  • ($ millions)
  • 3 Percent 818.97 7 Percent 692.49

    GIPSA expects the NPV of the upper boundary of the ten-year total costs of § 201.3(a) to be $818.97 million at a three percent discount rate and $692.49 million at a seven percent discount rate.

    G. Regulatory Alternative 2: Upper Boundary—Annualized Costs of the Preferred Alternative

    GIPSA then annualized the costs of § 201.3(a) at the upper boundary using both a three percent and seven percent discount rate and the results appear in the following table.

    Table 22—Annualized Costs of § 201.3(a)—Preferred Option Discount rate Preferred
  • option
  • ($ millions)
  • 3 Percent 96.01 7 Percent 98.60

    GIPSA expects the annualized costs of § 201.3(a) at the upper boundary to be $96.01 million at a three percent discount rate and $98.60 million at a seven percent discount rate.

    H. Sensitivity Analysis of the Upper Boundary

    In the section above, GIPSA explained that it chose 10 percent of the cattle and hog estimates from the Informa Study and 25 percent of the poultry estimate from the Informa Study as its point estimate for the upper boundary costs. Because of the uncertainty over the eventual impacts of this rule on industry behavior, GIPSA evaluates the sensitivity of its upper bound estimate to an alternative set of assumptions. GIPSA presents three alternative sets of assumptions for calculating the upper bound estimate.

    For the first scenario, GIPSA applies the full adjustment to the Informa Study cost estimates, specifically, 20 percent for cattle and hogs and 50 percent for poultry. In that case, GIPSA's estimate of the upper bound would be twice as high as presented in the previous section. For the second scenario, § 201.3(a) is assumed to impact industry behavior for the poultry industry only, (that is, zero percent of the Informa Study estimate for cattle and hogs, and 25 percent of the estimate for poultry). In that scenario, the upper bound estimate would be the same as presented in Table 20, above, for poultry, and would be the lower boundary estimate for cattle and hogs as shown in Table 15. For a third scenario, all the Informa Study estimates are adjusted to zero assuming that there are no indirect costs of adjustment to the rule. In that case, the lower boundary estimate, only reflecting litigation costs, as shown in Tables 15 through 17 would be the result.

    GIPSA calculated the NPV of the ten-year total costs of the regulation using both a three percent and seven percent discount rate for each of the three scenarios described above and the NPVs appear in the following table.

    Table 23—Sensitivity Analysis of the Upper Boundary Estimate of the Ten-Year Total Cost of § 201.3(a)—Preferred Alternative—Expressed in NPV Discount rate Point estimate
  • ($ millions)
  • Scenario 1
  • ($ millions)
  • Scenario 2
  • ($ millions)
  • Scenario 3
  • ($ millions)
  • 3 Percent 818.97 1,637.94 319.43 58.62 7 Percent 692.49 1,384.98 276.18 50.03 Scenario 1: Adjustment to Informa of 20% for cattle and hogs, 50% for poultry. Scenario 2: Adjustment to Informa of 0% for cattle and hogs, 25% for poultry. Scenario 3: Adjustment to Informa of 0% for cattle and hogs, and poultry.

    GIPSA then annualized the estimated costs of § 201.3(a) at the upper boundary for the three sensitivity scenarios using both a three percent and seven percent discount rate and the results appear in the following table.

    Table 24—Sensitivity Analysis of the Upper Boundary Estimate of the Ten-Year Total Cost of § 201.3(a)—Preferred Alternative—Annualized Discount rate Point estimate
  • ($ millions)
  • Scenario 1
  • ($ millions)
  • Scenario 2
  • ($ millions)
  • Scenario 3
  • ($ millions)
  • 3 Percent 96.01 192.02 37.45 6.87 7 Percent 98.60 197.19 39.32 7.12 Scenario 1: Adjustment to Informa of 20% for cattle and hogs, 50% for poultry. Scenario 2: Adjustment to Informa of 0% for cattle and hogs, 25% for poultry. Scenario 3: Adjustment to Informa of 0% for cattle and hogs, and poultry.
    I. Regulatory Alternative 2: Range of Annualized Costs of the Preferred Alternative

    The following table shows the full range of the annualized costs of § 201.3(a) at both a three percent and seven percent discount rate.

    Table 25—Range of Annualized Costs—Preferred Option Discount rate Lower
  • boundary
  • ($ millions)
  • Upper
  • boundary
  • ($ millions)
  • 3 Percent 6.87 96.01 7 Percent 7.12 98.60

    GIPSA estimates the annualized costs of § 201.3(a) will range from $6.87 million to $96.01 million at a three percent discount rate and from $7.12 million to $98.60 million at a seven percent discount rate.

    J. Regulatory Alternative 2: Point Estimate of Annualized Costs of the Preferred Alternative

    The range of potential costs is broad. The reason there is a broad range of potential costs is because § 201.3(a) has applicability to the livestock and poultry industries and it is difficult to predict how the industries will respond. If the industries do not change any of their current business practices, GIPSA expects additional litigation to be the only costs and the costs of the regulation will be closer to the lower boundary. If, however, the industries respond by reducing the use of AMAs and restricting their use of incentive pay, GIPSA expects the costs of the regulation to be closer to the upper boundary. Based on the uncertainty over how the industries will respond, GIPSA believes that the mid-point in the range of estimated annualized costs is the best available point estimate of the costs of § 201.3(a). The point estimate along with the lower and upper boundary estimates appear in the table below.

    Table 26—Point Estimate of Annualized Costs—Preferred Alternative Discount rate Lower
  • boundary
  • ($ millions)
  • Point estimate
  • ($ millions)
  • Upper
  • boundary
  • ($ millions)
  • 3 Percent 6.87 51.44 96.01 7 Percent 7.12 52.86 98.60

    GIPSA expects the annualized costs of § 201.3(a) at the point estimate to be $51.44 million at a three percent discount rate and $52.86 million at a seven percent discount rate. Based on the discussion of GIPSA's expectation that the cattle, hog, and poultry industries will likely take a “wait and see” approach to how the courts will interpret § 201.3(a) and for courts to take a status quo approach, GIPSA believes the point estimates of the preferred alternative to be the best available estimates of the costs of § 201.3(a).

    K. Regulatory Alternative 2: Sensitivity Analysis of Point Estimates of Annualized Costs

    In its estimate of litigation costs presented above, GIPSA recognized the uncertainty in estimating litigation costs and conducted a sensitivity analysis. GIPSA estimated that the lower boundary of the first-year costs of § 201.3(a) were $4.84 million at the lower percentile, $8.89 million at the average percentile, and $13.22 million at the upper percentile.80 GIPSA relied on the average estimate of litigation costs as the lower boundary of the litigation costs of § 201.3(a).

    80 See Tables 11-13 above.

    To consider the effects of the uncertainty in its estimation of litigation costs, GIPSA annualized its litigation costs estimates at the lower percentile, the average percentile, and the upper percentile and the results appear in the following table.

    Table 27—Annualized Range of Estimated Litigation Costs—Preferred Alternative Discount rate Lower
  • percentile
  • ($ millions)
  • Average
  • ($ millions)
  • Upper
  • percentile
  • ($ millions)
  • 3 Percent 3.74 6.87 10.22 7 Percent 4.54 7.12 12.41

    GIPSA then applied this uncertainty to its point estimates of the annualized costs of § 201.3(a) by subtracting the difference of the lower percentile of estimated litigation costs and the point estimate at both the three and seven percent discount rates and added the difference of the upper percentile of estimated litigation costs and the point estimate at both the three and seven percent discount rates. The results of the sensitivity analysis appear in the following table.

    Table 28—Annualized Range of Point Estimates of § 201.3(a)—Preferred Alternative Discount rate Lower
  • percentile
  • ($ millions)
  • Point estimate
  • ($ millions)
  • Upper
  • percentile
  • ($ millions)
  • 3 Percent 49.87 51.44 53.11 7 Percent 51.57 52.86 55.50

    GIPSA estimates that the point estimates of the annualized costs of § 201.3(a) will range from $49.87 million at the lower percentile to $53.11 million at the upper percentile using a three percent discount rate. At the seven percent discount rate, GIPSA estimates that the point estimate of the annualized costs will range from $51.57 million at the lower percentile to $55.50 million at the upper percentile. Given the size of the range between the upper and lower boundary of the estimated annualized costs, GIPSA's point estimate is not overly sensitive to the uncertainty in the estimated litigation costs. Thus, GIPSA believes the point estimates of the preferred alternative to be the best available estimate of the costs of § 201.3(a).

    L. Regulatory Alternative 2: Benefits of the Preferred Alternative

    GIPSA was unable to quantify the benefits of § 201.3(a). However, there are qualitative benefits of § 201.3(a) that merit discussion. The primary qualitative benefit of § 201.3(a) is ability of livestock producers, swine production contract growers, and poultry growers to have more protections and be treated more fairly, which may lead to more equitable contracts. A simple example is the inaccurate weighing of slaughter-ready poultry grown by a poultry grower for a live poultry dealer. The poultry grower is harmed if the true weight is above the inaccurate weight because the poultry grower's payment is typically tied to the poultry grower's efficiency in growing poultry, which in this case is artificially low due to the inaccurate weight of the live birds. The impact of this harm to the poultry grower is very small when compared to the entire industry and there is no discernable or provable harm to competition from this one instance. However because there is no discernible or provable harm or likely harm to competition, courts have been reluctant to find a violation of section 202(a) of the P&S Act in such a situation, despite the harm suffered by the individual poultry grower.

    However, if similar, though unrelated, harm is experienced by a large number of poultry growers, the cumulative effect does result in a discernible and provable harm to competition. The individual harm is inconsequential to the poultry industry, but the sum total of all individual harm has the potential to be quite significant when compared to the poultry industry and therefore, courts have found harm or likely harm to competition in such a situation. Under proposed § 201.210(b)(8), failing to ensure accurate weights of live poultry, absent a legitimate business justification, will constitute an unfair, unjustly discriminatory, or deceptive practice or device and a violation of section 202(a) of the P&S Act. Whether or not the conduct harms or is likely to harm competition becomes irrelevant.

    GIPSA expects § 201.3(a) to increase enforcement actions against live poultry dealers for violations of sections 202(a) and/or 202(b) when the conduct or action does not harm or is not likely to harm competition. Several appellate courts have disagreed with USDA's interpretation of the P&S Act that harm or likely harm to competition is not necessary in all cases to prove a violation of sections 202(a) and/or 202(b). In some cases in which the United States was not a party, these courts have concluded that plaintiffs could not prove their claims under sections 202(a) and/or (b) without proving harm to competition or likely harm to competition. One reason the courts gave for declining to defer to USDA's interpretation of the statute is that USDA had not previously enshrined its interpretation in a regulation. Interim final § 201.3(a) corrects the issue and courts may now give deference to USDA's interpretation.

    GIPSA expects the result will be additional enforcement actions that will be successfully litigated and serve as a deterrent to violating sections 202(a) and/or 202(b). Benefits to the industries and the markets from additional enforcement will also arise from establishing parity of negotiating power between livestock producers, swine production contract growers, and poultry growers and packers, swine contractors, and live poultry dealers by reducing the ability to use market power with the resulting dead weight losses.81

    81 Nigel Key and Jim M. MacDonald discuss evidence for the effect of concentration on grower compensation in “Local Monopsony Power in the Market for Broilers? Evidence from a Farm Survey” selected paper American Agri. Economics Assn. meeting Orlando, FL, July 27-29, 2008.

    Section 201.3(a) also provides additional protections for livestock producers, swine production contract growers, and poultry growers against unfair, unjustly discriminatory, and deceptive practices or devices and undue or unreasonable preferences, advantages, prejudices, or disadvantages since demonstration of harm to competition is required in all cases. GIPSA believes the standard articulated in § 201.3(a) is consistent with its mission “[T]o protect fair trade practices, financial integrity, and competitive markets for livestock, meats, and poultry.” 82 By making it clear that demonstration of harm or likely harm to competition is not necessary in all cases, this interim final rule promotes fairness and equity for livestock producers, swine production contract growers, and poultry growers.83

    82https://www.gipsa.usda.gov/laws/law/PS_act.pdf. Accessed on September 19, 2016.

    83 See additional discussion in Steven Y. Wu and James MacDonald (2015) “Economics of Agricultural Contract Grower Protection Legislation,” Choices 30(3): 1-6.

    M. Regulatory Alternative 2: Cost-Benefit Summary of the Preferred Alternative

    GIPSA estimates the annualized costs of § 201.3(a) to range from $6.87 million to $96.01 million at the three percent discount rate and from $7.12 million to $98.60 million at the seven percent discount rate. The range of potential costs is broad. GIPSA relied on its expertise to arrive at a point estimate range of expected annualized costs. GIPSA expects that the cattle, hog, and poultry industries will primarily take a “wait and see” approach to how courts will interpret § 201.3(a) and courts to take a status quo approach and only slightly adjust their use of AMAs and performance-based payment systems. GIPSA estimates that the annualized costs of § 201.3(a) will be $51.44 million at a three percent discount rate and $52.86 million at a seven percent discount rate based on an anticipated “wait and see” approach and industry adjustments.

    The primary benefit of § 201.3(a) is the increased ability for the enforcement of the P&S Act for violations of sections 202(a) and/or 202(b), which do not result in harm or likely harm to competition. This, in turn, will reduce instances of unfair, unjustly discriminatory, or deceptive practices or devices and undue or unreasonable preferences, advantages, prejudices, or disadvantages and increased efficiencies in the marketplace. The benefit of additional enforcement of the P&S Act will accrue to all segments of the value chain in the production of livestock and poultry, and ultimately to consumers.

    N. Regulatory Alternative 3: Small Business Exemption

    The third regulatory alternative that GIPSA considered is issuing § 201.3(a) as an interim final regulation, but exempting small businesses, as defined by the Small Business Administration, from having to comply with it.84 To estimate the expected costs of exempting small business, GIPSA relied on the percentage of small businesses in the cattle, hog, and poultry industries that are developed and presented in the Regulatory Flexibility Analysis section below.

    84 See: http://www.sba.gov/idc/groups/public/documents/sba_homepage/serv_sstd_tablepdf.pdf.

    To arrive at the estimated costs of § 201.3(a) based on exempting small businesses, GIPSA weighted the point estimates, lower boundary, and upper boundary of cost estimates by the percentage of cattle and hogs processed by packers that are large businesses and the percentage of contracts held by swine contractors and live poultry dealers that are large businesses. GIPSA estimates that small businesses account for 19.3 percent of the cattle slaughtered. For the hog industry, GIPSA estimates that small businesses slaughter 17.8 percent of hogs and that 65 percent of swine contractors are small businesses. GIPSA estimates that 10.27 percent of live poultry dealers are classified as small businesses.

    O. Regulatory Alternative 3: Lower Boundary of Cost Spectrum—Litigation Costs of the Small Business Exemption

    As discussed above, GIPSA considers the lower boundary of costs from § 201.3(a) to be increased litigation with no adjustments by the cattle, hog, and poultry industries to reduce their use of AMAs or incentive pay systems and there are no changes to existing marketing or production contracts. GIPSA used the average of the litigation cost estimates as the lower boundary for the estimated costs of § 201.3(a). GIPSA then weighted the lower boundary cost estimate under the preferred alternative by the percentage of large businesses in the cattle, hog, and poultry industries. The estimates appear in the table below. The preferred alternative is also shown for convenience.

    Table 29—Lower Boundary Annual Total Costs—Small Business Exemption Year Preferred
  • alternative
  • ($ millions)
  • Small
  • business
  • exemption
  • ($ millions)
  • 2017 8.89 7.49 2018 8.89 7.49 2019 8.89 7.49 2020 8.89 7.49 2021 8.89 7.49 2022 7.41 6.24 2023 5.93 4.99 2024 4.44 3.74 2025 2.96 2.50 2026 1.48 1.25 Totals 66.67 56.16

    At the lower boundary with a small business exemption, GIPSA estimates that § 201.3(a) will result in an additional $7.49 million in litigation costs in the cattle, hog, and poultry industries in the first full year following implementation. GIPSA expects the lower boundary of the ten-year total costs of § 201.3(a) with a small business exemption to be $56.16 million.

    P. Regulatory Alternative 3: Lower Boundary—NPV of Total Costs of the Small Business Exemption

    GIPSA calculated the lower boundary of the NPV of the ten-year total costs of the regulation under the small business exemption using both a three percent and seven percent discount and the NPVs appear in the following table. The preferred alternative is also shown for convenience.

    Table 30—Lower Boundary NPV of Ten-Year Total Cost—Small Business Exemption Discount rate Preferred
  • alternative
  • ($ millions)
  • Small
  • business
  • exemption
  • ($ millions)
  • 3 Percent 58.62 49.38 7 Percent 50.03 42.14

    GIPSA expects the NPV of the lower boundary of the ten-year total costs of § 201.3(a) under a small business exemption to be $49.38 million at a three percent discount rate and $42.14 million at a seven percent discount rate.

    Q. Regulatory Alternative 3: Lower Boundary—Annualized Costs of the Small Business Exemption

    GIPSA then annualized the NPV of the ten-year total costs of § 201.3(a) at the lower boundary using both a three percent and seven percent discount rate and the results appear in the following table. The preferred alternative is also shown for convenience.

    Table 31—Lower Boundary of Annualized Costs—Small Business Exemption Discount rate Preferred
  • alternative
  • ($ millions)
  • Small
  • business
  • exemption
  • ($ millions)
  • 3 Percent 6.87 5.79 7 Percent 7.12 6.00

    GIPSA expects the annualized costs of § 201.3(a) at the lower boundary with a small business exemption to be $5.79 million at a three percent discount rate and $6.00 million at a seven percent discount rate.

    R. Regulatory Alternative 3: Upper Boundary of Cost Spectrum—Small Business Exemption

    As discussed above, the upper boundary of the cost spectrum occurs if the cattle, hog, and poultry industries adjust their use of AMAs and incentive pay systems and make systematic changes in their marketing and production contracts to reduce the threat of litigation.

    For the upper boundary cost estimates under the small business exemption, GIPSA weighted the upper boundary cost estimates under the preferred alternative by the percentage of large businesses in the cattle, hog, and poultry industries and the estimates appear in the table below. For convenience, the estimated costs of the preferred alternative are shown in addition to the costs of the small business exemption.

    Table 32—Upper Boundary Annual Total Costs—Small Business Exemption Year Preferred
  • alternative
  • ($ millions)
  • Small
  • business
  • exemption
  • ($ millions)
  • 2017 76.49 60.08 2018 108.13 86.00 2019 145.82 115.60 2020 150.96 117.73 2021 137.65 106.32 2022 113.54 87.69 2023 79.92 60.87 2024 50.87 36.39 2025 37.24 27.68 2026 37.24 27.68 Totals 937.86 726.05

    At the upper boundary with a small business exemption, GIPSA estimates that § 201.3(a) will result in an additional $60.08 million in direct and indirect costs in the cattle, hog, and poultry industries in the first full year following implementation. GIPSA expects the upper boundary of the ten-year total costs of § 201.3(a) with a small business exemption to be $726.05 million.

    S. Regulatory Alternative 3: Upper Boundary—NPV of Ten-Year Total Costs of the Small Business Exemption

    GIPSA calculated the upper boundary of the NPV of the ten-year total costs of the regulation under the small business exemption using both a three percent and seven percent discount and the NPVs appear in the following table. The preferred alternative is also shown for convenience.

    Table 33—Upper Boundary NPV of Ten-Year Total Costs—Small Business Exemption Discount rate Preferred
  • alternative
  • ($ millions)
  • Small
  • business
  • exemption
  • ($ millions)
  • 3 Percent 818.97 634.97 7 Percent 692.49 537.90

    GIPSA expects the NPV of the upper boundary of the NPV of the ten-year total costs of § 201.3(a) under a small business exemption to be $634.97 million at a three percent discount rate and $537.90 million at a seven percent discount rate.

    T. Regulatory Alternative 3: Upper Boundary—Annualized Costs of the Preferred Alternative

    GIPSA then annualized the costs of § 201.3(a) at the upper boundary using both a three percent and seven percent discount rate and the results appear in the following table. The preferred alternative is also shown for convenience.

    Table 34—Upper Boundary of Annualized Costs—Small Business Exemption Discount rate Preferred
  • alternative
  • ($ millions)
  • Small
  • business
  • exemption
  • ($ millions)
  • 3 Percent 96.01 74.44 7 Percent 98.60 76.58

    GIPSA expects the annualized costs of § 201.3(a) at the upper boundary with a small business exemption to be $74.44 million at a three percent discount rate and $76.58 million at a seven percent discount rate.

    U. Regulatory Alternative 3: Point Estimates—Annualized Costs of the Small Business Exemption

    Using the same methodology, GIPSA also estimated the point estimates of the annualized costs of § 201.3(a) with a small business exemption using both a three percent and seven percent discount rate and the results appear in the following table. The preferred alternative is also shown for convenience.

    Table 35—Point Estimate of Annualized Costs—Small Business Exemption Discount rate Preferred
  • alternative
  • ($ millions)
  • Small
  • business
  • exemption
  • ($ millions)
  • 3 Percent 51.44 40.11 7 Percent 52.86 41.29

    GIPSA expects the annualized costs of § 201.3(a) at the point estimates with a small business exemption to be $40.11 million at a three percent discount rate and $41.29 million at a seven percent discount rate.

    V. Regulatory Alternative 3: Range of Annualized Costs of the Small Business Exemption

    The following table shows the range of the annualized costs of § 201.3(a) at both a three percent and seven percent discount rate under the small business exemption.

    Table 36—Range of Annualized Costs—Small Business Exemption Discount rate Lower
  • boundary
  • ($ millions)
  • Point
  • estimate
  • ($ millions)
  • Upper
  • boundary
  • ($ millions)
  • 3 Percent 5.79 40.11 74.44 7 Percent 6.00 41.29 76.58

    GIPSA estimates the annualized costs of § 201.3(a) to range from $5.79 million to $74.44 million at the three percent discount rate and from $6.00 million to $76.58 million at the seven percent discount rate. The range of potential costs is broad and GIPSA relied on its expertise and the methodology discussed above to arrive at point estimates of the costs within the range that GIPSA expects to occur. GIPSA expects the most likely point estimates of annualized costs to be $40.11 million at a three percent discount rate and $41.29 million at a seven percent discount rate.

    W. Regulatory Alternative 3: Benefits of the Small Business Exemption

    The benefits of § 201.3(a) with a small business exemption are the same as in the preferred alternative except that the benefits for livestock producers, swine production contract growers, and poultry growers will only be captured by those livestock producers, swine production contract growers, and poultry growers selling or growing livestock and poultry for packers, swine contractors, and poultry dealers classified as large businesses.

    X. Regulatory Alternative 3: Cost-Benefit Summary of the Small Business Exemption

    GIPSA estimates the annualized costs of § 201.3(a) under a small business exemption to range from $5.79 million to $74.44 million at the three percent discount rate and from $6.00 million to $76.58 million at the seven percent discount rate. GIPSA expects the point estimates of the annualized costs to be $40.11 million at a three percent discount rate and $41.29 million at a seven percent discount rate.

    Cost-Benefit Comparison of Regulatory Alternatives

    The status quo option has zero marginal costs and benefits as GIPSA does not expect any changes in the cattle, hog, or poultry industries. GIPSA compared the annualized costs of the preferred alternative to the annualized costs of the small business exemption alternative by subtracting the annualized costs of the small business exemption alternative from the preferred alternative and the results appear in the following table.

    Table 37—Costs Savings of the Small Business Exemption Alternative Compared to the Preferred Alternative Discount rate Lower
  • boundary
  • ($ millions)
  • Point
  • estimate
  • ($ millions)
  • Upper
  • boundary
  • ($ millions)
  • 3 Percent 1.08 11.33 21.57 7 Percent 1.12 11.57 22.01

    The annualized cost savings of the small business exemption alternative is between $1.08 million and $21.57 million using a three percent discount rate and between $1.12 million and $22.01 million using a seven percent discount rate. At GIPSA's point estimates, the annualized costs of the small business exemption alternative is $11.33 million less than the preferred alternative using a three percent discount rate and $11.57 million less expensive using a seven percent discount rate.

    The data presented in Table 4 above show that over 50 percent of broiler growers have only one or two integrators in their local area. This limited integrator choice may accentuate the risks of contracting. Poultry growers with contract growing arrangements with both small and large live poultry dealers face these risks.

    Similarly, the potential market failures or unequal bargaining power among contracting parties due to monopsony or oligopsony market power or asymmetric information likely applies to both production and marketing contracts regardless of whether the packer, swine contractor, or live poultry dealer is large or small due to the regional nature of concentration. The result is that the contracts may have detrimental effects on one of the contracting parties and may result in inefficiencies in the marketplace.

    One purpose of § 201.3(a) is to mitigate the risks of potential market failures or unequal bargaining power to all livestock producers, swine production contract growers, and poultry growers, not just the livestock producers, swine production contract growers, and poultry growers selling or growing livestock and poultry for large packers, swine contractors, and poultry dealers. The small business exemption would continue to subject the livestock producers, swine production contract growers, and poultry growers with contractual arrangements with small packers, swine contractors, and live poultry dealers to the contracting risks and potential market failures discussed above. GIPSA believes that the benefits of § 201.3(a) should be captured by all livestock producers, swine production contract growers, and poultry growers.

    GIPSA considered three regulatory alternatives and believes the preferred alternative is the best option. All livestock producers, swine production contract growers, and poultry growers, regardless of the size of the firm with which they contract, will capture the benefits of § 201.3(a).

    Regulatory Flexibility Analysis of the Preferred Option

    The Small Business Administration (SBA) defines small businesses by their North American Industry Classification System Codes (NAICS).85 SBA considers broiler and turkey producers and swine contractors, NAICS codes 112320, 112330, and 112210 respectively, to be small businesses if sales are less than $750,000 per year. Live poultry dealers, NAICS 311615, are considered small businesses if they have fewer than 1,250 employees. Beef and pork packers, NAICS 311611, are defined as small businesses if they have fewer than 1,000 employees.

    85 See: http://www.sba.gov/idc/groups/public/documents/sba_homepage/serv_sstd_tablepdf.pdf. Accessed on September 19, 2016.

    The Census of Agriculture (Census) indicates there were 558 farms that sold their own hogs and pigs in 2012 and that identified themselves as contractors or integrators. The Census provides the number of head sold from their own operations by size classes for swine contractors, but not the value of sales nor number of head sold from the farms of the contracted production. Thus, to estimate the entity size and average per-entity revenue by the SBA classification, the average value per head for sales of all swine operations is multiplied by production values for firms in the Census size classes for swine contractors. The estimates reveal that although about 65 percent of swine contractors had sales of less than $750,000 in 2012 and would have been classified as small businesses, these small businesses accounted for only 2.8 percent of the hogs produced under production contracts. Additionally, there were 8,031 swine producers in 2012 with swine contracts and about half of these producers would have been classified as small businesses.

    Currently, there are 133 live poultry dealers that would be subject to § 201.3(a). According to U.S. Census data on County Business Patterns, there were 74 live poultry dealers that had more than 1,250 employees in 2013. The difference yields approximately 59 live poultry dealers that have fewer than 1,250 employees and would be considered as small businesses that would be subject to the interim final regulation.

    GIPSA records for 2014 indicated there were 21,925 poultry production contracts in effect, of which 13,370, or 61 percent, were held by the largest six live poultry dealers, and 90 percent (19,673) were held by the largest 25 firms. These 25 firms are all in the large business SBA category, whereas the 21,925 poultry growers holding the other end of the contracts are almost all small businesses by SBA's definitions.

    Poultry dealers classified as large businesses are responsible for about 89.7 percent of the poultry contracts. Assuming that small businesses will bear 10.3 percent of the costs in the first full year § 201.3(a) is effective, between $590,000 86 at the lower boundary and $3.7 million 87 at the upper boundary in additional costs would fall on live poultry dealers classified as small businesses. This amounts to average estimated costs for each live poultry dealer classified as a small business of between $10,000 and $62,400.

    86 Lower bound cost estimate of $5.74 million (Table 12) × 10.27 percent of firms that are small businesses = $589 thousand.

    87 Upper bound cost estimate of $35.87 million (Table 20) × 10.27 percent of firms that are small businesses = $3.7 million.

    As of June 2016, GIPSA records identified 359 beef and pork packers actively purchasing cattle or hogs for slaughter. Many firms slaughtered more than one species of livestock. Of the 359 beef and pork packers, 161 processed both cattle and hogs, 132 processed cattle but not hogs, and 66 processed hogs but not cattle. GIPSA records had a total of 293 cattle slaughterers and 227 hog slaughterers. Two hundred eighty-seven of the cattle slaughterers and 219 of the hog slaughterers would be classified as small businesses.

    GIPSA estimates that small businesses accounted for 19.3 percent of the cattle and 17.8 percent of the hogs slaughtered in 2015. If the costs of implementing § 201.3(a) are proportional to the number of head processed, then in 2017, the first full year the regulation would be effective, GIPSA expects between $507,000 88 and $5.4 million 89 in additional costs would fall on beef packers classified as small businesses. This amounts to a range of $1,800 to $18,900 for each beef packer classified as a small business. GIPSA expects, between $13,000 90 and $308,000 91 would fall on pork packers classified as small businesses, and between $12,500 92 and $301,000 93 would fall on swine contractors classified as small businesses. This amounts to average estimated costs for each pork packer classified as a small business of between $60 and $1,400, and for each swine contractor classified as a small business of between $35 and $831 in the first full year the regulation would be effective.

    88 Lower bound cost estimate of $2.63 million × 19.3 percent of slaughter in small businesses = $507 thousand.

    89 Upper bound cost estimate of $28.14 million × 19.3 percent of slaughter in small businesses = $5.4 million.

    90 Lower bound cost estimate of $520 thousand × 17.8 percent of slaughter in small business × 13.8 percent of costs attributed to packers = $13,000.

    91 Upper bound cost estimate of $12.49 million × 17.8 percent of slaughter in small business × 13.8 percent of costs attributed to packers = $308 thousand.

    92 Lower bound cost estimate of $520 thousand × 2.8 percent of contracted hogs produced by swine contractors that are small businesses × 86.2 percent of costs attributed to swine contractors = $12,500.

    93 Upper bound cost estimate of $12.49 million × 2.8 percent of contracted hogs produced by swine contractors that are small businesses × 86.2 percent of costs attributed to swine contractors = $301 thousand.

    Annualized ten-year costs discounted at a three percent interest rate would fall between $392,000 and $8.7 million for the cattle industry, between $20,000 and $772,000 for the hog industry, and between $456,000 and $3.6 million for the poultry industry. This amounts to average estimated costs ranging from $1,400 to $30,400 for each beef packer, $45 to $1,800 for each pork packer, $27 to $1,053 for each swine contractor, and $7,700 to $61,000 for each live poultry dealer that is a small business. The total annualized ten-year costs for small businesses would be between $870,000 and $13.1 million.

    Annualized ten-year costs discounted at a seven percent interest rate would fall between $406,000 and $8.8 million for the cattle industry, $20,000 and $785,000 for the hog industry, and $473,000 and $3.8 million for the poultry industry. This amounts to average estimate costs ranging from $1,400 to $30,700 for each beef packer, $40 to $1,800 for each pork packer, $23 to $1,100 for each swine contractor, and $8,000 to $64,100 for each live poultry dealer that is a small business. The total annualized ten-year costs for small businesses would be between $900,000 and $13.4 million.

    The table below lists the expected additional costs associated with the proposed regulation and upper and lower bound estimates of the costs. It also lists the point estimate, upper bound, and lower bound annualized costs at three percent and seven percent interest rates.

    Table 38—Upper and Lower Bound Costs to Small Businesses of § 201.3(a) Estimate type Cattle
  • ($ millions)
  • Hogs
  • ($ millions)
  • Poultry
  • ($ millions)
  • Total
  • ($ millions)
  • First Year Costs: Lower Bound 0.507 0.025 0.590 1.122 Point Estimate 2.969 0.317 2.137 5.423 Upper Bound 5.430 0.609 3.684 9.723 10 years annualized at 3%: Lower Bound 0.392 0.020 0.456 0.867 Point Estimate 4.554 0.396 2.026 6.976 Upper Bound 8.716 0.772 3.596 13.084 10 years annualized at 7%: Lower Bound 0.406 0.020 0.473 0.899 Point Estimate 4.613 0.403 2.126 7.142 Upper Bound 8.820 0.785 3.780 13.385

    In considering the impact on small businesses, GIPSA considered the average costs and revenues of each small business impacted by § 201.3(a). The number of small businesses impacted by § 201.3(a), by NAICS code, as well as the per entity, first-year and annualized costs at both the three percent and seven percent discount rates appear in the following table.

    Table 39—Per Entity Upper and Lower Bound Costs to Small Businesses of § 201.3(a) NAICS Number
  • of
  • small business
  • Average cost per entity First-year Low
  • ($)
  • High
  • ($)
  • Annualized costs
  • 3%
  • Low
  • ($)
  • High
  • ($)
  • Annualized costs
  • 7%
  • Low
  • ($)
  • High
  • ($)
  • 112210—Swine Contractor 363 35 831 27 1,053 23 1,071 311615—Poultry 59 9,996 62,443 7,727 60,957 8,010 64,066 311611—Cattle 287 1,767 18,920 1,366 30,369 1,416 30,732 311611—Hogs 219 59 1,405 45 1,781 47 1,811

    The following table compares the average per entity first-year cost of § 201.3(a) to the average revenue per establishment for all firms in the same NAICS code.

    Table 40—Comparison of Per Entity First-Year Cost to Small Businesses of § 201.3(a) to Revenues NAICS Number
  • of small
  • business
  • Average first-year cost
  • per entity
  • Low
  • ($)
  • High
  • ($)
  • Average
  • revenue per
  • establishment
  • ($)
  • Cost as percent of
  • revenue
  • Low High
    112210—Swine Contractor 363 35 831 485,860 0.01 0.17 311615—Poultry 59 9,996 62,443 13,842,548 0.07 0.45 311611—Cattle 287 1,767 18,920 6,882,205 0.03 0.27 311611—Hogs 219 59 1,405 6,882,205 0.00 0.02

    The following table compares the average per entity annualized cost at a seven percent discount rate of § 201.3(a) to the average revenue per establishment for all firms in the same NAICS code. The annualized costs are slightly higher at the seven percent rate than at the three percent rate, so only the seven percent rate is shown as it is the higher annualized cost.

    Table 41—Comparison of Per Entity Annualized Cost to Small Businesses of § 201.3(a) to Revenues NAICS Number
  • of small
  • business
  • Average annualized
  • cost per entity
  • Low
  • ($)
  • High
  • ($)
  • Average
  • revenue per
  • establishment
  • ($)
  • Cost as percent of revenue Low
  • (%)
  • High
  • (%)
  • 112210—Swine Contractor 363 23 1,071 485,860 0.00 0.22 311615—Poultry 59 8,010 64,066 13,842,548 0.06 0.46 311611—Cattle 287 1,416 30,732 6,882,205 0.02 0.45 311611—Hogs 219 39 1,811 6,882,205 0.00 0.03

    The revenue figures in the above table come from Census data for live poultry dealers and cattle and hog slaughterers, NAICS codes 311615 and 311611, respectively.94 As discussed above, the Census provides the number of head sold by size classes for farms that sold their own hogs and pigs in 2012 and that that identified themselves as contractors or integrators, but not the value of sales nor the number of head sold from the farms of the contracted production. Thus, to estimate average revenue per establishment, GIPSA used the estimated average value per head for sales of all swine operations and the production values for firms in the Census size classes for swine contractors

    94 Source: http://www.census.gov/data/tables/2012/econ/susb/2012-susb-annual.html. Accessed on November 29, 2016.

    As the results in Tables 40 and 41 demonstrate, the costs of § 201.3(a) as a percent of revenue are small as they are less than one percent, with the exception of the upper boundary for swine contractors.95

    95 There are significant differences in average revenues between swine contractors and cattle, hog, and poultry processors, resulting from the difference in SBA thresholds.

    Annualized costs savings of exempting small businesses would be between $870,000 and $13.1 million using a three percent discount rate and between $900,000 and $13.4 million using a seven percent discount rate. At GIPSA's point estimates, the annualized costs of the small business exemption alternative is $7.0 million less than the preferred alternative using a three percent discount rate and $7.1 million less expensive using a seven percent discount rate.

    Exempting small businesses would continue to subject the livestock producers, swine production contract growers, and poultry growers with contractual arrangements with small packers, swine contractors, and live poultry dealers to the contracting risks and potential market failures discussed above. GIPSA believes that the benefits of § 201.3(a) should be captured by all livestock producers, swine production contract growers, and poultry growers.

    Based on the above analyses regarding § 201.3(a), GIPSA certifies that this rule is not expected to have a significant economic impact on a substantial number of small business entities as defined in the Regulatory Flexibility Act (5 U.S.C. 601 et seq.). While confident in this certification, GIPSA acknowledges that individual businesses may have relevant data to supplement our analysis. We would encourage small stakeholders to submit any relevant data during the comment period.

    B. Executive Order 12988

    This interim final rule has been reviewed under Executive Order 12988, Civil Justice Reform. These actions are not intended to have retroactive effect, although in some instances they merely reiterate GIPSA's previous interpretation of the P&S Act. This interim final rule will not pre-empt state or local laws, regulations, or policies, unless they present an irreconcilable conflict with this rule. There are no administrative procedures that must be exhausted prior to any judicial challenge to the provisions of this rule. Nothing in this interim final rule is intended to interfere with a person's right to enforce liability against any person subject to the P&S Act under authority granted in section 308 of the P&S Act.

    C. Executive Order 13175

    This rule has been reviewed in accordance with the requirements of Executive Order 13175, “Consultation and Coordination with Indian Tribal Governments.” Executive Order 13175 requires Federal agencies to consult and coordinate with tribes on a government-to-government basis on policies that have tribal implications, including regulations, legislative comments or proposed legislation, and other policy statements or actions that have substantial direct effects on one or more Indian tribes, on the relationship between the Federal Government and Indian tribes or the distribution of power and responsibilities between the Federal Government and Indian tribes.

    Although GIPSA has assessed the impact of this rule on Indian tribes and determined that this rule does not, to our knowledge, have tribal implications that require tribal consultation under Executive Order 13175, GIPSA offered opportunities to meet with representatives from Tribal Governments during the comment period for the proposed rule (June 22 to November 22, 2010) with specific opportunities in Rapid City, South Dakota, on October 28, 2010, and Oklahoma City, Oklahoma on November 3, 2010. All tribal headquarters were invited to participate in these venues for consultation. GIPSA has received no specific indication that the rule will have tribal implications and has received no further requests for consultation as of the date of this publication. If a Tribe requests consultation, GIPSA will work with the Office of Tribal Relations to ensure meaningful consultation is provided where changes, additions, and modifications herein are not expressly mandated by Congress.

    D. Paperwork Reduction Act

    This interim final rule does not contain new or amended information collection requirements subject to the Paperwork Reduction Act of 1995 (44 U.S.C. 3501 et seq.). It does not involve collection of new or additional information by the federal government.

    E. E-Government Act Compliance

    GIPSA is committed to compliance 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.

    List of Subjects in 9 CFR Part 201

    Contracts, Livestock, Poultry, Trade practices.

    For the reasons set forth in the preamble, we amend 9 CFR part 201 as follows:

    PART 201—REGULATIONS UNDER THE PACKERS AND STOCKYARDS ACT 1. The authority citation for part 201 continues to read as follows: Authority:

    7 U.S.C. 181-229c.

    2. Section 201.3 is amended by redesignating the existing text as paragraph (b), adding new paragraph (a), and adding a heading to paragraph (b) to read as follows:
    § 201.3 Applicability of regulations in this part.

    (a) Scope of sections 202(a) and (b) of the Act. The appropriate application of sections 202(a) and (b) of the Act depends on the nature and circumstances of the challenged conduct or action. A finding that the challenged conduct or action adversely affects or is likely to adversely affect competition is not necessary in all cases. Certain conduct or action can be found to violate sections 202(a) and/or (b) of the Act without a finding of harm or likely harm to competition.

    (b) Effective dates. * * *

    Larry Mitchell, Administrator, Grain Inspection, Packers and Stockyards Administration.
    [FR Doc. 2016-30424 Filed 12-19-16; 8:45 am] BILLING CODE 3410-KD-P
    DEPARTMENT OF THE TREASURY Office of the Comptroller of the Currency 12 CFR Part 51 [Docket ID OCC-2016-0017] RIN 1557-AE07 Receiverships for Uninsured National Banks AGENCY:

    Office of the Comptroller of the Currency, Treasury.

    ACTION:

    Final rule.

    SUMMARY:

    The Office of the Comptroller of the Currency (OCC) is adopting a final rule addressing the conduct of receiverships for national banks that are not insured by the Federal Deposit Insurance Corporation (FDIC) (uninsured banks) and for which the FDIC would not be appointed as receiver. The final rule implements the provisions of the National Bank Act (NBA) that provide the legal framework for receiverships of such institutions. The final rule adopts the rule as proposed without change.

    DATES:

    This final rule is effective on January 19, 2017.

    FOR FURTHER INFORMATION CONTACT:

    Mitchell Plave, Special Counsel, Legislative and Regulatory Activities Division, (202) 649-5490, or for persons who are deaf or hard of hearing, TTY, (202) 649-5597, or Richard Cleva, Senior Counsel, Bank Activities and Structure Division, (202) 649-5500, Office of the Comptroller of the Currency, 400 7th Street SW., Washington, DC 20219.

    SUPPLEMENTARY INFORMATION: I. Introduction

    On September 13, 2016, the OCC published a proposed rule to implement the provisions of the NBA that provide the legal framework for receiverships for uninsured banks,1 12 U.S.C. 191—200, with comments due by November 14, 2016.2 The OCC received 11 comments concerning the proposal. For the reasons discussed in section III of the SUPPLEMENTARY INFORMATION, the OCC is adopting the rule as proposed, without change.

    1 All Federal savings associations (FSAs), including trust-only FSAs, are required to be insured. For this reason, this final rule does not apply to FSAs, given that receiverships for FSAs would be conducted by the FDIC.

    2 Receiverships for Uninsured National Banks, 81 FR 62835 (September 13, 2016) (Proposed Rule).

    II. Background

    As of December 2, 2016, the OCC supervised 52 uninsured banks, all of which are national trust banks.3 Uninsured national trust banks have fundamentally different business models compared to commercial and consumer banks and savings associations and therefore face very different types of risks. National trust banks typically have few assets on the balance sheet, usually composed of cash on deposit with an insured depository institution, investment securities, premises and equipment, and intangible assets. These banks exercise fiduciary and custody powers, do not make loans, do not rely on deposit funding, and consequently have simple liquidity management programs. In view of these differences, the OCC typically requires these banks to hold capital in a specific minimum amount; as a result they hold capital in amounts that exceed substantially the “well capitalized” standard that applies when national banks calculate their capital pursuant to the OCC's rules in 12 CFR part 3.

    3 The OCC may charter national banks whose operations are limited to those of a trust company and related activities (national trust bank). See, e.g., 12 U.S.C. 27(a); 12 CFR 5.20(l).

    The business model of national trust banks is to generate income in the form of fees by offering fiduciary and custodial services that generally fall into one or more of a few broad categories. Some national trust banks focus on institutional asset management, providing trust and custodial services for investment portfolios of pension plans, foundations and endowments, and other entities, often with an investment management component. A few other national trust banks serve primarily as a fiduciary and custodian to facilitate the establishment of Individual Retirement Accounts by customers of an affiliated mutual fund complex or broker-dealer firm. Some national trust banks provide custodial services, such as corporate trust accounts, under which the bank performs services for others in connection with their issuance, transfer, and registration of debt or equity securities. Other custody accounts may be a holding facility for customer securities, where the bank assists institutional customers with global settlement and safekeeping of the customer's securities.

    Many of the uninsured national trust banks are subsidiaries or affiliates of a full-service insured national bank or are affiliates of an insured state bank. Other uninsured national trust banks are not affiliated with an insured depository institution, but are affiliated with an investment management firm or other financial services firm. Still other uninsured national trust banks have no affiliation with a larger parent company.4

    4 For additional discussion of the business model of uninsured national trust banks, see Proposed Rule, 81 FR at 62836-62837.

    The OCC appoints and oversees receivers for uninsured banks under the provisions of the NBA 5 and the substantial body of case law applying the statutory provisions and common law receivership principles to national bank receiverships.6 The FDIC is the required receiver only for an insured national (or state) bank.7 Based on the statutory history of the NBA and FIRREA, it is likely that the Federal Deposit Insurance Act (FDIA) would not apply to an OCC receivership of an uninsured bank conducted by the OCC, and that such a receivership would be governed exclusively by the NBA, the common law of receivers, and cases applying the statutes and common law to national bank receiverships. While FIRREA and the Federal Deposit Insurance Corporation Improvement Act of 1991 (FDICIA) greatly expanded the FDIC's powers in resolving failed insured depository institutions, the OCC believes that those additional powers are not available to the OCC as receiver of uninsured banks under the NBA.

    5 12 U.S.C. 191-200.

    6 For a discussion of the statutory history relating to receiverships of national banks conducted by the OCC, under the NBA, and by the FDIC, pursuant to the Financial Institutions Reform, Recovery and Enforcement Act of 1989 (FIRREA), see Proposed Rule, 81 FR at 62836.

    7 Section 11(c)(2)(A)(ii) of the FDIA provides that the FDIC “shall” be appointed receiver, and “shall” accept such appointment, whenever a receiver is appointed for the purpose of liquidation or winding up the affairs of an insured Federal depository institution by the appropriate Federal banking agency, notwithstanding any other provision of Federal law. 12 U.S.C. 1821(c)(2)(A)(ii). The term “Federal depository institution” includes national banks. 12 U.S.C. 1813(c)(4).

    The OCC has not appointed a receiver for an uninsured bank since shortly after the Congress established the FDIC in response to the banking panics of 1930-1933. National trust banks face very different types of risks because of the fundamentally different business model of national trust banks compared to commercial and consumer banks and savings associations. These risks include operational, compliance, strategic, and reputational risks without the credit and liquidity risks that additionally affect the solvency of commercial and consumer banks. While any of these risks can result in the precipitous failure of a bank or savings association, from a historical perspective, trust banks have been more likely to decline into a weakened condition, allowing the OCC and the institution the time needed to find other solutions for rehabilitating the institution or to successfully resolve the institution without the need to appoint a receiver.

    The OCC believes it would nevertheless be beneficial to financial market participants and the broader community of regulators for the OCC to clarify the receivership framework for uninsured banks. Although the OCC conducted 2,762 receiverships pursuant to this framework in the years prior to the creation of the FDIC,8 and the associated legal issues are the subject of a robust body of published judicial precedents, the details have not been widely articulated in recent jurisprudence or legal commentary. This final rule may also facilitate synergies with the ongoing efforts of U.S. and international financial regulators since the financial crisis to enhance our readiness to respond effectively to the different critical financial distresses that could manifest themselves unexpectedly in the diverse types of financial firms presently operating in the market.

    8Annual Report of the Comptroller of the Currency for the Year Ended October 31, 1934 at 33 (discussing the status of active and closed receiverships under the jurisdiction of the Comptroller between 1865 and 1934).

    III. Public Comments on the Proposed Rule

    The OCC received 11 comments from the public in response to the OCC's notice of proposed rulemaking and the alternatives the OCC discussed therein. The commenters included individuals, a state trust company, and a think tank, as well as representatives of consumer groups, financial reform advocacy groups, state banking regulators, banking institutions, and bitcoin firms. These submissions offered issues and viewpoints about selected portions of the proposed rule's regulatory provisions for the OCC's consideration; these are discussed in connection with the discussion of the OCC's rationale for issuing the associated portions of the final rule, in Section III of this SUPPLEMENTARY INFORMATION.

    As part of the notice of proposed rulemaking, the OCC also asked for the public's input on a number of specific questions and received comments on two of these questions. One question was whether any unique considerations would be raised by applying the proposed rule's framework for receivership of uninsured national banks, which are all national trust banks at present, to other uninsured banks that would be organized to engage in the delivery of banking services in new and innovative ways, such as special purpose national banks engaged in financial technology (fintech) activities.9

    9See Proposed Rule, 81 FR at 62837 (discussing the OCC's initiative on responsible innovation in the Federal banking system, and the OCC's authority to charter special purpose banks that engage in selected core non-depository services within the business of banking).

    On this receivership framework question, two commenters expressed concerns that the earlier-established legal regime for receiverships under the NBA and associated judicial precedent does not include select elements subsequently created for insured depository institutions under FIRREA and FDICIA, and thus might not be as effective outside the trust bank sphere in application to the receivership of special purpose national banks engaged in fintech activities. These commenters said the OCC should refrain from chartering these special purpose national banks until the law changes to address this difference. One commenter expressed concern that the rule's incorporation of the NBA's priority requirements for payment of receivership claims, which include no preference for consumer claims over other general creditors, might have the effect of distorting incentives among debt investors across special purpose national banks, and more broadly contribute to moral hazard.

    The OCC understands these comments to be urging, in effect, changes in the statutory receivership provisions underlying the rule. Absent Congressional action to do so, however, the current provisions of the NBA are the ones that would govern should it become necessary to appoint a receiver for an uninsured national bank. The OCC believes it is best to be clear, through a regulation implementing those NBA provisions, about the framework that would apply in order to avoid clouding the ongoing discussion about the chartering of special purpose national banks engaged in fintech activities with uncertainty about how uninsured institutions are resolved.

    More broadly, some commenters said the OCC should consider receivership and cost issues in deciding whether to charter special purpose national banks engaged in fintech activities, or the terms on which they could be chartered. Two commenters said the nature of a fintech firm's business diverges widely from banks, and that creditor loss rates in a receivership for an uninsured special purpose national bank engaged in fintech activities may exceed levels that are tolerable in the resolution of a chartered bank. These commenters said this was a contra-indication for chartering such banks, but one of the commenters further elaborated that the OCC can and should exercise particularly close supervision of these firms and thereby reduce the risk of receiverships ever taking place. Another commenter said that fintech firms do not have national trust banks' track record for remaining solvent and avoiding receivership, and the OCC should mitigate potential concerns about receivership costs by imposing capital support agreements and similar obligations in chartering special purpose national banks that engage in fintech activities.

    In contrast to these views about the uniqueness of special purpose national banks engaged in fintech activities, one commenter said that a fintech firm, such as a digital currency exchange, performs a function comparable to a national trust bank that obtains payments on behalf of customers and provides security for those funds, and therefore such institutions do not pose unique considerations for the receivership framework. Another commenter said the functions of special purpose national banks that engage in fintech activities could be even simpler than a national trust bank, such as a special purpose national bank that provides fintech payment services where each customer transaction is brief and segregated. For special purpose national banks engaged in fintech activities involving lending, this commenter stated the customer relationships are somewhat longer but still discrete, and that the OCC could adequately eliminate concerns about the impact of a receivership by ensuring the bank's plans for back-up servicing and orderly wind-up were robust.

    Some commenters discussed additional topics not touching on the receivership issues covered by the notice of proposed rulemaking, but more germane to the desired framework for creating, regulating, and supervising special purpose national banks that engage in fintech activities or uninsured national trust banks. These broader comments do not pertain to the OCC's adoption of the final rule for uninsured banks and many of them implicate issues that the OCC would need to evaluate on a case-by-case basis in connection with a decision on whether to charter a particular special purpose national bank that engages in fintech activities. The OCC has recently published and invited comment on a paper discussing these issues.10 We will consider the broader comments on fintech chartering submitted as part of this rulemaking together with those we receive in response to the paper.

    10See Exploring Special Purpose National Bank Charters for Fintech Companies (Dec. 2016), available at https://www.occ.gov/topics/bank-operations/innovation/special-purpose-national-bank-charters-for-fintech.pdf.

    In the second question asked in the preamble to the Proposed Rule, the OCC asked for alternatives that would take into account the cost considerations that could arise for the OCC if the administrative expenses of an uninsured national bank receivership exceeded the assets in the receivership.11 In response to this question, one commenter urged the OCC not to impose assessment costs for special purpose national banks that engage in fintech activities on insured national banks, and another commenter further urged the OCC not to impose assessment costs for such banks on uninsured national trust banks. The OCC continues to consider what approach to assessments would be appropriate should it approve charters for special purpose national banks engaged in fintech activities. Any resulting modification to the OCC's assessment structure would be proposed for public comment in a separate rulemaking.

    11See Proposed Rule, 81 FR at 62838 (discussing the receiver's priority claim to liquidation proceeds for administrative expenses, the OCC's potential direct expenses for its receivership functions, and funding alternatives, such as building resources to defray these costs through the OCC's regulations governing the OCC's collection of assessments from uninsured national banks).

    IV. The Final Rule Overview

    The final rule incorporates the framework set forth in the NBA for the Comptroller to appoint a receiver for an uninsured bank, generally under the same grounds for appointment of the FDIC as receiver for insured national banks. The uninsured bank may challenge the appointment in court, and the NBA affords jurisdiction to the appropriate United States district court for this purpose. The OCC will provide the public with notice of the appointment, as well as instructions for submitting claims against the uninsured bank in receivership. The Comptroller may appoint any person as receiver, including the OCC or another government agency. The receiver carries out its duties under the direction of the Comptroller.

    The final rule also follows the statutory framework under the NBA with respect to claims, under which persons with claims against an uninsured bank in receivership will file their claims with the receiver for the failed uninsured bank, for review by the OCC. In the event the OCC denies the claim, the only remedy available to the claimant is to bring a judicial action against the uninsured bank's receivership estate and assert the claim de novo. A person is also free to initiate a claim by bringing an action against the receivership estate in court for adjudication and then submit the judgment to the OCC to participate in ratable dividends of liquidation proceeds along with other approved and adjudicated claims.12

    12See First Nat'l Bank of Bethel v. Nat'l Pahquioque Bank, 81 U.S. 383, 401 (1871).

    Approved or adjudicated claims are paid solely out of the assets of the uninsured national bank in receivership. This reflects the legal distinction between the OCC as regulatory agency and the OCC acting in a receivership capacity. In the former, the OCC oversees national banks, FSAs, and Federal branches and Federal agencies, supervising them under the charge of assuring the safety and soundness of, and compliance with laws and regulations, fair access to financial services, and fair treatment of customers by, the institutions and other persons subject to its jurisdiction. As receiver, the OCC appoints and oversees receivers for uninsured national banks, thereby facilitating the winding down of bank operations, assets, and accounts while minimizing disruptions to customers and creditors of the institution. Under the “separate capacities” doctrine, which has long been recognized in litigation involving the FDIC, it is well established that the agency, when acting in one capacity, is not liable for claims against the agency acting in its other capacity.13

    13 For a discussion of the separate capacities doctrine and related case law, see Proposed Rule, 81 FR at 62838.

    As provided in the final rule, the receiver liquidates the assets of the uninsured bank, with court approval, and pays the proceeds into an account as directed by the OCC. The categories of claims and the priority thereof for payment are set out in the final rule. The final rule also clarifies certain powers held by the receiver.

    Section-by-Section Analysis

    Section 51.1 of the final rule identifies the purpose and scope of the final rule and clarifies that the rule applies to receiverships conducted by the OCC under the NBA for national banks that are not insured by the FDIC.14 The final rule does not extend to receiverships for uninsured Federal branches, although elements of the framework may be similar for uninsured Federal branch receiverships, which would also be resolved under provisions of the NBA.

    14 A nationwide organization of state regulators requested clarity on how the NBA receivership framework for uninsured national banks and the OCC's proposed rule thereunder would interact with the processes established for debtors and creditors pursuant to the U.S. Bankruptcy Code. The OCC is not aware of any opinion of a U.S. Bankruptcy Court, or any other U.S. court, finding that an uninsured national bank is eligible to be a debtor subject to a petition under the Code.

    Section 51.2 of the final rule is based on 12 U.S.C. 191 and 192 and concerns appointment of a receiver. The final rule sets out the Comptroller's authority to appoint any person, including the OCC or another government agency, as receiver for an uninsured bank and provides that the receiver performs its duties subject to the approval and direction of the Comptroller.15 If the Comptroller were to appoint the OCC as receiver, the OCC would act in a receivership capacity with respect to the uninsured bank in receivership, rather than in the OCC's supervisory capacity.

    15But see 12 U.S.C. 1821(c)(6) (Comptroller may appoint the FDIC as conservator or receiver and the FDIC has discretion to accept such appointment); id. section 1821(c)(2)(C) (FDIC “not subject to any other agency” when acting as conservator or receiver”). Read together, these provisions likely mean that the provision in § 51.2 concerning oversight of the receiver by the Comptroller would not apply to the FDIC acting as conservator or receiver for an uninsured institution, should the Comptroller appoint the FDIC and the FDIC accept such an appointment.

    As discussed earlier, this dual capacity (OCC as supervisor versus OCC as receivership sponsor for an uninsured bank) recognizes that, while the NBA makes the receivership oversight and claims review functions of the Comptroller part of the OCC's responsibilities, the receivership oversight role is unique and distinct from the OCC's role as a Federal regulatory agency and supervisor of national banks and FSAs. This is comparable to the dual capacity of the FDIC's receivership function for insured depository institutions pursuant to the FDIA.

    Section 51.2 of the final rule also provides that the Comptroller may require the receiver to post a bond or other security and the receiver may hire staff and professional advisors, with the approval of the Comptroller, if needed to carry out the receivership. This section also identifies the grounds for appointment of a receiver for an uninsured bank and notes that uninsured banks may seek judicial review of the appointment pursuant to 12 U.S.C. 191.

    Section 51.3 of the final rule provides that the OCC will provide notice to the public of the appointment of a receiver for the uninsured bank. The final rule specifies that one component of this notice will include publication in a newspaper of general circulation selected by the OCC for three consecutive months, as required by 12 U.S.C. 193. As a component of the OCC's notice to the public about the receivership, the OCC will also provide instructions for creditors and other claimants seeking to submit claims with the receiver for the uninsured bank.

    As noted in the proposed rule, the OCC believes that the purpose of section 193 may be better served by publication through means in addition to the statutorily required publication in a newspaper. For example, the OCC could provide direct notice to customers and creditors of the uninsured bank to the extent the uninsured bank's records included current contact information. The OCC could also arrange to provide notice through electronic channels that customers would typically use to contact the uninsured bank, such as the uninsured bank's Web site. The OCC believes that an effective set of notice protocols would best be established on a case-by-case basis, in light of a specific uninsured bank's fiduciary and custodial activities, the types of customers served by the bank, coordination with other notice protocols under way for any related entity that is also undergoing resolution activity, and similar factors. The OCC requested comment on alternative means of communicating with customers of uninsured banks.

    One commenter, a trade association for banks, suggested that the OCC employ notice mechanisms that are consistent with the way in which the failed bank typically communicates with its clients and counterparties. The commenter suggested, for example, that a receiver for an institution with clients in other countries should communicate with those clients in the language typically used by the institution in its communications with those clients. The OCC agrees that this approach would be appropriate in such cases and reiterates that effective forms of notice, beyond the statutorily required notice in a newspaper, will be evaluated on a case-by-case basis.

    Section 51.4 of the final rule addresses the submission of claims to the receiver for an uninsured bank. Under § 51.4(a), a person with a claim against the receivership may submit a claim to the OCC, which will consider the claim and make a determination concerning its validity and approved amount. This process reflects the provisions in 12 U.S.C. 193 and 194 regarding presentation of claims and payment of dividends on claims that are proved to the satisfaction of the Comptroller. Section 51.4 also provides that the Comptroller will establish a deadline for filing claims with the receiver, which could not be earlier than 30 days after the three-month publication of notice required by § 51.3. This provision reflects NBA case law that permits the Comptroller to establish a date for filing claims against the receiver for a failed bank.16

    16See Queenan v. Mays, 90 F.2d 525, 531 (10th Cir. 1937).

    Section 51.4(b) of the final rule clarifies that persons with claims against an uninsured bank in receivership may present their claims to a court of competent jurisdiction for adjudication in addition to, or as an alternative to, filing a claim with the OCC. If successful in court, such persons will be required to submit a copy of the final judgment to the OCC to participate in ratable dividends of liquidation proceeds along with claims against the bank in receivership submitted to, and approved by, the OCC. The final rule requires submission of a copy of the court's final judgment to the OCC. This provision is based on 12 U.S.C. 193 and 194.

    In this regard, the receivership regime established by the NBA differs somewhat from the approach set out in other resolution regimes, such as the bankruptcy provisions of the United States Code and the receivership provisions of the FDIA. Under those resolution regimes, creditors and claimants must generally submit their claims to the receivership estate for centralized administration and disposition, and claims that are not submitted by the claims deadline are barred from any participation in liquidation payments. The NBA provisions are different in that claimants are provided the opportunity to submit claims to the OCC for evaluation, but are not foreclosed from pursuing judicial resolution by filing litigation (or continuing a pre-existing lawsuit) in a court of competent jurisdiction against the uninsured bank in receivership.

    The claims filing deadline established by the Comptroller pursuant to § 51.4(a) of the final rule is the date by which claimants seeking review under the OCC's claims process must make their submission. Nevertheless, a claimant that has not made a submission to the OCC by the deadline is not barred from initiating judicial claims against the uninsured bank in receivership solely by virtue of missing the claims deadline.17

    17See First Nat'l Bank of Bethel v. Nat'l Pahquioque Bank, 81 U.S. 383, 401 (1871); Queenan v. Mays, 90 F.2d 525, 531 (10th Cir. 1937). As noted earlier, it is incumbent on a claimant that pursues the judicial route and ultimately obtains judicial relief to submit the final judicial determination and award to the OCC, in order to participate in the OCC's periodic ratable dividends of liquidation proceeds of the receivership estate. Except with respect to a valid and enforceable security interest in specific property of the uninsured bank established as part of a final judicial determination, there are no assets or funds available to a successful judicial claimant other than the ratable dividend process set out in 12 U.S.C. 194 and described in § 51.8 of the final rule.

    The NBA's receivership provisions are like the receivership regime established by the FDIC under the FDIA, however, in that the avenue available to a party whose claim has been denied by the FDIC or OCC, when performing the agencies' receivership claims functions, is to file (or continue) a de novo judicial action asserting the facts and legal theory of the claim against the receivership of the bank. The NBA does not contemplate or support further action by the claimant in an administrative or judicial forum against the OCC seeking review of the claim determination.

    Section 51.4(c) of the final rule provides that if a person with a claim against an uninsured bank in receivership also has an obligation owed to the bank, the claim and obligation will be set off against each other and only the net balance remaining after set-off will be considered as a claim. To this end, § 51.4(a) also includes language referring to claims for set-off. The right of set-off where parties have mutual obligations has long been recognized as an equitable principle.18 Well-settled case law has held that a receivership creditor's or other claimant's equitable right to a set-off is not precluded by the ratable distribution requirement of the NBA, provided such set-off is otherwise legally valid.19 If, after set-off, an amount is owed to the creditor, the creditor may file a claim for the net amount remaining as any other general creditor. Conversely, if, after set-off, an amount is owed to the bank, the creditor does not have a claim and the net amount remaining is an asset of the uninsured bank, which the receiver may obtain in connection with marshalling the assets (as described further in § 51.7(a) of the final rule).

    18See, e.g. , Scammon v. Kimball, 92 U.S. 362 (1876); Blount v. Windley, 95 U.S. 173, 177 (1877); Carr v. Hamilton, 129 U.S. 252 (1889).

    19See Scott v. Armstrong, 146 U.S. 499, 510 (1892); InterFirst Bank of Abilene, N.A. v. FDIC, 777 F.2d 1092, 1095-1096 (5th Cir. 1985); FDIC v. Mademoiselle of California, 379 F.2d 660, 663 (9th Cir. 1967).

    The OCC requested comment on whether there are additional characteristics of set-offs or other situations in which set-off may arise that should be included in the rule. One commenter, a trade association for banks, said that the administration of set-offs may be complex, given that the trust and fiduciary business is a fee-based industry. The commenter offered the example of instances in which fees have been accrued or are otherwise in the process of payment to one or more service providers at the time of receivership. The commenter suggested that the final rule acknowledge that a given resolution may involve bespoke, fact-specific set-off situations that would need to be carefully considered, while also serving the need for the receiver or a successor fiduciary to be in a position to continue providing fiduciary services during the receivership.

    The OCC believes that, on balance, it is not necessary to make this kind of an addition to the language of the final rule. Section 51.4 as a whole is designed to make the basic framework of claim submission transparent to creditors of the uninsured bank, and set-off is included as an element of this framework. As the commenter states, the OCC's determination of particular claims will require consideration of fact-specific situations prior to reaching a disposition, and this extends to considerations of set-offs. The final rule is designed to accommodate with flexibility the consideration of such factors in the context in which each claim is postured.

    Section 51.5 of the final rule sets out the order of priorities for payment of administrative expenses of the receiver and claims against the uninsured bank in receivership. Under this section, the OCC will pay these expenses and claims in the following order: (1) administrative expenses of the receiver; (2) unsecured creditors, including secured creditors to the extent their claim exceeds their valid and enforceable security interest; (3) creditors of the uninsured bank, if any, whose claims are subordinated to general creditor claims; and (4) shareholders of the uninsured bank. The order is based on case law and, in the case of the first priority for administrative expenses, on 12 U.S.C. 196.20

    20See Ticonic Nat'l Bank v. Sprague, 303 U.S. 406, 410-411 (1938); Merrill v. Nat'l Bank of Jacksonville, 173 U.S. 131, 146 (1899); Scott v. Armstrong, 146 U.S. 499, 510 (1892); Bell v. Hanover Nat'l Bank, 57 F. 821, 822 (C.C.S.D.N.Y. 1893).

    A creditor or other claimant with a security interest that was valid and enforceable as to its terms prior to the appointment of the receiver is entitled to exercise that security interest, outside the priority of distributions set out in the final rule.21 If the collateral value exceeds the amount of the claim as it was immediately prior to the receiver's appointment, the surplus remains an asset of the uninsured bank, and the receiver may obtain it in connection with marshalling the assets (as further described in § 51.7(a) of the final rule).22

    21Ticonic Nat'l Bank v. Sprague, 303 U.S. 406, 410-411 (1938); Bell v. Hanover Nat'l Bank, 57 F. 821, 822 (C.C.S.D.N.Y. 1893).

    22Bell v. Hanover Nat'l Bank, 57 F. 821, 822 (C.C.S.D.N.Y. 1893).

    Liens arising from judicial determinations after the initiation of the receivership, as well as contractual liens that are triggered due to the appointment of a receiver or other post-appointment events, are not enforceable. This is because recognition of these liens would afford these claimants a priority that is not recognized under the established legal priorities described in § 51.5 of the final rule. Similarly, a secured creditor is not entitled to a priority distribution of any portion of the claim that is not covered by the value of the collateral because the creditor is in the position of a general unsecured creditor for that portion of the claim and must participate in ratable liquidation distributions on par with other unsecured creditors.23

    23Merrill v. Nat'l Bank of Jacksonville, 173 U.S. 131, 146 (1899).

    Assets held by the uninsured bank at the time of the receiver's appointment in a fiduciary or custodial capacity, as identified on the bank's books and records, are not general assets of the bank. Section 51.8(b) of the final rule reiterates this point. In the same vein, the claim of the customer for the return of the customer's fiduciary or custodial assets is separate from, and not subject to, the priority set out in § 51.5. Fiduciary and custodial customers of the bank have direct claims on those assets pursuant to their fiduciary or custodial account contracts. However, the priority of a fiduciary or custodial customer's other claims against the bank, if any, would remain subject to the priority described in § 51.5. For example, a fiduciary customer's claim for a refund of prepaid investment management fees that were attributable to periods after the receiver returned the fiduciary assets to the customer generally would be a general unsecured claim covered by § 51.5(b). The claims process described in § 51.4(b) is available to a fiduciary customer, for both a direct claim for the return of fiduciary assets, as well as a receivership claim for amounts the customer believes it is owed by the bank.

    The OCC requested comment on whether there are other Federal statutes regarding specific types of claims that may be applicable to a receivership of an uninsured bank under the NBA and that would give certain claims a different priority, such as claims owed to the Federal government. One commenter, a coalition that advocates for reform in the financial services industry, agreed that customer assets held by a bank in a fiduciary capacity should not be considered assets of the bank, but questioned why other claims of the customer, such as a claim for a refund of prepaid investment management fees that were attributable to periods after the receiver returned the fiduciary assets to the customer, would be treated as a unsecured general creditor claim. The commenter suggested that such customer funds would have less protection in a receivership for an uninsured bank than they would under certain modern receivership and bankruptcy statutes that set forth claim priorities which include preference to customer claims over other general creditor claims.

    The OCC is required, by statute, to pay claims on a ratable basis. As discussed in connection with the description of § 51.8 of the final rule, this requirement has been interpreted by the courts as requiring the OCC to make distributions on OCC-approved claims and judicial awards on an equal footing, determining the amount of each creditor's claim as it stands at the point of insolvency. As a result, the controlling ratable payment statute does not support a rule that makes distinctions in distribution priority between customer and general creditor claimants.

    Section 51.6 of the final rule provides that all administrative expenses of the receiver for an uninsured bank will be paid out of the assets of the receivership before payment of claims against the receivership. This reflects the requirements in 12 U.S.C. 196. The final rule also states that receivership expenses will include pre-receivership and post-receivership obligations that the receiver determines are necessary and appropriate to facilitate the orderly liquidation or other resolution of the uninsured bank in receivership. To further illustrate the kinds of expenses that § 196 affords a first priority claim on the uninsured bank's receivership assets, § 51.6 enumerates examples of such administrative expenses, such as wages and salaries of employees, expenses for professional services, contractual rent pursuant to an existing lease or rental agreement, and payments to third-party or affiliated service providers, when the receiver determines these expenses are of benefit to the receivership.

    Section 51.7 of the final rule contains provisions describing the powers and duties of the receiver and the disposition of fiduciary and custodial accounts. As described in § 51.7, the receiver will take over the assets and operation of the uninsured bank, take action to realize on debts owed to the uninsured bank, sell the property of the bank, and liquidate the assets of the uninsured bank for payment of claims against the receivership. Section 51.7(a)(1)-(5) lists some of the major powers and duties for the receiver set out in 12 U.S.C. 192 and clarified by the courts, including taking possession of the books and records of the bank, collecting on debts and claims owed to the bank, selling or compromising bad or doubtful debts (with court approval), and selling the bank's real and personal property (also with court approval).

    Section 51.7(b) of the final rule provides for the receiver to close the uninsured bank's fiduciary and custodial appointments, or transfer such accounts to a successor fiduciary or custodian under 12 CFR 9.16 or other applicable Federal law. The uninsured banks currently in existence focus on fiduciary and custodial services, so this function of the receiver will be of primary importance. This provision recognizes that the receiver's power to wind up the affairs of the uninsured bank in receivership, acting with court approval to make disposition of bank assets, should properly encompass the power to transfer fiduciary or custodial appointments and any associated assets in appropriate circumstances.

    Transfer of fiduciary appointments may occur under the terms of the instrument creating the relationship, if it provides for transfer, or under a fiduciary transfer statute, if one is applicable. The OCC believes there are strong public policy interests in endeavoring to replace fiduciaries and custodians expeditiously, without an interruption in service to their customers, if transfer can be arranged to a qualified successor, maintaining the same duties and standards of care with respect to the customers that previously pertained to their accounts at the uninsured bank in receivership. The alternative, given that the uninsured bank must be wound down and cannot provide services in the future, is to stop managing and reinvesting the customer's assets, stop responding to directions to transfer or receive assets in custody, close the accounts, and seek instructions from the account holders or the courts regarding return of associated assets. For institutional customers, this is likely to cause significant interruption of the intricate machinery of their financial operations. For individuals, it can potentially result in loss of asset value in adverse markets, or loss of income due to foregone reinvestments.

    Across the United States, there are disparate and often conflicting legal rules restricting or conditioning transfers of an appointment of a fiduciary for a beneficiary residing within the state. Depending on the geographic area across which the uninsured bank has established fiduciary relationships with its customers, and the standardization of its fiduciary account agreements or appointing instruments, it may be practicable for the receiver to transition an uninsured bank's fiduciary and custody accounts to a qualified successor through the mechanisms provided by applicable local law. On the other hand, if faced with dispersed customers, diverse account agreements or appointments of different vintage, or even the absence of an applicable law of transfer for customers in certain states, reliance on these methods may be so cumbersome as to effectively prevent accomplishment of the transfers in a timely way.

    In order to address these potential problems, the OCC, relying on the support of existing case law, is including language in the final rule to make it clear that the uninsured bank receiver's power under 12 U.S.C. 192 to sell, with court approval, the real and personal property of the bank includes the power to transfer the bank's fiduciary accounts and related assets, subject to the approval of the court exercising jurisdiction over the receiver's efforts to transfer the bank's assets. The final rule is consistent with case law recognizing that a receiver for a national bank may properly arrange asset purchase and liability assumption transactions to move the business of a failed bank to a successor on an integrated basis, as part of the power to transfer assets, as well as analogous case law concerning the transfer of fiduciary and custodial assets by the FDIC, acting as receiver of failed insured depository institutions.24

    24See NCNB Texas National Bank v. Cowden, 895 F.2d 1488 (5th Cir. 1990) (holding that the FDIC, as receiver of insolvent bank, had authority to transfer fiduciary appointments to a bridge bank prior to the Financial Institutions Reform, Recovery, and Enforcement Act of 1989).

    Section 51.7(c) of the final rule incorporates, in general terms, the powers, duties, and responsibilities of receivers for national banks under the NBA and under judicial precedents determining the authorities and responsibilities of receivers for national banks. Examples of these powers include: (1) the authority to repudiate certain contracts, including: (a) purely executory contracts, upon determining that the contracts would be unduly burdensome or unprofitable for the receivership estate,25 (b) contracts that involve fraud or misrepresentation,26 and (c) in limited cases, non-executory contracts that are contrary to public policy; 27 (2) the authority to recover fraudulent transfers; 28 and (3) the authority to enforce collection of notes from debtors and collateral, regardless of the existence of side arrangements that would otherwise defeat the collectability of such notes.29

    25Bank One Texas v. Prudential Life Ins. Co., 878 F. Supp. 943, 964-66 (N.D. Tex. 1995).

    26 A. Corbin, Corbin on Contracts § 228 at 320 (1952) (addressing contracts voidable for fraud, duress, or mistake).

    27Cf. Fidelity Deposit Co. of Md. v. Conner, 973 F.2d 1236, 1241 (5th Cir. 1992).

    28See Peters v. Bain, 133 U.S. 670 (1890) (applying state substantive law to determine whether to void a transfer); Rogers v. Marchant, 91 F.2d 660, 663 (4th Cir. 1937).

    29D'Oench, Duhme & Co., Inc. v. FDIC, 315 U.S. 447, 458 (1942). A. Corbin, Corbin on Contracts, § 228 at 320 (1952) (addressing contracts voidable for fraud, duress or mistake).

    Section 51.7(d) of the final rule requires the receiver to make periodic reports to the OCC concerning the status and proceedings of the receivership.

    Section 51.8 of the final rule contains provisions regarding the payment of dividends on claims against the uninsured bank and the distribution of any remaining proceeds to shareholders. This section provides that, after administrative expenses of the receivership have been paid, the OCC will make ratable dividends from available receivership funds based on the priority of claims in proposed § 51.5 for claims that have been proved to the OCC's satisfaction or adjudicated in a court of competent jurisdiction, as provided in 12 U.S.C. 194. The OCC will make payment of dividends, if any, periodically, at the discretion of the OCC, as the receiver liquidates the assets of the uninsured bank.

    The final rule's inclusion of the “ratable dividend” requirement is designed to incorporate the associated standards about the proper application of this statutory directive, which the judiciary has articulated over the years. The ratable dividend requirement directs the OCC to make distributions on OCC-approved claims and judicial awards on an equal footing, determining the amount of each creditor's claim as it stands at the point of insolvency. As one example, a court's award of interest on an unpaid debt to the date of a judgment rendered in the plaintiff's favor after the receiver was appointed does not increase the amount of the plaintiff's claim for purposes of making ratable dividends. As another example, the ratable dividend requirement generally restricts claims against the bank receivership for debts that were not due and owing at the appointment of the receiver and arose for the first time as a consequence of the appointment or a post-appointment event.

    The OCC requested comment on alternatives to the proposed rule's approach to paying dividends on claims, under which the OCC would exercise its discretion under section 194 to determine the timing of the distributions on established claims. Under one alternative presented in the proposed rule, the OCC would refrain from paying any dividends until all claims have been submitted and validated, with final allowed claim amounts established. As we noted in the proposal, this approach presents the possibility that proven claims may be delayed for a significant amount of time pending more protracted resolution of other claims. Under a second option presented in the proposed rule, the OCC would make ongoing dividends on proven claims, subject to the receiver's retaining a percentage of the funds on hand at the time of the distribution as a pool of dividends for catch-up distributions to a successful plaintiff later.

    The OCC did not receive comments on these alternative approaches for making ratable distributions on claims against a receivership. For this reason, and because the proposed rule's approach to payment of dividends provides the OCC with the discretion to tailor the dividend process to facts and circumstances of a particular receivership, the final rule adopts § 51.8 as proposed.

    Section 51.8(a)(2) of the final rule recognizes the basic legal premise under the NBA receivership provisions and judicial interpretations thereof that any dividend payments to creditors and other claimants of an uninsured bank will be made solely from receivership funds, if any, paid to the OCC by the receiver after payment of the expenses of the receiver. This provision is also consistent with the established dichotomy of the OCC's supervisory and receivership capacities in the NBA, as discussed earlier.

    Section 51.8(b) of the final rule similarly recognizes that assets held by an uninsured national bank at the time of the receiver's appointment in a fiduciary or custodial capacity, as designated on the bank's books and records, are not part of the bank's general assets and liabilities held in connection with its other business and will not be considered a source for payment for unrelated claims of creditors and other claimants. This provision is intended to make clear that the receiver will segregate identified fiduciary and custodial assets and either transfer those assets to other fiduciaries or custodians as described in connection with § 51.7(b), or close the accounts and endeavor to make the associated assets available to the account holders or their representatives through other means.

    One commenter, a trade association for banks, agreed with the treatment of fiduciary assets in the proposed rule, but questioned whether § 51.8(b) indicates with sufficient clarity that fiduciary assets will not be treated as assets of the bank in receivership. As stated in the final rule, fiduciary and custodial assets “will not be considered as part of the bank's general assets. . .”. The OCC reiterates that, under this section, assets held by an uninsured bank in a fiduciary or custodial capacity, as designated on the bank's books and records, are not part of the bank's general assets and liabilities held in connection with its other business and will not be a source for payment for unrelated claims of creditors and other claimants.

    Section 51.8(d) of the final rule provides that, after all administrative expenses and claims have been paid in full, any remaining proceeds will be paid to shareholders in proportion to their stock ownership, also as provided in 12 U.S.C. 194.

    Section 51.9 of the final rule contains provisions for termination of receiverships in which there are assets remaining after all administrative expenses and all claims had been paid. This is the scenario addressed by 12 U.S.C. 197. In such a case, section 197 requires the Comptroller to call a meeting of the shareholders of the bank at which the shareholders would decide whether to continue oversight by the Comptroller, or whether to end the receivership and appoint a liquidating agent to continue the liquidation of the remaining assets, under the direction of the board of directors and shareholders, as in a liquidation that had commenced under 12 U.S.C. 181.

    There may be other circumstances under which termination would take place, such as when there are no receivership assets remaining after completion of receivership activities. Under this scenario, the receiver for an uninsured bank has liquidated all of the bank's assets, closed or transferred all fiduciary accounts to a successor fiduciary, paid all administrative expenses, and either paid creditor claims in full and distributed the remaining proceeds to shareholders, as provided in § 51.8(c) of the final rule, or made ratable dividends of all remaining proceeds to creditors as provided in § 51.8(a), but no additional assets remain in the estate. Under these circumstances, the provisions in 12 U.S.C. 197 for termination would not apply.

    V. Regulatory Analysis A. Paperwork Reduction Act

    Under the Paperwork Reduction Act (PRA) of 1995 (44 U.S.C. 3501 et seq.), the OCC may not conduct or sponsor, and, notwithstanding any other provision of law, a person is not required to respond to, an information collection unless the information collection displays a valid Office of Management and Budget (OMB) control number. The final rule contains no information collection requirements under the PRA.

    B. Regulatory Flexibility Act

    The Regulatory Flexibility Act (RFA), 5 U.S.C. 601 et seq., generally requires that, in connection with a rulemaking, an agency prepare and make available for public comment a regulatory flexibility analysis that describes the impact of the rule on small entities. However, the regulatory flexibility analysis otherwise required under the RFA is not required if an agency certifies that the rule will not have a significant economic impact on a substantial number of small entities (defined in regulations promulgated by the Small Business Administration (SBA) to include commercial banks and savings institutions, and trust companies, with assets of $550 million or less and $38.5 million or less, respectively) and publishes its certification and a brief explanatory statement in the Federal Register together with the rule.

    The OCC currently supervises approximately 1,032 small entities. The scope of the final rule extends to uninsured banks. The maximum number of OCC-supervised small uninsured banks that could be subject to the receivership framework described in the final rule is approximately 18.30 Accordingly, the OCC certifies that the final rule will not have a significant economic impact on a substantial number of small entities.

    30 Consistent with the General Principles of Affiliation 13 CFR 121.103(a), the OCC counts the assets of affiliated financial institutions when determining if we should classify an institution we supervise as a small entity. We used December 31, 2015, to determine size because a financial institution's assets are determined by averaging the assets reported on its four quarterly financial statements for the preceding year. See footnote 8 of the U.S. SBA's Table of Size Standards.

    OCC Unfunded Mandates Reform Act of 1995 Determination

    The OCC has analyzed the final rule under the factors in the Unfunded Mandates Reform Act of 1995 (UMRA) (2 U.S.C. 1532). Under this analysis, the OCC considered whether the final rule includes a Federal mandate that may result in the expenditure by state, local, and tribal governments, in the aggregate, or by the private sector, of $100 million or more in any one year (adjusted annually for inflation). As detailed in the SUPPLEMENTARY INFORMATION, the OCC currently supervises 52 uninsured banks, all of which are uninsured trust banks, and has not appointed a receiver for an uninsured bank since 1933. Unlike commercial and consumer banks and savings associations, which generally face credit and liquidity risks, national trust banks primarily face operational, reputational, and strategic risks. While any of these risks could result in the precipitous failure of a bank or savings association, from a historical perspective, trust banks have been more likely to decline into a weakened condition, allowing the OCC and the institution the time needed to find other solutions for rehabilitating the institution or to successfully resolve the institution without the need to appoint a receiver. As such, we believe the OCC is unlikely to place an uninsured trust bank into receivership. For this reason, and because the final rule does not impose any implementation requirements, the OCC concludes that the final rule will not result in an expenditure of $100 million or more by state, local, and tribal governments, or by the private sector, in any one year.

    List of Subjects in 12 CFR Part 51

    Administrative practice and procedure, Banks, Banking, National banks, Procedural rules, Receiverships.

    Authority and Issuance

    For the reasons set forth in the preamble and under the authority of 12 U.S.C. 16, 93a, 191-200, 481, 482, 1831c, and 1867 the Office of the Comptroller of the Currency adds part 51 to chapter I of title 12, Code of Federal Regulations to read as follows:

    PART 51—RECEIVERSHIPS FOR UNINSURED NATIONAL BANKS Sec. 51.1 Purpose and scope. 51.2 Appointment of receiver. 51.3 Notice of appointment of receiver. 51.4 Claims. 51.5 Order of priorities. 51.6 Administrative expenses of receiver. 51.7 Powers and duties of receiver; disposition of fiduciary and custodial accounts. 51.8 Payment of claims and dividends to shareholders. 51.9 Termination of receivership. Authority:

    12 U.S.C. 16, 93a, 191-200, 481, 482, 1831c, and 1867.

    § 51.1 Purpose and scope.

    (a) Purpose. This part sets out procedures for receiverships of national banks conducted by the Office of the Comptroller of the Currency (OCC) under the receivership provisions of the National Bank Act (NBA). These receivership provisions apply to national banks that are not insured by the Federal Deposit Insurance Corporation (FDIC).

    (b) Scope. This part applies to the appointment of a receiver for uninsured national banks (uninsured banks) and the operation of a receivership after appointment of a receiver for an uninsured bank under 12 U.S.C. 191.31

    31 This part does not apply to receiverships for uninsured Federal branches or uninsured Federal agencies.

    § 51.2 Appointment of receiver.

    (a) In general. The Comptroller of the Currency (Comptroller) may appoint any person, including the OCC or another government agency, as receiver for an uninsured bank. The receiver performs its duties under the direction of the Comptroller and serves at the will of the Comptroller. The Comptroller may require the receiver to post a bond or other security. The receiver, with the approval of the Comptroller, may employ such staff and enter into contracts for professional services as are necessary to carry out the receivership.

    (b) Grounds for appointment. The Comptroller may appoint a receiver for an uninsured bank based on any of the grounds specified in 12 U.S.C. 191(a).

    (c) Judicial review. If the Comptroller appoints a receiver for an uninsured bank, the bank may seek judicial review of the appointment as provided in 12 U.S.C. 191(b).

    § 51.3 Notice of appointment of receiver.

    Upon appointment of a receiver for an uninsured bank, the OCC will provide notice to the public of the receivership, including by publication in a newspaper of general circulation for three consecutive months. The notice of the receivership will provide instructions for creditors and other claimants seeking to submit claims with the receiver for the uninsured bank.

    § 51.4 Claims.

    (a) Submission of claims for consideration by the OCC. (1) Persons who have claims against the receivership for an uninsured bank may present such claims, along with supporting documentation, for consideration by the OCC. The OCC will determine the validity and approve the amounts of such claims.

    (2) The OCC will establish a date by which any person seeking to present a claim against the uninsured bank for consideration by the OCC must present their claim for determination. The deadline for filing such claims will not be less than 30 days after the end of the three-month notice period in § 51.3.

    (3) The OCC will allow any claim against the uninsured bank received on or before the deadline for presenting claims if such claim is established to the OCC's satisfaction by the information on the uninsured bank's books and records or otherwise submitted. The OCC may disallow any portion of any claim by a creditor or claim of a security, preference, set-off, or priority which is not established to the satisfaction of the OCC.

    (b) Submission of claims to a court. Persons with claims against an uninsured bank in receivership may present their claims to a court of competent jurisdiction for adjudication. Such persons must submit a copy of any final judgment received from the court to the OCC, to participate in ratable dividends along with other proved claims.

    (c) Right of set-off. If a person with a claim against an uninsured bank in receivership also has an obligation owed to the bank, the claim and obligation will be set off against each other and only the net balance remaining after set-off shall be considered as a claim, provided such set-off is otherwise legally valid.

    § 51.5 Order of priorities.

    The OCC will pay receivership expenses and proved claims against the uninsured bank in receivership in the following order of priority:

    (a) Administrative expenses of the receiver;

    (b) Unsecured creditors of the uninsured bank, including secured creditors to the extent their claim exceeds their valid and enforceable security interest;

    (c) Creditors of the uninsured bank, if any, whose claims are subordinated to general creditor claims; and

    (d) Shareholders of the uninsured bank.

    § 51.6 Administrative expenses of receiver.

    (a) Priority of administrative expenses. All administrative expenses of the receiver for an uninsured bank shall be paid out of the assets of the bank in receivership before payment of claims against the receivership.

    (b) Scope of administrative expenses. Administrative expenses of the receiver for an uninsured bank include those expenses incurred by the receiver in maintaining banking operations during the receivership, to preserve assets of the uninsured bank, while liquidating or otherwise resolving the affairs of the uninsured bank. Such expenses include pre-receivership and post-receivership obligations that the receiver determines are necessary and appropriate to facilitate the orderly liquidation or other resolution of the uninsured bank in receivership.

    (c) Types of administrative expenses. Administrative expenses for the receiver of an uninsured bank include:

    (1) Salaries, costs, and other expenses of the receiver and its staff, and costs of contracts entered into by the receiver for professional services relating to performing receivership duties; and

    (2) Expenses necessary for the operation of the uninsured bank, including wages and salaries of employees, expenses for professional services, contractual rent pursuant to an existing lease or rental agreement, and payments to third-party or affiliated service providers, that in the opinion of the receiver are of benefit to the receivership, until the date the receiver repudiates, terminates, cancels, or otherwise discontinues the applicable contract.

    § 51.7 Powers and duties of receiver; disposition of fiduciary and custodial accounts.

    (a) Marshalling of assets. In resolving the affairs of an uninsured bank in receivership, the receiver:

    (1) Takes possession of the books, records and other property and assets of the uninsured bank, including the value of collateral pledged by the uninsured bank to the extent it exceeds valid and enforceable security interests of a claimant;

    (2) Collects all debts, dues and claims belonging to the uninsured bank, including claims remaining after set-off;

    (3) Sells or compromises all bad or doubtful debts, subject to approval by a court of competent jurisdiction;

    (4) Sells the real and personal property of the uninsured bank, subject to approval by a court of competent jurisdiction, on such terms as the court shall direct; and

    (5) Deposits all receivership funds collected from the liquidation of the uninsured bank in an account designated by the OCC.

    (b) Disposition of fiduciary and custodial accounts. The receiver for an uninsured bank closes the bank's fiduciary and custodial appointments and accounts or transfers some or all of such accounts to successor fiduciaries and custodians, in accordance with 12 CFR 9.16, and other applicable Federal law.

    (c) Other powers. The receiver for an uninsured bank may exercise other rights, privileges, and powers authorized for receivers of national banks under the NBA and the common law of receiverships as applied by the courts to receiverships of national banks conducted under the NBA.

    (d) Reports to OCC. The receiver for an uninsured bank shall make periodic reports to the OCC on the status and proceedings of the receivership.

    (e) Receiver subject to removal; modification of fees. (1) The Comptroller may remove and replace the receiver for an uninsured bank if, in the Comptroller's discretion, the receiver is not conducting the receivership in accordance with applicable Federal laws or regulations or fails to comply with decisions of the Comptroller with respect to the conduct of the receivership or claims against the receivership.

    (2) The Comptroller may reduce the fees of the receiver for an uninsured bank if, in the Comptroller's discretion, the Comptroller finds the performance of the receiver to be deficient, or the fees of the receiver to be excessive, unreasonable, or beyond the scope of the work assigned to the receiver.

    § 51.8 Payment of claims and dividends to shareholders.

    (a) Claims. (1) After the administrative expenses of the receivership have been paid, the OCC shall make ratable dividends from time to time of available receivership funds according to the priority described in § 51.5, based on the claims that have been proved to the OCC's satisfaction or adjudicated in a court of competent jurisdiction.

    (2) Dividend payments to creditors and other claimants of an uninsured bank will be made solely from receivership funds, if any, paid to the OCC by the receiver after payment of the expenses of the receiver.

    (b) Fiduciary and custodial assets. Assets held by an uninsured bank in a fiduciary or custodial capacity, as designated on the bank's books and records, will not be considered as part of the bank's general assets and liabilities held in connection with its other business, and will not be considered a source for payment of unrelated claims of creditors and other claimants.

    (c) Timing of dividends. The payment of dividends, if any, under paragraph (a) of this section, on proved or adjudicated claims will be made periodically, at the discretion of the OCC, as the receiver liquidates the assets of the uninsured bank.

    (d) Distribution to shareholders. After all administrative expenses of the receiver and proved claims of creditors of the uninsured bank have been paid in full, to the extent there are receivership assets to make such payments, any remaining proceeds shall be paid to the shareholders, or their legal representatives, in proportion to their stock ownership.

    § 51.9 Termination of receivership.

    If there are assets remaining after full payment of the expenses of the receiver and all claims of creditors for an uninsured bank and all fiduciary accounts of the bank have been closed or transferred to a successor fiduciary and fiduciary powers surrendered, the Comptroller shall call a meeting of the shareholders of the uninsured bank, as provided in 12 U.S.C. 197, for the shareholders to decide the manner in which the liquidation will continue. The liquidation may continue by:

    (a) Continuing the receivership of the uninsured bank under the direction of the Comptroller; or

    (b) Ending the receivership and oversight by the Comptroller and replacing the receiver with a liquidating agent to proceed to liquidate the remaining assets of the uninsured bank for the benefit of the shareholders, as set out in 12 U.S.C. 197.

    Dated: December 15, 2016. Thomas J. Curry, Comptroller of the Currency.
    [FR Doc. 2016-30666 Filed 12-19-16; 8:45 am] BILLING CODE 4810-33-P
    DEPARTMENT OF HEALTH AND HUMAN SERVICES Food and Drug Administration 21 CFR Part 4 [Docket No. FDA-2008-N-0424] RIN 0910-AF82 Postmarketing Safety Reporting for Combination Products AGENCY:

    Food and Drug Administration, HHS.

    ACTION:

    Final rule.

    SUMMARY:

    The Food and Drug Administration (FDA or Agency) is issuing regulations to set forth postmarketing safety reporting requirements for combination products. Specifically, this final rule describes the postmarketing safety reporting requirements that apply when two or more different types of regulated medical products (drugs, devices, and/or biological products, which are referred to as “constituent parts” of a combination product) comprise a combination product and the combination product or its constituent parts have received FDA marketing authorization. The rule is intended to promote and protect the public health by setting forth the requirements for postmarketing safety reporting for these combination products, and is part of FDA's ongoing effort to ensure the consistency and appropriateness of the regulatory requirements for combination products.

    DATES:

    Effective date: This rule is effective on January 19, 2017.

    Compliance dates: Some provisions of the rule have a compliance date that is the same as the effective date of this rule, and other provisions of the rule have a later compliance date as discussed in section III.I, Effective Date and Compliance Dates.

    FOR FURTHER INFORMATION CONTACT:

    John Barlow Weiner, Associate Director for Policy, Office of Combination Products, Food and Drug Administration, 10903 New Hampshire Ave., Bldg. 32, Rm. 5129, Silver Spring, MD 20933, 301-796-8930, [email protected]

    SUPPLEMENTARY INFORMATION: Table of Contents Executive Summary I. Background A. Rationale for Rulemaking B. The Proposed Rule II. Overview of the Final Rule A. Section 4.100—What is the scope of this subpart? B. Section 4.101—How does FDA define key terms and phrases in this subpart? C. Section 4.102—What reports must you submit to FDA for your combination product or constituent part? D. Section 4.103—What information must you share with other constituent part applicants for the combination product? E. Section 4.104—How and where must you submit postmarketing safety reports for your combination product or constituent part? F. Section 4.105—What are the postmarketing safety reporting recordkeeping requirements for your combination product or constituent part? III. Comments on the Proposed Rule A. Section 4.100—What is the scope of this subpart? B. Section 4.101—How does FDA define key terms and phrases in this subpart? C. Section 4.102—What reports must you submit to FDA for your combination product or constituent part? D. Section 4.103—What information must you share with other constituent part applicants for the combination product? E. Section 4.104—How and where must you submit postmarketing safety reports for your combination product or constituent part? F. Section 4.105—What are the postmarketing safety reporting recordkeeping requirements for your combination product or constituent part? G. Alternate Approaches H. Guidance and Agency Internal Coordination and Training I. Effective Date and Compliance Dates J. Miscellaneous IV. Legal Authority V. Analysis of Environmental Impact VI. Paperwork Reduction Act of 1995 VII. Federalism VIII. Economic Analysis of Impacts A. Introduction B. Summary of Costs and Benefits IX. References Executive Summary Purpose of the Final Rule

    The Agency has not previously issued regulations on postmarketing safety reporting specifically for combination products, which are products comprised of: (1) A drug and a device; (2) a device and a biological product; (3) a biological product and a drug; or (4) a drug, a device, and a biological product. Instead, the Agency has applied provisions to combination products from the postmarketing safety reporting regulations applicable to the constituent parts (i.e., reporting requirements specific to drugs, devices, and biological products). These regulations for drugs, devices, and biological products share many similarities; however, each set of regulations has certain unique reporting requirements, standards, and timeframes based in part on the characteristics of the type of product. These variations among the regulations and lack of clarity on how to apply these requirements to combination products can result in inconsistent and incomplete postmarketing safety reporting for combination products and their constituent parts.

    The purpose of this final rule is to ensure consistent, complete postmarketing safety reporting requirements for combination products that have received FDA marketing authorization, while avoiding duplicative reporting. The term “postmarketing safety” is used in this rule because this rule concerns certain postmarket events, including manufacturing events, device malfunctions, and events causing injury to users, and the reporting requirements that relate to product and patient safety arising from these events. The final rule supports the underlying purpose of postmarketing safety reporting for all medical products, namely to protect the public health by ensuring continued safety and effectiveness of the product once it is placed on the market.

    Summary of the Major Provisions of the Final Rule

    This final rule requires that a “combination product applicant” (an entity holding the application(s), as the term “application” is defined in 21 CFR 4.101 of this rule, for a combination product) and a “constituent part applicant” (an entity holding the application to market a drug, device, or biological product as a constituent part of a combination product the constituent parts of which are marketed under applications held by different applicants) comply with postmarketing safety reporting requirements applicable to the product based on the application type (e.g., new drug application, premarket approval application, biologics license application) under which the combination product or constituent part received marketing authorization. In addition to these application-type based reporting requirements, the final rule requires combination product applicants to submit additional specified reports based on the constituent parts included in the combination product (e.g., malfunction reports if the combination product includes a device, field alert reports if it includes a drug, and biological product deviation reports if it includes a biological product). The final rule requires constituent part applicants to share certain postmarketing safety information they receive with one another. The rule also specifies how combination product and constituent part applicants must submit postmarketing safety reporting information to the Agency and what records they must maintain.

    The Agency received 16 sets of comments on the proposed rule. Commenters largely sought clarification of the scope of the proposed rule, how reporting requirements, timelines, and reporting standards from the underlying regulations for drugs, devices, and biological products apply, and how and what information must be shared between constituent part applicants. Several commenters, while supporting rulemaking to address postmarketing safety reporting for combination products, recommended alternative approaches. After considering the comments received on the proposed rule, the Agency has made clarifications and other revisions in the final rule to, among other things: (1) Clarify that the final rule applies only to combination product and constituent part applicants; (2) clarify when a single report may suffice to comply with more than one reporting requirement; and (3) incorporate biological product deviation reporting and device correction and removal reporting requirements applicable to combination product applicants.

    Legal Authority

    The legal framework underlying this final rule is twofold. The first aspect is that drugs, devices, and biological products do not lose their discrete regulatory identities when they become constituent parts of a combination product. In general, the postmarketing safety reporting requirements specific to each constituent part of a combination product also apply to the combination product itself. Although the constituent parts of combination products retain their regulatory identities, the Federal Food, Drug, and Cosmetic Act (FD&C Act) also recognizes combination products as a category of products that are distinct from products that are solely drugs, devices, or biological products. FDA has the authority to develop regulations to ensure sufficient and appropriate ongoing assessment of the risks associated with combination products.

    The second aspect of the framework is founded on the postmarketing safety reporting regulatory scheme associated with the application under which the combination product received marketing authorization, plus any applicable requirements associated with the additional six specified report types listed in this rule. Although similar in effect to the first aspect of the framework, this aspect is based on the legal authority FDA used to issue each of its existing regulations for postmarketing safety reporting for drugs, devices, and biological products.

    Costs and Benefits

    The final rule will generate one-time administrative costs from reading and understanding the rule, assessing current compliance, modifying existing standards of practice, changing storage and reporting software, and training personnel on the requirements under this rule. Firms that do not currently comply with the reporting requirements identified in 21 CFR 4.102(c) of this rule will also incur annual reporting costs from the submission of field alert reports, 5-day reports, 15-day reports, malfunction reports, correction or removal reports, and biological product deviation reports. The annualized total costs of the rule are between $1.36 and $2.68 million at a 7 percent discount rate and between $1.35 and $2.65 million at a 3 percent discount rate.

    The final rule will benefit firms through reduced uncertainty about the reporting requirements for their specific combination product and through decreased duplicative reporting. The final rule will also benefit public health by helping to ensure that important safety information is submitted and directed to the appropriate Agency components, so that the Agency may receive and review this information in a timely manner.

    I. Background

    As set forth in 21 CFR part 3, a combination product is a product comprised of a drug and a device; a device and a biological product; a biological product and a drug; or a drug, a device, and a biological product. A combination product includes the following: (1) A product comprised of two or more regulated components, i.e., drug/device, biologic/device, drug/biologic, or drug/device/biologic, that are physically, chemically, or otherwise combined or mixed and produced as a single entity (“single-entity” combination products); (2) two or more separate products packaged together in a single package or as a unit and comprised of drug and device products, device and biological products, or biological and drug products (“co-packaged” combination products); (3) a drug, device, or biological product packaged separately that, according to its investigational plan or proposed labeling, is intended for use only with an approved individually specified drug, device, or biological product where both are required to achieve the intended use, indication, or effect and where upon approval of the proposed product the labeling of the approved product would need to be changed; e.g., to reflect a change in intended use, dosage form, strength, route of administration, or significant change in dose (a type of “cross-labeled” combination product); or (4) any investigational drug, device, or biological product packaged separately that, according to its proposed labeling, is for use only with another individually specified investigational drug, device, or biological product where both are required to achieve the intended use, indication, or effect (another type of “cross-labeled” combination product).1 For purposes of this rulemaking and consistent with 21 CFR 4.2, the drugs, devices, and/or biological products included in a combination product are referred to as “constituent parts” of the combination product.

    1 As discussed in response to Comment 1, this rule addresses only PMSR requirements for combination products that have received marketing authorization. It does not describe reporting requirements for investigational combination products.

    A. Rationale for Rulemaking

    In the proposed rule (74 FR 50744 at 50745 to 50751, October 1, 2009), FDA described its rationale and goals for the proposed rulemaking. To date, the Agency has not issued regulations on postmarketing safety reporting (PMSR) specifically for combination products. Instead, the Agency has applied provisions to combination products from the PMSR regulations applicable to the constituent parts of the combination product (i.e., the reporting requirements specific to drugs, devices, and biological products). These requirements for drugs, devices, and biological products share many similarities and have a common underlying purpose, namely to protect the public health by ensuring a product's continued safety and effectiveness once placed on the market. However, each set of regulations has certain reporting standards and timeframes with unique requirements based in part on the characteristics of the type of product.

    FDA held a public hearing on November 25, 2002, entitled “FDA Regulation of Combination Products” (Ref. 1) and a public workshop on July 8, 2003, entitled “Innovative Systems for Delivery of Drugs and Biologics: Scientific, Clinical and Regulatory Challenges” (Ref. 2) to discuss postmarketing safety reporting, among other issues pertaining to combination products. In developing the proposed rule, we carefully considered the comments offered by stakeholders, including written comments submitted to the docket that we opened to facilitate further input on combination product issues. Two common themes from the comments were the need for consistency in postmarketing safety reporting requirements for combination products and the importance of avoiding unnecessarily duplicative reporting. Some stakeholders suggested that FDA consider developing an entirely new postmarketing safety reporting scheme for combination products, but we concluded that because of the broad similarities in the postmarketing safety reporting regulations for drugs, devices, and biological products and industry's familiarity and experience with current postmarketing safety reporting requirements, the most appropriate approach would be to rely on existing rules and to explain how to comply with them.

    FDA is issuing this final rule to ensure appropriate and consistent PMSR requirements for combination products that have received FDA marketing authorization by describing how combination product applicants and constituent part applicants must comply with the PMSR regulations for drugs, devices, and biological products, and also to eliminate unnecessary PMSR requirements for such combination products.

    B. The Proposed Rule

    Entities subject to the proposed rule included those subject to PMSR duties under 21 CFR parts 314, 600, 606, and 803, except for user facilities and distributors as defined under part 803.

    Those four sets of regulations expressly address PMSR for: (1) Drugs (part 314); (2) biological products (parts 600 and 606); and (3) devices (part 803). These sets of regulations have certain similarities. For example, the PMSR regulations for biological products, devices, and drugs each requires reports of death and other serious adverse events; each provides for expedited reporting for certain types of safety events; and each provides for followup and non-expedited reports. However, there are also certain significant differences in these sets of regulations designed, in part, to address the distinct characteristics and potential safety issues related to a particular type of product (i.e., drug, device, and biological product).

    Accordingly, we proposed to require that entities comply with the PMSR requirements associated with the combination product's application type (e.g., requirements under part 314 for a combination product approved under a new drug application (NDA), or under part 803 for a combination product approved under a premarket approval application (PMA)) and also comply with certain specified additional reporting provisions that are not associated with that application type but are associated with a constituent part(s) of the combination product. The additional reporting requirements specified in the proposed rule were: (1) 5-Day reports under § 803.53; (2) device malfunction reports under § 803.50; (3) 15-day “alert reports” for drugs and biological products under §§ 314.80 and 600.80; (4) field alert reports for drugs under § 314.81; and (5) expedited blood fatality reports under § 606.170. The Agency identified these five types of reports as addressing particular safety issues related to the type of article (drug, biological product, and device) and, therefore, appropriate to apply to combination products that include that type of article regardless of the application type for the combination product, to ensure consistent and appropriate PMSR for the combination product.

    The proposed rule also addressed circumstances in which the constituent parts of a combination product are marketed under separate applications, or are legally marketed by different reporters without separate applications. For constituent parts marketed under separate applications, we proposed that the reporter must comply with the reporting requirements associated with that application type. In addition, we proposed for constituent parts marketed under separate applications held by different entities or legally marketed by separate entities without an approved or cleared marketing application, that each of these entities would have a duty to share within 5 calendar days information it receives about the event, either with the other entity or entities for the combination product or with FDA. We further proposed that entities that receive postmarketing safety information from another such entity, would have to investigate the event and comply with applicable reporting obligations under the rule.

    We proposed that reporters submit their reports and maintain records for them in accordance with the requirements of the underlying regulations from which the reporting duty arises (parts 314, 600, 606, or 803).

    Following publication of the proposed rule, FDA participated in a workshop on January 21, 2010, entitled “Understanding Implications of the Postmarket Safety for Combination Products Proposed Rule,” sponsored by the Advanced Medical Technology Association, the Combination Products Coalition, and the Regulatory Affairs Professional Society. At this workshop, the Agency provided a summary of the proposed rule, and stakeholders then worked in groups to identify issues on which to comment.

    II. Overview of the Final Rule

    The final rule follows the approach presented in the proposed rule, with certain simplifications, clarifications, additions, and other changes, generally made in light of comments received, as described in sections II.A through II.F. The goal of the final rule remains the same as for the proposed rule, to ensure consistent and appropriate postmarketing safety reporting for combination products, while enabling this reporting to be as efficient as possible. Accordingly, this rulemaking seeks to apply those postmarketing safety reporting requirements to combination products necessary to ensure their safety and effectiveness, clarify how to comply with reporting requirements applicable to combination products, and enable efficiencies including submission of a single report if multiple reporting duties apply to an event. Following is a section-by-section overview of the final rule, and then a summary chart of the requirements presented in the rule.

    A. Section 4.100—What is the scope of this subpart?

    The scope of the rule remains largely the same as proposed. As in the proposed rule, § 4.100(a) reflects that the rule describes PMSR requirements for combination products. We have revised § 4.100(a) to clarify that the rule only applies to “combination product applicants” and “constituent part applicants” (as defined in § 4.101); this rule does not apply to any other entities. We have also revised § 4.100(b) to clarify that the rule does not apply to investigational combination products or to combination products that have not received marketing authorization. We have eliminated proposed § 4.102 as that section was largely duplicative of proposed § 4.100.

    B. Section 4.101—How does FDA define key terms and phrases in this subpart?

    We eliminated unnecessary definitions, including terms not used in this final rule. We also simplified certain definitions, using cross-references to definitions provided in other provisions of Title 21 of the CFR without restating those definitions. We made these changes for clarity and to minimize the need for amendments to this rule if a change is made in the future to the terminology or definitions in the cross-referenced provisions.2

    2 We understand that provisions cross-referenced in this rule may be revised in the future, and we want to ensure that it is clear that those provisions as revised continue apply to combination products under this rule, without having to amend this rule each time to provide such clarity. However, if the Agency determines that a future revision to a cross-referenced provision is not appropriate to apply to combination products under this rule, or its application to combination products is unclear under this rule, we intend to amend this rule or otherwise clarify.

    The final rule newly includes definitions for “biological product deviation report” (BPDR) (by reference to §§ 600.14 and 606.171), and “correction or removal report” (by reference to 21 CFR 806.10), because the final rule incorporates these reporting requirements as discussed in relation to § 4.102(c) in section III.C. Similarly, we added a definition for “Product Development Protocol” (PDP) (by reference to section 515(f) of the FD&C Act (21 U.S.C. 360e(f))) and de novo classification request (by reference to section 513(f)(2) of the FD&C Act (21 U.S.C. 360c(f)(2))) because the final rule addresses these types of applications.

    In addition, we included definitions for “applicant”, “combination product applicant”, “constituent part applicant”, and “device application” to help clarify which entities are subject to which duties under this rule. Specifically, we clarified that an applicant is the person holding an application under which a combination product or constituent part has received marketing authorization, and that there is a combination product applicant if there is one applicant that either holds the application for a combination product or, holds the applications for each constituent part if the constituent parts of the combination product are marketed under separate applications (as could be the case for the constituent parts of a cross-labeled combination product). We also clarified that a constituent part applicant is the applicant for a constituent part of a combination product the constituent parts of which marketed under applications held by different applicants. We defined the term “device application” to mean a PMA, PDP, humanitarian device exemption (HDE), de novo classification request (request for classification under section 513(f)(2) of the FD&C Act), or premarket notification (510(k)) submission, so that we could simplify and clarify the rule by using this term to refer to all such submission types, rather than listing them each, where appropriate in the rule.

    C. Section 4.102—What reports must you submit to FDA for your combination product or constituent part?

    The requirements listed in § 4.102 include those that were in § 4.103 of the proposed rule with certain adjustments and additional requirements to address, in part, comments received on the proposed rule.

    Specifically, we have eliminated the requirement to comply with blood fatality reporting requirements as described in § 606.170 for combination products that received marketing authorization under an application other than a biologics license application (BLA). We have also revised the requirement for all combination product applicants to submit 15-day reports as described in §§ 314.80 and 600.80, to permit these reports to be submitted within 30 days rather than 15 days for combination products that received marketing authorization under a device application.

    In addition, we have incorporated BPDR and correction and removal reporting requirements for combination product applicants to ensure that the issues addressed by these reporting requirements, for biological products and devices, respectively, are also addressed for combination products that include these types of constituent parts. We have also made other adjustments in § 4.102 for clarity.

    Following is a description of § 4.102 as finalized, including explanations of changes from § 4.103 of the proposed rule.

    1. Section 4.102(a)

    A new § 4.102(a) clarifies that all applicants must comply with the applicable PMSR requirements with respect to their product. A constituent part applicant must comply with applicable requirements for the constituent part it is marketing, and a combination product applicant must comply with applicable requirements for the combination product it is marketing.

    2. Section 4.102(b)

    As in § 4.103(a) of the proposed rule, § 4.102(b) lists the PMSR requirements that apply based on the application type for the product. Section 4.102(b) clarifies that combination product applicants and constituent part applicants must comply with the requirements identified under § 4.102(b)(1) through (3) that are applicable based on their product's application type. In addition, § 4.102 clarifies that this rule does not require a combination product applicant to submit multiple reports relating to the same event when one report could be used to satisfy both § 4.102(b) and (c). Specifically, if the applicant has submitted one type of report and that report: Includes all of the information that would also be required in another type of report; is required to be submitted in the same manner under this rule as that other report; and is submitted within applicable deadlines, the submission of the single report will be considered to satisfy both reporting obligations.

    The requirements of § 4.102(b) are as follows:

    a. Section 4.102(b)(1). Combination product applicants and constituent part applicants must comply with the PMSR requirements under parts 803 and 806 if their product received marketing authorization under a device application.

    b. Section 4.102(b)(2). Combination product applicants and constituent part applicants must comply with the PMSR requirements under part 314 if their product received marketing authorization under an NDA or abbreviated new drug application (ANDA).

    c. Section 4.102(b)(3). Combination product applicants and constituent part applicants must comply with the PMSR requirements under parts 600 and 606 if their product received marketing authorization under a BLA.

    3. Section 4.102(c)

    This provision applies only to combination product applicants, not to constituent part applicants. It states which requirements combination product applicants must meet in addition to those associated with the product's application type, to ensure consistent and appropriate PMSR for combination products. Like § 4.102(b), it also states how applicants can submit a single report to comply with multiple reporting requirements.

    As indicated previously, § 4.102(c) does not require blood fatality reporting for combination products that received marketing authorization under a device application, NDA, or ANDA, and permits combination product applicants for combination products that received marketing authorization under a device application to submit 15-day reports within 30 days rather than 15 days.

    We removed the requirement under this rule to make blood fatality reports for combination products that received marketing authorization under a device application, NDA, or ANDA, because facilities at which such events occur are currently required to make blood fatality reports irrespective of the type of application under which the product received marketing authorization. Because these facilities must make such reports, we concluded that it would be unnecessary for a combination product applicant (who is not also the operator of the facility) to report the same information as well.

    In light of comments received (as discussed more fully in response to Comments 7, 8, 10), we modified the 15-day report requirement to permit these reports to be made within 30 days for combination products that received marketing authorization under a device application. We made this change based on several factors, including the following. We determined that the Agency would continue to be able to respond in a timely manner to these reports if submitted within 30 days rather than 15 days for such combination products. Further, we determined that permitting such reports to be made within 30 days would enable better alignment of reporting for device-led combination products because this timing would be consistent with the timing for submission of medical device reports. This alignment could be expected to improve the efficiency, clarity and completeness of reports for this class of combination products and to eliminate unnecessary complexity and potential for confusion.3

    3 We considered whether to make a corresponding change for combination products that received marketing authorization under an NDA or ANDA (drug-led combination products) or under a BLA (biologic-led combination products), to require that malfunction reports be submitted within 15 days to align with the deadline for 15-day reports, in the interest of simplifying and clarifying requirements for such combination product applicants as well. However, we determined that the nature of events triggering, and the information required for, malfunction reports might make it difficult to provide a meaningful report within 15 days in some cases. As indicated in the final rule, if an event triggers both a 15-day report and a malfunction report for such a combination product, the combination product applicant can opt to comply with both reporting requirements in a single report submitted within 15 days. If the applicant determines that additional time is needed to investigate the device malfunction, the applicant can submit a followup report to the initial 15-day report with the additional information.

    Section 4.102(c) includes additional reporting requirements not in the proposed rule to address specific safety concerns related to medical devices and biological products. Combination product applicants must submit correction and removal reports as described in § 806.10 and comply with related recordkeeping requirements as described in § 806.20 for combination products that include a device constituent part; and combination product applicants must submit BPDRs as described in §§ 600.14 and 606.171 for combination products that include a biological product constituent part. Having considered the unique safety issues that these additional requirements address in light of comments received, we concluded that this rule should ensure that these additional requirements are addressed by all combination product applicants for combination products that include constituent parts to which these requirements relate.

    In many cases, correction and removal reporting requirements arise in relation to manufacturers' recalls in response to adverse events that may also trigger medical device reporting requirements under part 803. In such cases, submission of a medical device report (MDR) that contains all the information required by part 806 will suffice to comply with both sets of reporting requirements. Under § 806.10(f), no separate correction or removal report is required to be submitted if a report of the correction or removal has been submitted under part 803. However, in some instances, a correction or removal will not be associated with a reportable adverse event, or the action that a manufacturer takes in response will not trigger a 5-day reporting requirement, but the action must still be reported as described in part 806 to ensure, in part, appropriate coordination between the manufacturer and the Agency. In such cases, the correction or removal report currently should be submitted to the appropriate Agency field office.

    Further, some corrections and removals may not trigger reporting requirements under part 803 or part 806, but may trigger recordkeeping requirements under part 806, and these recordkeeping requirements must be satisfied for combination products that include a device constituent part. Accordingly, we have incorporated the correction and removal reporting and recordkeeping requirements under § 4.102(c) to ensure that combination product applicants comply with these requirements.

    With respect to BPDRs, as discussed more fully in response to Comment 13 in section III, we concluded that these reports are akin to field alert reports for drugs, and that it was important for BPDRs to be submitted for combination products that include biological product constituent parts to enable the applicant and the Agency to address the deviation in a timely, appropriate manner. Further, we note that in most instances, a biological product deviation that is reportable under §§ 600.14 and 606.171 is not associated with an adverse experience. Accordingly, we have included in § 4.102(c) BDPR requirements for all combination product applicants whose combination products contain a biological product constituent part.

    The requirements applicable to combination products applicants under § 4.102(c) are now specified as follows:

    a. Section 4.102(c)(1). Combination product applicants whose combination products received marketing authorization under a BLA, NDA, or ANDA and include a device constituent part must also submit: (i) 5-Day reports as described in §§ 803.3 and 803.53 and supplemental or followup reports as described in § 803.56; (ii) Malfunction reports as described in § 803.50 and supplemental or followup reports as described in § 803.56; and (iii) Correction or removal reports as described in § 806.10 and comply with recordkeeping requirements as described in § 806.20.

    b. Section 4.102(c)(2). Combination product applicants whose combination products received marketing authorization under a BLA or a device application and include a drug constituent part must also submit: (i) Field alert reports as described in § 314.81 and (ii) 15-day reports and followup reports as described in § 314.80, within 30 calendar days instead of 15 calendar days if the combination product received marketing authorization under a device application.

    c. Section 4.102(c)(3). Combination product applicants whose combination products received marketing authorization under an NDA, ANDA, or device application, and include a biological product constituent part must also submit: (i) BPDRs as described in §§ 600.14 and 606.171 and (ii) 15-day reports and followup reports as described in § 600.80, within 30 calendar days instead of 15 calendar days if the combination product received marketing authorization under a device application.

    4. Section 4.102(d)

    This provision replaces and has been revised as compared to proposed § 4.103(c) to: (a) Clarify that it applies only to combination product applicants; (b) identify the content expected in periodic safety reports for combination products that received marketing authorization under an NDA, ANDA, or BLA; and (c) provide that additional reporting is required for combination products that received marketing authorization under a device application only upon notification by the Agency if the Agency determines additional or clarifying safety information is required to protect the public health. Section 4.102(d) has two paragraphs stating the following requirements:

    a. Section 4.102(d)(1). Combination product applicants for combination products that received marketing authorization under an NDA, ANDA, or BLA must include in their periodic safety reports, in addition to information required under § 314.80 or 600.80, respectively, a summary and analysis of reports that the applicant submitted in accordance with § 4.102(c)(1)(i) and/or (ii) (5-day and malfunction reporting requirements).

    b. Section 4.102(d)(2). Combination product applicants for combination products that received marketing authorization under a device application do not have to make periodic reports under this rule but must submit additional reports regarding postmarketing safety events in accordance with written requests by the Agency that will be made only if the Agency determines that protection of the public health requires additional or clarifying safety information. Any such written request will specify the safety information to include in such reports and the reason or purpose for the request.

    D. Section 4.103—What information must you share with other constituent part applicants for the combination product?

    As discussed more fully in response to Comment 18 in section III, the final rule makes clear that the duties to share information within 5 calendar days under § 4.103 (replacing § 4.104 in the proposed rule) apply only to constituent part applicants. In addition, we clarified and simplified these requirements. Constituent part applicants must share only information they receive regarding events that involve a death or serious injury within the meaning of § 803.3 or an adverse experience within the meaning of § 314.80(a) or § 600.80(a), and must share this information only with each other; we have eliminated the alternative of sharing the information with FDA as unnecessary and inefficient. Also, we have removed as unnecessary the content of proposed § 4.104(b) regarding how to respond to information received from another constituent part applicant. Section 4.102(b) states which PMSR requirements apply to constituent part applicants, and those PMSR requirements prescribe under what circumstances an entity subject to them must submit a report regarding information that the entity receives.

    We have added a new § 4.103(b) addressing recordkeeping for this information sharing duty. This provision has been added to provide constituent part applicants appropriate clarity and certainty regarding what records to keep and what documentation the Agency will consider adequate to demonstrate compliance with the information-sharing requirement.

    E. Section 4.104—How and where must you submit postmarketing safety reports for your combination product or constituent part?

    This section has been revised as compared to proposed § 4.105, to clarify where and how to submit postmarketing safety reports for constituent part applicants (§ 4.104(a)) and combination product applicants (§ 4.104(b)).

    1. Section 4.104(a)

    Constituent part applicants must make all reports in accordance with the existing regulations applicable to that type of product (for example, making reports in accordance with the requirements of part 314 if the constituent part is a drug). Like an applicant for a non-combination product, a constituent part applicant holds an application for a single type of article (drug, device, or biological product) and is required to make postmarketing safety reports to FDA only for events concerning its product. Accordingly, these reports are most appropriately submitted to the same Agency components in the same manner as they would be by any applicant holding an application for the same type of product.

    2. Section 4.104(b)

    Combination product applicants are required to submit postmarketing safety reports concerning the combination product, including each of that combination product's constituent parts. The nature of the events and the appropriate Agency component to contact regarding them can vary however. In light of these considerations, § 4.104(b) draws a distinction between individual case study reports (ICSRs) (Ref. 3) for safety events experienced by individual users of combination products 4 and other safety reports.

    4 “Individual case study report” or ICSR is the internationally recognized term of art referring to reports of an adverse event, including a malfunction, experienced by an individual user of the product. This term is used to refer to such reports in international standards, and FDA implementing materials, regarding proper methods for submitting ICSRs to regulatory bodies for drugs, biologics, and devices.

    Section 4.104(b) requires that combination product applicants must submit all ICSRs (15-day reports, malfunction reports, serious injury or death reports, and 5-day reports) applicable to the combination product in the manner specified in the PMSR regulations associated with the application type for the combination product. See §§ 4.104(b)(1) and (2).

    This approach to submission of ICSRs by combination product applicants best assures the clarity, completeness, and efficiency of such reporting. Having all ICSRs submitted in the same manner to the Center with the lead for the application enables multiple reporting requirements for an event to be satisfied by submitting a single report and ensures that all such reports relating to the same event will be captured in a single series (see also response to Comment 24).

    In addition, under § 4.104(b), all BPDRs, field alert reports, and correction and removal reports must be submitted as described in the regulations from which these reporting requirements arise. The Agency currently receives these reports through differing mechanisms and Agency components based on such factors as logistical considerations and expertise to take the lead in assessing and addressing the issues raised in the report. For example, field alert reports for drugs currently must be submitted to FDA district offices as described in part 314, and BPDRs currently must be submitted to the Center for Biologics Evaluation and Research (CBER) or the Center for Drug Evaluation and Research (CDER) as appropriate based on which of these two Centers would ordinarily have jurisdiction over the type of biological product included in the combination product, as described in parts 600 and 606. These existing reporting systems are designed to assure timely, effective resolution of the matters raised in these reports.

    As discussed in response to Comment 28 and in section III.A., the Agency anticipates issuing a guidance to provide recommendations on how applicants may adopt more streamlined, effective approaches to making reports under this rule.

    F. Section 4.105—What are the postmarketing safety reporting recordkeeping requirements for your combination product or constituent part?

    As discussed more fully in section III, response to Comment 26, we revised this section (replacing § 4.106 in the proposed rule) to clarify and simplify the recordkeeping requirements associated with PMSR obligations for combination product applicants and constituent part applicants. Section 4.105(a) describes the recordkeeping requirements for constituent part applicants and § 4.105(b) describes the requirements for combination product applicants, as follows:

    1. Section 4.105(a)

    Constituent part applicants must comply with the recordkeeping requirements prescribed in the underlying PMSR regulations identified in § 4.102(b) as applicable to the product based on its application type. In addition, they must retain the records required in § 4.103 (information sharing) for the longest retention period (if more than one period applies) required for records under the PMSR regulations applicable to their constituent part (as explained in response to Comment 26).

    2. Section 4.105(b)

    Combination product applicants must maintain records relating to their postmarketing safety reports for whichever is the longest required record-keeping period under the PMSR requirements applicable to the combination product applicant under § 4.102. Because both parts 314 and 600 currently require recordkeeping for 10 years, at this time the recordkeeping period for combination product applicant PMSR records would be at least 10 years.

    Table 1—Requirements for BOTH Constituent Part Applicants and Combination Product Applicants 1 [See § 4.102(b) of this rule] Source of PMSR requirements Application Types ANDA/NDA BLA Device
  • application
  • Part 314 X Part 600 X Part 606 X Part 803 X Part 806 X 1 In addition to the requirements in table 1, constituent part applicants must share certain adverse event information with other constituent part applicant(s) for the combination product. (See § 4.103 of this rule).
    Table 2—Additional Requirements ONLY for Combination Product Applicants 1 [See § 4.102(c) of this rule] Combination product includes Reporting requirement Application Type ANDA/NDA BLA Device
  • application
  • Drug § 314.81, Field Alert Reports See table 1 X X § 314.80, 15-Day Reports (initial and followup) X X Biologic §§ 600.14 and 606.171, Biological Product Deviation Reports X See table 1 X § 600.80, 15-day Reports (initial and followup) X X Device §§ 803.53 and 803.56, 5-Day Reports (initial and supplemental or followup) X X See table 1 §§ 803.50 and 803.56, Malfunction Reports (initial and supplemental or followup) X X Part 806, Correction or Removal Reports and Records X X 1 In addition to the requirements in table 2, the rule addresses other reporting requirements for combination product applicants as follows: (1) Combination products that received marketing authorization under an NDA, ANDA, or BLA: Include a summary and analysis of malfunction (§§ 803.50 and 803.56) and 5-day (§§ 803.53 and 803.56) reports submitted during the report interval in the periodic safety reports (see § 4.102(d)(1)) and (2) combination products that received marketing authorization under a device application: Submit additional reports when notified by the Agency because FDA has determined the information is required to protect the public health (see § 4.102(d)(2)).
    III. Comments on the Proposed Rule

    We received comments from 15 entities and one individual on the proposed rule. Commenters included trade organizations and manufacturers of drugs, devices, biological products, and combination products. Many commenters sought clarification on particular points or recommended adjustments to specific aspects of the proposed rule. Several commenters, while supporting rulemaking to address PMSR for combination products, recommended alternative approaches as discussed in Comment 27.

    To make it easier to identify comments and our responses, the word “Comment” appears before the descriptions of the comments, and the word “Response” appears before our response. We have also numbered comments to help distinguish among them. The number assigned to each comment is purely for organizational purposes and does not signify relative value or importance of comments or the order in which they were received. Certain comments are grouped together under a single number because the subject matter of the comments was similar.

    A. Section 4.100—What is the scope of this subpart?

    (Comment 1) Some commenters sought clarification of safety reporting requirements for investigational combination products through guidance or expansion of the scope of the rule, including for investigational combination products that contain a legally marketed article as a constituent part. One commenter asked if the Agency is planning to publish guidance on this issue. One commenter asked that the Agency clearly lay out the responsibilities of the manufacturer of an approved product in the investigational setting.

    (Response 1) Safety reporting for investigational products is an important issue for combination products, just as it is for drugs, devices, and biological products. However, this rule only discusses the PMSR requirements for combination products that have received marketing authorization. As stated in § 4.100(b), this rule does not apply to investigational combination products. The safety reporting requirements for investigational new drugs are in 21 CFR 312.32, and the safety reporting requirements for investigational devices are in 21 CFR 812.150. The Agency intends to continue developing guidance relating to this topic for combination products. If you have questions regarding how to comply with the reporting requirements for your investigational combination product, please raise them with the review division in CDER, CBER, or the Center for Devices and Radiological Health (CDRH) that is responsible for reviewing your application, or with the Office of Combination Products (OCP) as needed.

    (Comment 2) Some commenters requested that the Agency clarify which entities and products are subject to this rule. Some commenters proposed clarifying that this rule applies only to application holders. Other commenters sought clarification of the rule's applicability to devices marketed under a 510(k) clearance and to non-applicants, including contract manufacturers. One commenter asked for clarification of whether the rule would apply to component suppliers. One commenter sought clarification of which entities have reporting requirements under this rule for combination products composed of constituent parts marketed under separate applications. One commenter proposed that the Agency prepare a comprehensive list of products by class, product code or other designations that are subject to this rule.

    (Response 2) As also discussed in section II (discussions of §§ 4.100 and 4.101), in light of comments received, we have amended this rule to clarify which entities it addresses and what PMSR requirements apply to them. We have clarified that this rule applies only to “combination product applicants” and “constituent part applicants,” as those terms are defined in § 4.101. We also have clarified the final rule to state which requirements apply to combination product applicants and which apply to constituent part applicants.

    Under § 4.101 of this rule, the term “applicant” is defined to mean a person holding an application (BLA, NDA, ANDA, PMA, HDE, PDP, de novo classification request or premarket notification (510(k)) submission) under which a combination product or constituent part has received marketing authorization (see also definitions for “application” and “device application”); “combination product” is defined to mean a product meeting the definition for this term under § 3.2(e); and the term “constituent part” is defined as in § 4.2 to mean a drug, device, or biological product that is part of a combination product. The term “combination product applicant” is defined to mean an applicant holding the application(s) for a combination product (i.e., either holding the application for the entire combination product or the applications for each constituent part—in some cases the constituent parts of a combination product are marketed under their own marketing authorizations, as might be the case for a cross-labeled combination product for example), and “constituent part applicant” is defined to mean an applicant for a constituent part of a combination product the constituent parts of which are marketed under applications held by different applicants. In other words, if a single entity holds the application(s) under which a combination product is marketed, that entity is the combination product applicant; there are no constituent part applicants for that combination product. If instead, one applicant receives marketing authorization to market a constituent part of a combination product and another applicant receives marketing authorization to market another constituent part of that combination product, each of those entities is a constituent part applicant for their constituent part of that combination product. Importers, component manufacturers and suppliers, and any other entities that do not meet the definition of combination product applicant or constituent part applicant, are not subject to this rule.5

    5 We note that all entities that are not subject to this rule but that have reporting requirements under other regulations must comply with those requirements, including, as appropriate, with respect to events relating to a combination product. For example, although they are not applicants under this rule, entities marketing unapproved combination products must comply with all applicable PMSR requirements, for instance under 21 CFR part 310, for their products. Similarly, all entities subject to PMSR requirements under parts 314, 600, 606, 803, and 806 must comply with those requirements including for events relating to a combination product.

    We note that non-applicants subject to reporting requirements under 314.80 and 600.80 may provide their reports to the applicant rather than the Agency. Similarly, non-applicants subject to reporting requirements under part 803 may request a reporting exemption from CDRH under § 803.19. Accordingly, entities that are not combination product applicants or constituent part applicants, as those terms are defined under this rule (importers, for example), who have reporting duties under part 803 in relation to a combination product may request a reporting exemption, subject to § 803.19. We intend to provide further information on these topics for combination products in guidance.

    To illustrate how these definitions are used to determine who is subject to this rule, take the example of a prefilled syringe that received marketing authorization under an NDA or ANDA held by entity A, which purchases the syringe components for this product from entity B, which manufactures the syringe components. Entity A is the only applicant for the combination product, and, therefore, is the combination product applicant and must comply with the provisions of this rule applicable to combination product applicants. There are no constituent part applicants for the combination product. Entity B has no reporting duties under this rule (nor does it have any under part 803 or 806 for the syringe components 6 ). (It bears noting that entity A is responsible not only for reporting but also for conducting any necessary quality investigations for the combination product as a whole and may need to coordinate with entity B for such investigations and to address safety issues relating to the device constituent part for the combination product.) If entity B were also to manufacture and separately market under a 510(k) complete, finished, empty syringes, not as part of a combination product, entity B would be subject to reporting requirements under parts 803 and 806, but would not be subject to this rule for this device. Entity A would remain the sole applicant for the combination product, i.e., the combination product applicant. Similarly, if entity B manufactured syringes to supply to entity A for inclusion in kits for which entity A received marketing authorization under an NDA or ANDA, entity A would still be the sole applicant for the combination product, i.e., the combination product applicant, since it holds the NDA or ANDA under which the kits received marketing authorization, and, therefore, only entity A would be subject to this rule.

    6 Parts 803 and 806 apply to, among others, device “manufacturers,” and under §§ 803.3 and 806.2, device “manufacturers” include entities that manufacture components which are devices that are ready to be used and are intended to be commercially distributed and intended to be used as is, or are processed by a licensed practitioner or other qualified person to meet the needs of a particular patient.

    To take another example, if entity C receives marketing authorization under a PMA or 510(k) to market an imaging device as a constituent part of a cross-labeled combination product, and entity D receives marketing authorization under an NDA or ANDA to market a contrast agent drug as a constituent part of that same cross-labeled combination product, then entities C and D are both constituent part applicants, and both are subject to the provisions of this rule applicable to constituent part applicants. There is no combination product applicant for this product.

    Regarding one commenter's request for the Agency to develop a comprehensive list of products subject to this rule, we note that combination products are marketed for diverse medical purposes and include a wide variety of constituent parts, making a comprehensive listing impractical to compile. The definition of combination product is provided at § 3.2(e), and additional information regarding product classification is available on the Web page for OCP. In addition, regulated entities may seek feedback from OCP regarding the classification of their products, including by submitting a request for designation (RFD) in accordance with part 3 to obtain a formal decision from the Agency of whether their product is a drug, device, biological product, or combination product. Guidance for how to prepare an RFD is available on OCP's Web page (http://www.fda.gov/CombinationProducts/default.htm).

    B. Section 4.101—How does FDA define key terms and phrases in this subpart?

    (Comment 3) One commenter thought we should clarify what we mean by “combination product,” and in particular whether we mean to include products that combine only two or more of the same type of article, such as a drug and a drug.

    (Response 3) This rule defines combination products as those products falling within the scope of § 3.2(e). Under § 3.2(e), a combination product must include: A drug and either a device or biological product; a device and either a drug or biological product; a biological product and either a drug or device; or a drug, device, and a biological product. A product that includes only multiple drugs, multiple devices, or multiple biological products is not a combination product as defined in § 3.2(e).

    (Comment 4) Some commenters proposed that we clarify what products fall within the scope of “cross-labeled” combination products as described in § 3.2(e)(3), with some noting that the preamble to the part 3 regulation (56 FR 58754, November 21, 1991) states that most drugs, devices, and biological products intended for concomitant use are not combination products. One commenter stated that the Agency must issue “guidance on cross-labeled combination products” before the effective date of this rule “for meaningful implementation of this rule.”

    (Response 4) While we disagree that we must issue guidance on cross-labeled combination products prior to the effective date for this final rule, we agree that clarifying when separately distributed articles constitute a combination product would be helpful. This issue may be relevant not only for purposes of postmarketing safety reporting, but to all aspects of the regulation of such combination products. Whether a drug, device, and/or biological product together constitute a cross-labeled combination product generally would be determined during the premarket review process, but sponsors may, for example, wish to clarify the matter earlier in product development. If sponsors have questions regarding whether a drug, device, and/or biological product that are intended to be separately distributed, but intended to be used with one another constitute a cross-labeled combination product, we encourage them to contact OCP. If sponsors wish to obtain a formal classification determination from the Agency, they may submit an RFD to OCP (see Comment 2).

    FDA intends to publish a guidance that provides recommendations on how to comply with the requirements under this rule for combination products, including cross-labeled combination products.

    (Comment 5) Two commenters noted that the definition of “constituent part” incorrectly cited § 3.1(e), a non-existent provision, rather than § 3.2(e), which is the citation for the “combination product” definition.

    (Response 5) We have corrected this error by revising the definition to cite to § 4.2 as “constituent part” is defined in that section.

    (Comment 6) Some commenters expressed concerns regarding the definition of “constituent part” for this rule and asked how constituent parts of combination products compare to components of devices. Some commenters specifically raised concerns that the definition of constituent part would result in certain entities, which are currently not subject to reporting requirements, becoming subject to PMSR requirements under this rule. Some commenters proposed revising the definition for “constituent part” and adding a definition for “component” in this rule to clarify that components of drugs, devices, and biological products are not constituent parts.

    (Response 6) The purpose of the term “constituent part” is to identify the drug, device, and/or biological products that are part of a combination product. We believe the questions and concerns raised in these comments are fully addressed by the revisions we have made to the rule. As discussed in sections II.A and B (discussions of §§ 4.100 and 4.101) and in response to Comment 2, we have included definitions of “combination product applicant” and “constituent part applicant,” and clarified that this rule applies only to these two categories of entities.

    The term “component” is defined elsewhere in Title 21 for drugs and devices (see 21 CFR parts 210, 212, and 820). Because the term “component” is not used in this rule, we determined it is not necessary to define the term as part of this rulemaking.

    C. Section 4.102—What reports must you submit to FDA for your combination product or constituent part?

    (Comment 7) Several commenters requested that the Agency clarify under what circumstances this rule might require the submission of multiple reports in relation to the same event. In this regard, some commenters sought clarification of what reports “supersede” others and under what circumstances the submission of one type of report applicable to a combination product would obviate the need to submit a second type of report for the same event. Another commenter sought clarification of reporting requirements for combination products comprised of constituent parts marketed under separate constituent part applications.

    (Response 7) Under this rule, combination product applicants and constituent part applicants must submit reports as required by the PMSR requirements applicable to that applicant under § 4.102. Constituent part applicants are subject to only one set of PMSR requirements under this rule (in addition to the duty to share information with other constituent part applicants for the combination product, in accordance with § 4.103 as discussed in section II.D). Specifically, constituent part applicants must comply only with the PMSR requirements listed under § 4.102(b) based on the application type for their constituent part (e.g., parts 803 and 806 PMSR requirements if the constituent part received marketing authorization under a device application). Combination product applicants also must comply with the PMSR requirements applicable to their combination product under § 4.102(b) based on the application type for their combination product. In addition, combination product applicants must comply with the PMSR requirements identified in § 4.102(c) as applicable based on the types of constituent parts (drug, device, and/or biological product) that the combination product includes.

    We have clarified when a single report may suffice to comply with more than one reporting requirement for combination product applicants.7 If a combination product applicant submits a report that satisfies multiple applicable reporting requirements, including all submission deadlines, for reports required to be submitted in the same manner, then the applicant does not need to submit any additional reports to satisfy those reporting requirements. As an example, a combination product applicant who holds an NDA for a drug-device combination product must submit both 15-day reports as described in § 314.80 and malfunction reports as described in § 803.50, for an event that triggers both duties. That applicant could satisfy both requirements by submitting a single report within 15 days that includes all of the information that would be required in both types of reports for the event.

    7 Constituent part applicants are subject only to the PMSR regulations applicable to their type of constituent part (drug, device, or biological product) (in addition to the duty to share information with other constituent part applicants for the combination product, in accordance with § 4.103 of this rule, as discussed elsewhere in this preamble). Accordingly, any circumstances under which they may be able to comply with more than one reporting requirement through a single report are identified in those PMSR regulations (see, e.g., § 806.10(f)).

    (Comment 8) Some commenters sought clarification of the standards for submitting a report under this rule. One commenter requested clarification of whether limitations established under §§ 314.80 and 600.80 for 15-day reporting requirements with respect to postmarketing studies apply to combination products under this rule. Other commenters sought clarification of the standard for when to submit an expedited report under § 314.80 or § 600.80, which state that events must be reported if “associated with” the use of the product, “whether or not considered” drug or biologic related. Other commenters requested clarification of how to interpret aspects of the device reporting standards in part 803, such as the meaning of “reasonably suggests” in relation to whether the event is reportable, the meaning of “unreasonable risk of substantial harm to the public health” in relation to 5-day reports, and the meaning of “caused or contributed,” a term defined under § 803.3.

    (Response 8) The standards in this rule for when to submit a report are those established in the underlying PMSR regulations listed in § 4.102(b) and (c), including any exceptions provided in those underlying regulations. The standards and definitions for the underlying PMSR requirements, such as the definition of “caused or contributed” in § 803.3, remain applicable for combination products and their constituent parts.

    For instance, if you are a combination product applicant for a drug-device combination product, in deciding whether you must submit a 15-day report for a serious, unlabeled adverse event, you must determine if the event was “associated with” the use of the combination product, and if so, you must submit the report regardless of whether you believe the combination product caused or contributed to the event. Similarly, in deciding whether you must submit a malfunction report, you must assess, among other things, whether the information “reasonably suggests” that the product malfunctioned. If the information does not “reasonably suggest” that a malfunction occurred, then a malfunction report would not be required.

    If you are a combination product applicant and your combination product received marketing authorization under a device application, in deciding whether you must submit a serious injury or death report, you must consider whether the information “reasonably suggests” that the combination product may have caused or contributed to the death or serious injury in which case you must submit a report even if the event does not trigger submittal of a 15-day report.

    In some cases, a report required under § 4.102(c) for a combination product applicant may address a constituent part; in others, it may address the combination product as a whole. For example, correction or removal that triggers a correction or removal report may involve the entire combination product. Bacteriological contamination or a significant change or deterioration to the drug constituent part that triggers a field alert report may relate to an aspect of manufacturing for the drug alone, or may also relate to an aspect of the manufacture of the combination product as a whole that is affecting the drug constituent part. A manufacturing deviation or other event that may affect the safety, purity, or potency of a biological product constituent part and trigger a BPDR may involve the biological product alone, or the combination product as a whole. In all cases, the report should fully present the issues, including with respect to each constituent part and the combination product as a whole, as applicable, to ensure an appropriate response to the event.

    (Comment 9) One commenter sought clarification of what adverse events would be considered “unexpected,” for purposes of §§ 314.80 and 600.80 with regard to combination products. Another commenter asked whether a serious adverse event that is expected under the drug labeling for a combination product and that does not involve a device malfunction should be reported in an expedited manner. In relation to these issues, other commenters also raised whether this rule will “require labeling specific to the combination product,” and whether a distinct understanding of “expectedness” would need to be developed with respect to combination products marketed under a device application as opposed to an NDA or BLA due to differences in product review and labeling.

    (Response 9) Under this rule, a serious adverse event could trigger a requirement for submission of a 15-day report as described in § 314.80 or § 600.80 by a combination product applicant or a drug or biological product constituent part applicant if the event is not listed in the current FDA-approved labeling for the combination product.

    While this rule does not establish any labeling requirements, we recognize that there is a question of what labeling is relevant to a determination of whether an adverse event is unexpected for purposes of 15-day reports described in §§ 314.80 and 600.80, if the constituent parts of the combination product have their own labeling.

    Our goal is to ensure timely, complete reporting without creating unnecessary redundancy of reporting. Combination product labeling must meet the labeling requirements for each constituent part, including all required information regarding the risks associated with the use of the combination product. The term “expectedness” for purposes of § 314.80 or § 600.80 should be interpreted in the same manner regardless of the type of application(s) under which the combination product received marketing authorization.

    Accordingly, in determining whether an adverse experience is unexpected, it is appropriate to consider all of the FDA-approved labeling for the combination product. For example, if the constituent parts of a cross-labeled combination product have their own labeling, and the event is addressed in the labeling for either constituent part, the event is expected for the combination product.

    (Comment 10) One commenter proposed that the requirements for submitting postmarketing 15-day reports and MDRs be consolidated for combination products, arguing that this would eliminate duplicative reporting as much as possible and improve efficiency. Other commenters proposed applying only the reporting requirements associated with the application type if it is unclear which constituent part or parts contributed to the event.

    (Response 10) We agree with the goal of consolidating requirements and avoiding unnecessary redundancy in reporting for combination products. To this end, we have not required submission of serious injury and death reports under part 803 for combination products that received marketing authorization under a BLA, NDA, or ANDA and that include a device constituent part, based on the premise that the requirements of §§ 600.80 and 314.80, respectively, ensure timely reporting of such events for such combination products. In addition, as discussed in section II.C, discussion of § 4.102(c), we have revised the requirement for combination product applicants to submit 15-day reports to permit these reports to be submitted within 30 days for combination products that received marketing authorization under a device application, so that the timing for these reports corresponds to the timing for related MDRs for such combination products, specifically serious injury, death, and malfunction reports. Further, we have clarified that applicants need not submit multiple types of reports for the same event if they are able to satisfy the requirements of each in a single report.

    As discussed in the preamble to the proposed rule, there are certain significant differences in the PMSR regulations for drugs, devices, and biological products, that address distinct characteristics and potential safety issues associated with the particular type of product, and the public health benefit of these unique provisions would be lost if the combination product were subject solely to the reporting requirements associated with the application type (74 FR 50744 at 50746). For example, malfunction reports can address distinct issues that are not captured by other reporting requirements and need to be submitted for all combination products that include a device constituent part. Specifically, malfunction reports ensure that the Agency receives notice of malfunctions of combination products and device constituent parts if that product or a similar one marketed by that applicant would be likely to cause or contribute to a death or serious injury if the malfunction were to recur.

    (Comment 11) One commenter argued that the proposed rule included provisions that could result in inconsistent reporting requirements. This commenter stated that an applicant for a drug-device combination product marketed under a single application would have a duty to address adverse events caused by the device under 15-day reporting requirements while, if a drug-device combination product were marketed under separate applications for the drug and device, the 15-day reporting requirements would extend only to the adverse events caused by the drug.

    (Response 11) This final rule clarifies these reporting requirements, which we do not consider to be inconsistent. As the commenter indicates, 15-day reports are required for combination product applicants and for drug and biological product constituent part applicants. The scope of these reporting requirements depends on the type of product (drug, biological product, device, combination product) that is marketed by the applicant. A combination product applicant must report unexpected serious adverse events associated with its product, i.e., the combination product. A drug or biological product constituent part applicant must report unexpected serious adverse events associated with its product, i.e., the drug or biological product, and also must share information it receives with the other constituent part applicant(s) for that combination product in accordance with § 4.103. The other constituent part applicant(s) then must comply with any applicable PMSR requirements for its product with respect to that event, including preparation and submission of reports as appropriate.

    (Comment 12) One commenter sought clarification of when the clock starts for a 5-day report (as described in §§ 803.3 and 803.53).

    (Response 12) This rule does not affect or change when the clock starts for reporting requirements. The clock starts for a 5-day report for a combination product as it would for a device. As required under § 803.53(a), the clock begins when you become aware that a reportable event necessitates remedial action to prevent an unreasonable risk of substantial harm to the public health. Or, as required under § 803.53(b), the clock begins when you receive a written request from FDA for the submission of a 5-day report. Additional information on the timing requirements associated with 5-day reports is in the CDRH guidance document “Medical Device Reporting for Manufacturers” available at http://www.fda.gov/downloads/MedicalDevices/DeviceRegulationandGuidance/GuidanceDocuments/ucm359566.pdf.

    (Comment 13) One commenter proposed BPDRs as an additional type of required report to include among the specified required reports listed in proposed § 4.103(b), arguing that BPDRs serve a purpose similar to field alert reports and, therefore, would be appropriate to include as well.

    (Response 13) We agree with this comment. To ensure the completeness of postmarketing safety reports for combination products that include a biological product constituent part, including combination products that received marketing authorization under an NDA, ANDA, or device application, we are explicitly including BPDRs under § 4.102(c). Similar to field alert reports for drugs, BPDRs address events associated with manufacturing that represent a deviation from current good manufacturing practice, applicable regulations, applicable standards or established specifications, or represent an unexpected or unforeseeable event that may affect the safety, purity, or potency of the product. Therefore, we are adding BPDRs to the list of types of reports under § 4.102(c) that a combination product applicant must submit if the combination product includes a biological product constituent part.

    (Comment 14) One commenter sought clarification of the application of part 806 device correction and removal reporting requirements within the proposed PMSR system for combination products. The commenter also sought confirmation that part 806 reporting requirements can be met for combination products through part 803 reporting, as they can for devices that are not constituent parts of combination products.

    (Response 14) To address this comment, we have expressly incorporated under § 4.102(c) correction and removal reporting described in § 806.10 and associated recordkeeping requirements described in § 806.20. We have made this change to provide clarity, promote efficiency, and ensure the completeness of postmarketing safety reports for combination products that include a device constituent part.

    Part 806 implements, in part, section 519(g) of the FD&C Act (21 U.S.C. 360i), which was enacted due to Congressional concern that device manufacturers were carrying out product corrections or removals without notifying FDA or not doing so in a timely fashion (H.R. Rep. No. 101-808, at 29 (1990); S. Rep. No. 101-513, at 23 (1990)). Congress explained that industry's failure to report corrections and removals, particularly those undertaken to reduce risks associated with the use of a device, “denies the agency the opportunity to fulfill its public health responsibilities by evaluating device-related problems and the adequacy of corrective actions” (S. Rep. No. 101-513, at 23), and “has seriously interfered with the FDA's ability to take prompt action against potentially dangerous devices” (H. R. Rep. No. 101-808, at 29).

    FDA believes that correction and removal reporting and recordkeeping for combination products containing a device constituent part is necessary to protect the public health as envisioned by Congress, by ensuring that the Agency has current and complete information regarding those actions taken by applicants to reduce risks to health caused by their products. Reports of such actions will improve the Agency's ability to evaluate problems and to take prompt action against potentially dangerous combination products, regardless of the type of application under which the combination product received marketing authorization.

    As for all of the PMSR requirements incorporated into this rule by reference, the standards for how to report under § 806.10 and for recordkeeping under § 806.20 are not affected by this rule, including not having to submit an 806 report if the correction or removal is addressed in a report submitted under part 803 (§ 806.10(f)). To enable efficient reporting and avoid unnecessarily redundant reports, this rule provides that part 803 reporting requirements can be satisfied through submission of drug or biological product reports, as explained in response to comment 7. Similarly, part 806 reporting requirements also can be satisfied through submission of an MDR or 15-day report, so long as the report includes all of the information needed to comply with the requirements of part 806 and is filed within 10 working days of initiating the correction or removal, as described in § 806.10.

    In circumstances in which a 15-day report or MDR is not triggered but reporting under part 806 is required, reports of corrections or removals should be sent to the FDA in the same manner as for other such reports unless otherwise specified by the Agency. Currently, reports required under part 806 are submitted to the district office for the district in which the reporting facility is located, on the basis that the district office can best monitor the firm's removal or corrections activities in a timely fashion. Combination product applicants for combination products with a device constituent part who initiate a correction or removal that is not required to be reported to FDA under 806.10, must maintain a record of the correction or removal as described in § 806.20.

    (Comment 15) Some commenters sought clarification of the applicability of section 227 of the Food and Drug Administration Amendments Act of 2007 (FDAAA) concerning the reporting of malfunctions to FDA, including the use of summary reporting, for Class I devices and for Class II devices that are not permanently implantable, life supporting, or life sustaining. Some commentators sought clarification of how the status of “life-supporting” or “life-sustaining” would apply to combination products, and whether the intended use of the combination product would determine the status of the device constituent part. One commenter sought clarification of how such a class-based approach would be applied to combination products approved under NDA or BLA, for which no express classification may have been made for the device constituent part.

    (Response 15) FDA issued a notice in the Federal Register (76 FR 12743, March 8, 2011) clarifying that Class I and II device manufacturers and importers must continue to submit malfunction reports in accordance with part 803, pending future action by FDA to address the malfunction reporting requirements for Class I and Class II devices addressed in FDAAA. Accordingly, combination product applicants for combination products that include a device constituent part, and constituent part applicants for device constituent parts, must comply with part 803 requirements as described in this rule pending such further Agency action. At this time, therefore, malfunction reporting duties are the same for all combination products that include a device constituent part, regardless of whether the combination product or device constituent part would be considered life-supporting or life-sustaining, and regardless of whether the device constituent part would be considered a Class I, II, or III device.

    (Comment 16) One commenter sought clarification of whether the periodic reports addressed in proposed § 4.103(c) should be considered “expedited” reports for purposes of this rule.

    (Response 16) FDA has retitled this provision to “Other reporting requirements for combination product applicants” for clarity because it addresses periodic safety reports for drug and biologic-led combination products and also addresses under what circumstances additional reports for device-led combination products are required upon Agency request. This rule does not modify the timing of periodic safety reports. The purpose of § 4.102(d) is to clarify which combination product applicants must submit periodic safety reports and other safety reports, and what information they must include in such reports. The intent of § 4.102(d), in conjunction with § 4.102(a), (b), and (c) is to ensure that the Agency obtains complete, timely postmarketing safety information regarding combination products while avoiding unnecessary burden to applicants.

    (Comment 17) One commenter proposed the reorganization of proposed 4.103(b) to parallel the structure of § 4.103(a).

    (Response 17) We have not adopted this approach because § 4.102(c) is intended to address a different issue than § 4.102(b). Section 4.102(b) (like proposed § 4.103(a)) addresses requirements that constituent part applicants and combination product applicants must satisfy for their marketed products depending upon the type of application under which it received marketing authorization, and structuring the provision based on the type of application that the applicant holds provides a clear, efficient way to identify such requirements. In contrast, the purpose of § 4.102(c) (like proposed § 4.103(b)) is to state which additional requirements a combination product applicant must satisfy based on the types of constituent parts included in the combination product, which are most clearly and efficiently listed by constituent part type (drug, biological product, or device).

    D. Section 4.103—What information must you share with other constituent part applicants for the combination product?

    (Comment 18) Some commenters requested clarification of whether proposed § 4.104(a) applied if there were a single application holder for the combination product but the combination product included an article approved under another application held by another entity for independent marketing not related to the combination product. Other commenters asked for clarification of which applicants for constituent parts of combination products could be subject to proposed § 4.104(a) and (b) if the combination product were not approved under a single application. Some commenters proposed an approach under which, if there is a single application for the combination product, the holder of that application would report to FDA in accordance with proposed § 4.103, and FDA would then decide whether any other application holders for articles included in the combination product should be notified and whether to seek additional reports from them.

    (Response 18) As reflected in the preamble to the proposed rule (see 74 FR 50744 at 50749 to 50750), proposed § 4.104(a) was intended to apply if the constituent parts of the combination product were being marketed by different entities, including when the constituent parts received marketing authorization under separate applications held by different applicants. As explained in the response to Comment 2, we have revised the rule to apply to combination product applicants and constituent part applicants, in part to clarify which entities are subject to it. Accordingly, we have revised this provision to clarify that it applies solely to constituent part applicants. Section 4.103 of this final rule is not intended to establish any duties for entities who hold a marketing authorization to market a product not as part of a combination product, even if the same article is part of a combination product for which another entity received marketing authorization (e.g., the second entity might have combined the article with another product to make a co-packaged or single-entity combination product, or market the article for a new use with another product as a cross-labeled combination product).

    For example, if entity A holds an approved application to market a cross-labeled combination product that includes a device and a drug, and entity B holds an approved application to market the drug for a different use (i.e., not as part of the combination product), then entity A would be the combination product applicant for that combination product, and neither entity A nor B would be a constituent part applicant for that combination product. Therefore, § 4.103 would not require either entity A or B to share information with the other.

    In contrast, if entity A holds an approved PMA to market a device as one constituent part of a cross-labeled combination product (i.e., entity A is the constituent part applicant for the device constituent part of the combination product), and entity B holds an approved NDA to market a drug as the other constituent part of that combination product (i.e., entity B is the constituent part applicant for the drug constituent part of the combination product), then § 4.103 would require both entities A and B to share postmarketing safety information with each other for the specified types of events relating to that combination product.

    Regarding the issue of which entities would be subject to proposed § 4.104(b), we have decided to eliminate the provision as unnecessary. Constituent part applicants that receive information from another constituent part applicant must comply with the same duties under § 4.102(b) with respect to this information as they must with respect to any information they receive regarding a postmarketing safety issue for their product, including the duty to submit postmarketing safety reports as required.

    (Comment 19) Some commenters argued that the 5-day deadline under proposed § 4.104(a) for information sharing was too short. Some commenters recommended instead tying the timeframe to the nature of the event. Some argued that it is not warranted or useful to share information automatically within a 5-day timeframe because it leaves entities little time to evaluate the information before sharing it and could result in unnecessary redundancy of reporting.

    (Response 19) We disagree with these comments. The provision calls for sharing information that the constituent part applicant receives regarding an adverse event relating to the combination product, and does not require the applicant to prepare a report in accordance with any of the regulatory reporting requirements established under parts 314, 600, 606, 803, or 806. The duty under § 4.103 does not require a constituent part applicant to analyze, investigate, or organize the information or take any other actions beyond forwarding the information as received to the other constituent part applicant(s) for the combination product and maintaining certain records. Accordingly, we believe 5 calendar days is a reasonable deadline that does not impose undue burden, while enabling timely reporting by the constituent part applicant(s) with whom the information is shared.

    Such an expedited sharing of information is important to ensure timely, complete reporting with regard to adverse events that may have been brought to the attention of only one constituent part applicant for a combination product. Enabling each constituent part applicant to review in a timely manner the information related to the combination product enhances efficiency and thoroughness of reporting because each constituent part applicant evaluates the information with respect to its own constituent part and with regard to the reporting requirements applicable to that type of constituent part.

    (Comment 20) Some commenters stated that the information sharing requirements of proposed § 4.104 should be eliminated; some said these requirements are unnecessary depending on the nature of the event, and likely to produce unnecessary, duplicative reporting. Some commenters proposed that the information sharing requirements under proposed § 4.104 should apply only if the event is potentially reportable and that proposed § 4.104(a) should not apply if the applicant determines that the event does not concern the other constituent part(s) of the combination product. Other commenters proposed that if it can be determined that the event is attributable to only one constituent part, then reporting requirements should apply only to the application holder for that constituent part. Some commenters proposed that the rule be revised such that, in the event that constituent parts of a combination product are being marketed under separate applications, and it is unclear which constituent part(s) contributed to the event, the rule would require compliance only with the reporting requirements for the constituent part providing the primary mode of action for the combination product.8 One commenter argued that requiring separate reporting to the centers responsible for each constituent part would be overly burdensome. Some commenters sought clarification for when an applicant should report to another applicant or to FDA under proposed § 4.104(a). Some commenters requested clarification regarding when FDA would notify application holder(s) for the constituent part(s) of a combination product if FDA receives information from another application holder for that combination product. One commenter proposed eliminating the option of sharing the information with FDA arguing that including FDA in the process would slow communications and not provide any benefit. One commenter proposed that subsequent information received relating to the same event be shared only with FDA or with another applicant in the same time-frame as a report would be required to be submitted to FDA.

    8 The term “primary mode of action” is defined at § 3.2 as the mode of action that provides the most important therapeutic action of the combination product, i.e., that is expected to make the greatest contribution to the overall therapeutic effects of the combination product.

    (Response 20) The best way for the Agency to receive complete reports for combination products is to ensure that each constituent part applicant has an opportunity to review the information received regarding the specified types of events (serious injuries, deaths, and other adverse events) for the combination product. Accordingly, we disagree with the proposals to narrow or eliminate the information sharing requirement. We do not agree this requirement will produce unnecessarily duplicative reporting. The trigger for a constituent part applicant to submit a report to the Agency is not the mere act of receiving information but a determination that the event is reportable under the PMSR requirements applicable to that applicant. The Agency may receive multiple reports regarding the same event because of § 4.103 (formerly § 4.104 in the proposed rule), but this approach ensures that the Agency has the benefit of each constituent part applicant's expertise and familiarity regarding its own constituent part in assessing the information with respect to that constituent part.

    Regarding the issue of sharing information with FDA as opposed to other constituent part applicants, we have eliminated the option of sharing information with FDA as unnecessary and inefficient. We agree that timely, complete reporting by each constituent part applicant is best assured by having constituent part applicants share information they receive directly with one another.

    We also agree that when any constituent part applicant shares information relating to an event with the other constituent part applicant(s), the information sharing duty ends with respect to that event. When information is shared, each constituent part applicant must investigate and report to the Agency, under the applicable PMSR requirements, regarding the event as they would for any event for which they receive information. The constituent part applicants may find it helpful to share with one another additional and followup information they receive or develop relating to the event, but this is not required by this rule.

    (Comment 21) Some commenters stated that disclosure of event information to another company might involve disclosure of confidential and proprietary information. One commenter proposed that the information be shared with the other applicant if practicable and if it does not raise concerns regarding confidentiality or proprietary information.

    (Response 21) Section 4.103 does not require the sharing of trade secret or confidential commercial information with other constituent part applicants. Further, we have revised this section to specify that the information required to be shared concern events that involve a death or serious injury as described in § 803.3, or an adverse experience as described in § 314.80(a) or § 600.80(a). Such information is likely to be received from health care facilities, consumers, and other sources, and therefore, unlikely to contain trade secret or confidential commercial information.

    In regard to the Federal Health Insurance Portability and Accountability Act (HIPAA), we note that HIPAA only applies to covered entities (i.e., health plans, covered health care providers, and health care clearinghouses), and their business associates, and thus is unlikely to apply to constituent part applicants. Moreover, even if a constituent part applicant is a HIPAA covered entity or business associate, we note that HIPAA permits the disclosure of protected health information (PHI), such as information that identifies a particular patient, if such disclosures are required by other law. The HIPAA Privacy Rule permits the use or disclosure of PHI “to the extent that such use or disclosure is required by law and the use or disclosure complies with and is limited to the relevant requirements of such law.” 45 CFR 164.512(a)(1). Because § 4.103 of this rule requires constituent part applicants to share with each other information received, including PHI, regarding certain events related to the combination product, a constituent part applicant, which is subject to HIPAA, would be permitted by HIPAA to make such disclosure.

    (Comment 22) Some commenters sought clarification of the start time for meeting the reporting deadlines under proposed § 4.104(b). One commenter recommended that it be the day the information is received from the reporter subject to proposed § 4.104(a).

    (Response 22) While the content of proposed § 4.104(b) has been removed from the rule as unnecessary, we note that the start time for determining the submission deadline for postmarketing safety reports is the same as for information received from any other source, and depends on the type of report and the regulation from which the requirement for the report arises.

    (Comment 23) Some commenters asked for the Agency to provide examples of the application of proposed § 4.104, including guidance on what information to include in reports under this provision. One commenter asked for guidance on the process for submitting information to the Agency under proposed § 4.104.

    (Response 23) Section 4.103 requires the transmittal of information received. Constituent part applicants do not need to modify, organize, or evaluate the information; they must only forward the information to the other constituent part applicant(s) for the combination product. As discussed in Comment 18, we have eliminated the alternative of sharing the information with FDA as unnecessary and inefficient. We intend to provide additional information regarding how to comply with § 4.103 in guidance.

    E. Section 4.104—How and where must you submit postmarketing safety reports for your combination product or constituent part?

    (Comment 24) Some commenters sought clarification of how to comply with the submission requirements for different types of reports for a combination product. One commenter proposed that the rule expressly state reports be submitted to “the approved application” if there is only one reporter for the combination product. Another proposed that reports for a combination product marketed under one application be submitted to the lead center, while those for combination products marketed under separate applications for different constituent parts in some, but not all, cases be submitted to the center responsible for the particular constituent part's application. One commenter noted a need to clarify how to make electronic submissions for combination products.

    (Response 24) As discussed in section II.E (discussion of § 4.104), we have revised the rule to clarify how and where to submit postmarketing safety reports for constituent part applicants and for combination product applicants. In keeping with comments received, § 4.104(a) requires constituent part applicants to submit their reports in the same manner as any other applicant holding the same kind of application for a product (e.g., a constituent part applicant holding a PMA for a device constituent part must submit reports in the same manner as any other applicant holding a PMA for a device).

    We have drawn a distinction between types of postmarketing safety reports submitted by combination product applicants. With regard to ICSRs, we have adopted an approach consistent with comments suggesting that reports be submitted to the lead center and in accordance with the procedures associated with the application type for the combination product. Specifically, § 4.104(b) requires such combination product applicants to submit 5-day, 15-day, and malfunction reports, if required for their product, in the manner described in the PMSR regulations associated with the application type for the combination product. For example, if the combination product received marketing authorization under an NDA, then 5-day, 15-day, and malfunction reports, and all followup reports, would be submitted how and where described in part 314 for 15-day reports and followup reports to them. This approach promotes efficiency and ensures that all such reports relating to the same event are pooled together, and that multiple ICSR reporting requirements for the same event can be satisfied through a single submission (so long as that submission meets the content and deadlines for each reporting requirement).

    At the same time, it is appropriate for specific components of the Agency to have the lead for addressing certain distinct types of reports, in light of such factors as the issues raised in the reports, logistical considerations for Agency response, and efficient engagement of appropriate Agency expertise. Specifically, correction or removal reports, field alert reports, and BPDRs are currently directed to specific Agency offices to ensure efficient, effective assessment and response. Accordingly, under § 4.104(b), all combination product applicants must direct field alert reports and BPDRs to the same Agency components that currently receive them, in accordance with the underlying regulations for these reports. For example, if the combination product includes a biological product, BPDRs must be submitted to the appropriate component within CDER or CBER in accordance with parts 600 and 606, based upon which of these two Centers would ordinarily have jurisdiction over the biological product included in the combination product. Part 806 does not specify where to submit correction or removal reports. Accordingly, neither does this rule, but applicants currently should submit them to the appropriate FDA district office, unless the information is included in an ICSR for the event, as explained in response to Comment 14. See Recalls, Corrections and Removals (Devices) (http://www.fda.gov/medicaldevices/deviceregulationandguidance/postmarketrequirements/recallscorrectionsandremovals/default.htm).

    The Agency intends to provide guidance concerning procedural and technical details of complying with these requirements, including how to comply with the Centers' electronic reporting requirements. We seek to take best advantage of information technology and other resources to maximize the benefit of PMSR while minimizing the burden.

    (Comment 25) Several commenters sought guidance regarding the content, format, and completeness of applicable forms, and appropriate terminology to use with respect to different types of events and constituent parts for combination products.

    (Response 25) Applicants should provide relevant information in as complete and clear a manner as possible, consistent with the parameters of the FDA form. Also, we intend to update relevant FDA forms, if appropriate, including the instructions for how to complete them, and to develop guidance that provides recommendations for meeting PMSR requirements under this rule.

    F. Section 4.105—What are the postmarketing safety reporting recordkeeping requirements for your combination product or constituent part?

    (Comment 26) A commenter proposed that the same recordkeeping requirements apply to all types of reports for a combination product.

    (Response 26) We agree with the premise that a uniform set of record retention requirements apply to all reports relating to a combination product marketed by a single applicant, i.e., a combination product applicant. Accordingly, § 4.105(b) requires that combination product applicants maintain all PMSR records for the longest time period established in the recordkeeping requirements associated with the PMSR provisions applicable to the combination product. This approach allows combination product applicants to maintain all these PMSR records for a product under one record retention scheme, and helps ensure that potentially interrelated records all remain available for events and for the combination product. Because both parts 314 and 600 currently require record retention for 10 years, at this time, all combination product applicants must retain PMSR records for at least 10 years.

    In contrast to combination product applicants, constituent part applicants market only a drug, device, or biological product rather than a complete combination product. This distinction is acknowledged and reflected in the approach taken throughout the rule in establishing PMSR requirements for constituent part applicants. The requirements for record retention by constituent part applicants align with the overall approach of the rule. Specifically, § 4.105(a)(1) requires that constituent part applicants comply with the underlying recordkeeping requirements, including timeframes, established in the PMSR requirements identified in § 4.102(b) as applicable based on their product's application type. This ensures that constituent part applicants comply with the same requirements as any other applicant marketing a drug, device, or biological product.

    The essential difference between constituent part applicants and other applicants for drugs, devices, and biological products is the distinct relationship of constituent part applicants' products to one another as parts of a combination product. The information sharing requirements of § 4.103 reflect this distinct relationship and the overarching need for coordination between constituent part applicants to ensure the safety and effectiveness of the combination product. As explained in section II (discussion of § 4.103), § 4.103(b) includes an explicit recordkeeping requirement in relation to the information constituent part applicants are required to share with one another under § 4.103(a). Section 4.103 is intended to ensure complete, timely reporting for the combination product as a whole. To support this goal, while at the same time aligning the record retention requirement for the records required under § 4.103(b) with the overall approach of this rule for constituent part applicants, § 4.105(a)(2) requires constituent part applicants to maintain the specified records of information shared for the retention period established in the PMSR recordkeeping requirements for that constituent part applicant's constituent part if there is only one period established, and the longest recordkeeping requirement established in those requirements if those requirements establish more than one record retention period. We believe that this retention period will ensure that the information remains available to the applicants and the Agency for a sufficiently long period to inform investigation of events and responses to them for the combination product, and enable the Agency to assess compliance with § 4.103, without imposing undue burden on constituent part applicants. This approach also avoids the complexities of tying the retention period for records relating to the information sharing provision to the record retention requirements applicable to the other constituent part applicant(s).

    G. Alternate Approaches

    (Comment 27) Several commenters proposed that the Agency adopt a wholly different PMSR approach for combination products, with some supporting the Agency's proposed approach as an interim measure until a unified framework is developed either for combination products in particular or for all FDA-regulated medical products. Some commenters proposed adopting the most stringent set of PMSR requirements applicable to the combination product. Others called for developing a harmonized approach for combination products, with one commenter calling for a public meeting to address the issue and another for such a system to be put in place after a single reporting porthole is established for all regulated products. One commenter called for FDA to develop a PMSR system for combination products consistent with Global Harmonization Task Force guidelines, International Organization for Standardization standards, and European Commission guidelines. This comment emphasized that such other approaches rely on the “primary intended action” of the combination product to determine what PMSR requirements should apply. Some commenters recommended applying only the reporting requirements applicable to the application type. One commenter emphasized challenges of complying with multiple reporting systems.

    (Response 27) The Agency has considered alternate approaches to PMSR for combination products, including in relation to the public hearing held on November 25, 2002, and the workshop held on July 8, 2003. We have considered such options and presented in the preamble (74 FR 50744 at 50745 to 50747) the Agency's reasons for pursuing the approach described in the proposed rule. In finalizing this rule, FDA again determined that the approach described in this rule allows FDA to receive complete, timely postmarketing safety information regarding combination products, which is necessary to assure the continued safety and effectiveness of such products, using established standards and systems, while minimizing unnecessary duplication and burdens on combination product and constituent part applicants.

    H. Guidance and Agency Internal Coordination and Training

    (Comment 28) Various commenters requested that the Agency address implementation of this rule through guidance. Commenters noted the importance of ensuring that this rule is as clear as possible. Most commenters requested that the guidance present how the rule would apply to different types of combination products and different types of events. Several commenters requested that this guidance include a decision tree, flow charts, tables, algorithm, or other organizational and explanatory tools to clarify how to comply with the reporting requirements applicable to a combination product. One commenter asked for guidance on whether to cross-reference reports submitted to different locations, such as field alert reports and 15-day reports. Some commenters proposed that the Agency issue guidance prior to publication of this rule. One commenter called for the guidance to address how Agency personnel will coordinate to ensure compliance and how the Agency will monitor implementation of this rule's requirements. One commenter called for the Agency to ensure that the lead center has appropriate expertise to address adverse event reports for a combination product and that training, guidance, and cross-assignment of staff might be helpful in this regard. Another commenter proposed that the Agency take appropriate measures to ensure timely, effective communication between Agency components with respect to postmarketing safety reports for combination products. Some commenters also noted the importance of appropriate training and other Agency personnel considerations.

    (Response 28) We intend to publish guidance that provides recommendations on how to comply with the requirements under this rule for combination product applicants and constituent part applicants, including such matters as cross-referencing of reports. We appreciate the comments received on this issue and look forward to further feedback in response to the publication of this final rule and of the draft guidance we may issue. With regard to the requests that we issue guidance prior to issuance of this final rule, we clarified and revised the rule in certain respects, and we did not believe it would be appropriate to anticipate the content of this final rule by publishing guidance concerning its content prior to its finalization.

    We agree that appropriate training of Agency staff and timely, effective coordination among Agency components to address postmarketing safety reports for combination products are important efforts that the Agency continues to address.

    I. Effective Date and Compliance Dates

    (Comment 29) Some commenters proposed that the Agency delay the effective date for this rule, arguing that 180 days would not provide sufficient time to take steps to come into compliance, including to develop, validate, and implement new systems, alter procedures and commercial arrangements, and train staff as needed to comply with this rule's requirements. Some proposed making the effective date 1 year after issuance. One commenter proposed 2 years.

    (Response 29) We do not agree that it would be appropriate to delay the effective date of this rule. However, in light of these comments, and in consideration of the costs of this rule as discussed in section VIII, we have decided to extend the compliance date with respect to certain provisions of the rule for combination product applicants and constituent part applicants, for a period of 18 months following the effective date of this rule.

    The duties for both combination product and constituent part applicants under § 4.102(a) and (b), and for constituent part applicants under §§ 4.104(a) and 4.105(a)(1) are generally the same as for any other entity holding such an application for its product, and we expect all applicants subject to this rule already to be in compliance with these provisions for their products as these provisions generally refer to existing regulations that such applicants have generally followed (see 74 FR 50744 at 50745). Accordingly, the effective date for the rule is 30 days after the date of its publication and the compliance date for these provisions is the same as the effective date for this rule. However, with respect to the requirements of § 4.102(c) and (d) for combination product applicants, the requirements of §§ 4.103 and 4.105(a)(2) for constituent part applicants, and the requirements of §§ 4.104(b) and 4.105(b) for combination product applicants, the compliance date will be 18 months following the effective date of this rule.

    J. Miscellaneous

    (Comment 30) Some comments concerned coordination of various Agency activities related to adverse events including then pending Agency rulemakings concerning electronic reporting, adverse event report database management and searchability, forms referenced in this and other rulemakings, and harmonization efforts with foreign regulatory agencies.

    (Response 30) The Agency has taken into account such coordination considerations. Pending FDA rulemakings were one consideration in deciding to streamline this rule by using cross-references to requirements of the underlying regulations listed in § 4.102, without repeating the substance of those requirements. As noted in section II (see discussion of § 4.101), this approach will minimize the need to revise this regulation should the underlying regulations be amended. Similar considerations have informed our determination to reference in § 4.104 the reporting procedures required in the underlying regulations. As discussed in Response 25, we intend to update relevant FDA forms, if appropriate, including the instructions for how to complete them, and to develop guidance that provides recommendations for meeting PMSR requirements under this rule.

    With respect to international harmonization, we remain committed to such efforts, including with respect to PMSR requirements for combination products. A practical challenge for combination products in particular is that international collaboration and harmonization efforts are at an early stage for these products. At the same time, there is a current need to clarify FDA's PMSR requirements for this class of products. We have taken an approach that integrates underlying PMSR approaches for drugs, devices, and biological products, which have benefited in various respects from international harmonization efforts. We are committed to continuing to work with our foreign counterparts on PMSR and other issues for combination products.

    IV. Legal Authority

    The Agency derives its authority to issue the regulations in proposed part 4 subpart B from 21 U.S.C. 321, 331, 351, 352, 353, 355, 360, 360b-360f, 360h-360j, 360l, 360hh-360ss, 360aaa-360bbb, 371(a), 372-374, 379e, 381, 383, and 394, and 42 U.S.C. 216, 262, 263a, 264, and 271. For a drug approved under an NDA or an ANDA, section 505(k) of the FD&C Act (21 U.S.C. 355) requires the applicant to submit reports concerning clinical experience and other data or information with respect to the drug to FDA and to establish and maintain related records. Section 505(k) provides the Agency with authority to specify by regulation which data or information must be submitted in such reports. FDA used this statutory authority, among others, in issuing the Agency's regulation concerning postmarketing reporting of adverse drug experiences and other postmarketing reports including field alert reports. The regulations for postmarketing reporting of adverse drug experiences and for field alert reports are set forth in § 314.80 and § 314.81, respectively.

    For a device, section 519 of the FD&C Act requires manufacturers and importers to establish and maintain records, make reports, and provide information, as FDA may reasonably require to assure that such device is not adulterated or misbranded and to otherwise assure its safety and effectiveness. FDA utilized this statutory authority, in addition to other authorities, in issuing the MDR regulation and the correction and removal regulation, found in parts 803 and 806, respectively.

    For a biological product, section 351 of the Public Health Service Act (PHS Act) (42 U.S.C. 262) requires FDA to approve a BLA on the basis of a demonstration that the product is safe, pure, and potent (section 351(a)(2)(C) of the PHS Act). Section 351(a)(2)(A) of the PHS Act requires FDA to establish by regulation requirements for the approval, suspension, and revocation of BLAs. Section 351(b) of the PHS Act also prohibits falsely labeling a biological product. FDA used section 351of the PHS Act as statutory authority, along with other sources of statutory authority, in issuing the postmarketing reporting of adverse experiences regulation for biological products. This regulation is found in § 600.80. In proposing § 600.80, FDA indicated that information made available to the Agency through the adverse experience reports contemplated under § 600.80 could establish that a biological product is not safe or properly labeled and that the license should be revoked (55 FR 11611 at 11613, March 29, 1990). FDA used section 351 of the PHS Act as statutory authority, along with other sources of statutory authority, in issuing the BPDR regulations for biological products. These regulations are found in §§ 600.14 and 606.171. In issuing these regulations, FDA stated that these reports would enable FDA to respond when public health may be at risk, provide FDA with uniform data to track trends that may indicate broader threats to the public health, and help ensure facilities are taking appropriate actions to investigate and correct biological product deviations. (65 FR 66621 at 66623, November 7, 2000).

    There is considerable overlap in the PMSR requirements for drugs, devices, and biological products. The regulatory schemes for adverse event reporting for drugs and biological products are identical in most respects. The MDR regulation has many similarities to the drug and biological product PMSR regulations. Overall, the regulatory framework governing PMSR for each type of product is intended to achieve the same general goals.

    Nevertheless, these three sets of regulations differ somewhat because each is tailored to the characteristics of the types of products for which it was designed. For instance, each set of regulations contains certain specific requirements pertaining to particular products or types of postmarketing safety events that are not found in the other sets of regulations. The additional requirements for combination product applicants that FDA considers necessary are as follows: 5-day reports, 15-day reports, malfunction reports, correction or removal reports, field alert reports, and BPDRs. As set forth in this rule, it is crucial that these additional requirements be met if they apply.

    The legal framework underlying this proposed rule is twofold. The first is that drugs, devices, and biological products do not lose their discrete regulatory identities when they become constituent parts of a combination product. In general, the PMSR requirements specific to each constituent part of a combination product also apply to the combination product itself. Therefore, all combination products are subject to at least two sets of PMSR requirements. For example, in the case of a device and biological product combination product, the PMSR requirements applicable to devices and to biological products would apply to the combination product. However, this rule is intended to clarify that a combination product applicant may comply only with the PMSR requirements associated with the application under which the combination product received marketing authorization and certain, specified PMSR requirements associated with the other constituent part(s). Taking the example of a device-biologic combination product, if the combination product has an approved BLA, the combination product applicant (holder of the BLA) would use parts 600 and 606 to make postmarketing safety reports for the combination product. In addition, as explained in this rule, the combination product applicant must also comply with all of the specified requirements that apply to the product. Thus, in this case, the combination product applicant must also comply with the reporting requirements for 5-day reports, correction or removal reports, and malfunction reports if the criteria for such reports are met. Under this legal framework, if you demonstrate compliance with the applicable requirements of the set of regulations (e.g., biological product PMSR) associated with the approved application (e.g., BLA), and comply with any applicable specified additional provisions (e.g., 5-day reports, correction or removal reports, and malfunction reports), you will be considered to have satisfied all applicable PMSR requirements associated with the combination product, including its constituent parts.

    The legal authority for this streamlining approach is based on the following. Although combination products retain the regulatory identities of their constituent parts, the FD&C Act also recognizes combination products as a category of products that are distinct from products that are solely drugs, devices, or biological products. For example, section 503(g)(4)(A) of the FD&C Act (21 U.S.C. 353b(g)(4)(A)) requires OCP to “designate” a product as a combination product as well as to ensure “consistent and appropriate postmarket regulation of like products subject to the same statutory requirements.” Further, section 563 of the FD&C Act (21 U.S.C. 360bbb-2) governs the “classification” of products as “drug, biological product, device, or a combination product subject to section 503(g)” (emphasis added). In this respect, the FD&C Act identifies a combination product as a distinct type of product that could be subject to specialized regulatory controls. In addition, for the efficient enforcement of the FD&C Act under section 701 (21 U.S.C. 371), FDA has the authority to develop regulations to ensure sufficient and appropriate ongoing assessment of the risks associated with combination products.

    The second legal framework for this rule is founded on the postmarket safety reporting regulatory scheme associated with the application under which the combination product is approved, plus any applicable requirements associated with the additional six specified report types listed in this rule. Although similar in effect to the previously discussed framework, this approach is based on the legal authority FDA used to issue each of its three existing regulations for postmarketing safety reporting for drugs, devices, and biological products. In the context of this rule, such authority would include, but not be limited to, sections 505(k) and 519 of the FD&C Act, and section 351 of the PHS Act. Under this authority FDA is now issuing additional requirements based on the six additional specified report types. This means that in the case, for example, of a device-biologic combination product, approved under a BLA, section 351 of the PHS Act (in addition to other applicable authorities) would provide the authority for FDA to require postmarketing safety reporting in accordance with parts 600 and 606. Furthermore, section 351 of the PHS Act also would provide the authority for the Agency to require additional reporting for the device-biologic combination product (5-day reports, malfunction reports, and correction or removal reports) if the criteria for such reports are met.

    V. Analysis of Environmental Impact

    FDA has determined under 21 CFR 25.30(a), 25.30(h), and 25.31(a) through (c) 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.

    VI. Paperwork Reduction Act of 1995

    This final rule contains information collection provisions that are subject to review by the Office of Management and Budget (OMB) under the Paperwork Reduction Act of 1995 (44 U.S.C. 3501-3520). The title, description and respondent description of the information collection provisions are shown in the following paragraphs with an estimate of the annual reporting and recordkeeping burdens. Included in the estimate is the time for reviewing instructions, searching existing data sources, gathering and maintaining the data needed, and completing and reviewing each collection of information.

    Title: Postmarketing Safety Reporting for Combination Products.

    Description: This final rule describes the PMSR requirements for combination products. In the development of this final rule, the Agency considered the fact that a combination product is subject to the PMSR provisions applicable to its constituent parts (drug, device, and/or biological product). The Agency reviewed each set of regulations governing PMSR for new drugs (part 314), biological products (parts 600 and 606), and devices (parts 803 and 806). The review determined that each set of regulations contains many substantially similar requirements.

    Given the broad similarities in the PMSR regulations, the Agency determined that, to ensure consistent, appropriate PMSR for combination products that received marketing authorization under a single application, we need only require that combination product applicants comply with the regulatory requirements for PMSR associated with the application, and with additional, specified provisions from the other set(s) of PMSR requirements applicable to the other constituent part(s) of the combination product. This approach recognizes and addresses PMSR considerations relevant to each type of constituent part of a combination product while avoiding unnecessary redundancy and burden.

    Specifically, the additional reporting requirements specified in this rule, along with any associated followup reports, are: (1) Submission of a “5-day report” as described in § 803.53 if the combination product contains a device constituent part; (2) submission of a “malfunction report” as described in § 803.50 if the combination product contains a device constituent part; (3) submission of a “correction or removal report” as described in § 806.10 if the combination product contains a device constituent part; (4) submission of a “field alert report” as described in § 314.81 if the combination product contains a drug constituent part; (5) submission of a 15-day report as described in § 314.80 or § 600.80 if the combination product contains a drug or biological product constituent part, respectively; and (6) submission of a “BPDR” as described in §§ 600.14 and 606.171 if the combination product contains a biological product constituent part.

    For combination products for which the constituent parts received marketing authorization under separate applications held by different entities, the Agency has determined that compliance with the PMSR requirements associated with the application type for the constituent part is sufficient. In addition, constituent part applicants must share safety information they receive related to certain events with the other constituent part applicant(s).

    We note that the PMSR information collections for drugs, biological products, and devices found in §§ 314.80, 314.81, 600.80, 600.81, 606.170, 606.171, 803.50, 803.53, 803.56, 806.10, and 806.20 have already been approved and are in effect. The pertinent PMSR information collection provisions for § 314.80(c) and (e), as well as for § 314.81(b) are approved under OMB control numbers 0910-0001, 0910-0230, and 0910-0291. The information collection provisions for §§ 600.80 and 600.81 are approved under OMB control number 0910-0308. Those for § 606.170 are approved under OMB control number 0910-0116. Those for § 606.171 are approved under OMB control number 0910-0458. The information collection provisions for §§ 803.50, 803.53, and 803.56 are approved under OMB control numbers 0910-0291 and 0910-0437. The information collection provisions for §§ 806.10 and 806.20 are approved under OMB control number 0910-0359.

    While this rule serves to permit combination product applicants to comply with a streamlined subset of the PMSR requirements applicable to all of their constituent parts, we recognize that some combination product applicants have been complying with only the reporting requirements associated with their application type. As a result, the information collection described here refers to the reporting and recordkeeping requirements for the six additional report types specified in this rule. It also refers to the new information sharing and related recordkeeping requirement applicable to constituent parts marketed under separate applications.

    These requirements are necessary to ensure: (1) Consistent PMSR for combination products and constituent parts, (2) that the Agency receives necessary information to promote and protect the public health, (3) appropriate ongoing assessment of risks, and (4) consistent and appropriate postmarketing regulation of combination products. This rule enables applicants to comply with these requirements while avoiding unnecessary duplicative reporting, for example, by limiting the number of PMSR requirements with which combination product applicants must comply and by authorizing applicants to submit only a single, complete report for an event even if multiple reporting duties apply to the same event.

    Description of Respondents: This rule applies to combination product applicants and constituent part applicants. Any person holding the application(s) under which a combination product received marketing authorization is a combination product applicant. Any person holding an application under which a constituent part (drug, device, or biological product) of a combination product received marketing authorization is a constituent part applicant if the other constituent part received marketing authorization under an application held by a different person.

    FDA estimates the burden for this information collection as follows:

    Table 3—Estimated Annual Reporting Burden 21 CFR section Number of
  • respondents
  • Number of
  • responses per respondent
  • Total annual responses Average
  • burden per
  • response
  • Total hours
    4.102(c)(1)(i) Submitting 5-day reports 15 98 1,470 1.21 1,779 4.102(c)(1)(ii) Submitting malfunction reports 15 98 1,470 1.21 1,779 4.102(c)(1)(iii) Submitting correction or removal reports 20 1 20 10 200 4.102(c)(2)(i) Submitting field alerts 92 10.8 994 8 7,949 4.102(c)(2)(ii) and (3)((ii) Submitting 15-day reports 1 1 1 1 1 4.102(c)(3) Submitting BPDRs 24 6 144 2 288 4.102(d) 1 1 1 1 1 Totals * 11,709
    Table 4—Estimated Annual Recordkeeping Burden 21 CFR section Number of recordkeepers Number of records per recordkeeper Total annual records Average burden per recordkeeping Total hours 4.103(b)/4.105(a)(2) Records of information shared by constituent part applicants 33 18 594 .1 (6 minutes) 59 4.105(b) additional record-keeping by device-led combination products 279 .45 126 .5 (30 minutes) 63 4.105(b) additional recordkeeping by drug and biologic-led combination products 186 6 1,116 .5 (30 minutes) 558 Totals 680 Table 5—Estimated Annual Third Party Disclosure Burden 21 CFR section Number of
  • respondents
  • Number of
  • disclosures per
  • respondent
  • Total annual disclosures Average burden per disclosure Total hours
    4.103 Sharing information with other constituent part applicants 33 18 594 .35 (21 minutes) 208

    Based on FDA's experience regarding receipt of postmarketing safety reports for combination products, the Agency estimates that there will be 401 reporters (who will keep corresponding records) submitting a total of 11,709 reports annually under § 4.102(c) and (d) and 33 reporters (who will keep corresponding records) sharing information eighteen times annually under § 4.103. Further, FDA estimates, based on its experience with information collection regarding postmarketing safety reporting provisions for drugs, biological products, and devices, that each report (or information sharing event under § 4.103) may take from approximately 20 minutes to 10 hours, depending on report type, to prepare and submit, and from approximately 6 to 30 minutes to fulfill the corresponding recordkeeping requirements. FDA believes that there are no significant new operating and maintenance costs associated with this collection of information because, in order to legally market their products, all applicants are required to develop and maintain systems for reporting and maintaining records of postmarketing safety events. Therefore, appropriate mechanisms for PMSR should already be in place, and combination product applicants and constituent part applicants will accrue no significant additional costs to fulfill the requirements set forth here.

    In addition, we estimate that there will no significant new costs for 15-day reporting (§ 4.102(c)(2)(ii) and (3)(ii)) and periodic reporting (§ 4.102(d)(1)) under the rule because there is significant overlap between the types of events that trigger a 15-day report for drugs and biological products and the events that trigger expedited reporting for devices. We also estimate there will be no significant new costs for other non-expedited reporting (§ 4.102(d)(2)) because of the expected rarity of the agency seeking such additional information.

    Before the effective date of this final rule, FDA will publish a notice in the Federal Register announcing OMB's decision to approve, modify, or disapprove the information collection provisions in this final rule. An Agency may not conduct or sponsor, and a person is not required to respond to, a collection of information unless the Agency displays a currently valid OMB control number.

    VII. Federalism

    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 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 final 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.9

    9 The rule clarifies which PMSR requirements apply when drugs, devices, and biological products are used to create combination products. The Agency notes that there are no express preemption provisions of the FD&C act applicable to prescription drugs or biological products. Section 521 of the FD&C Act (21 U.S.C. 360k) contains an express preemption provision that applies to devices; nonetheless, the Supreme Court concluded in Medtronic, Inc. v. Lohr, 581 U.S. 470, 500-01 (1996), that requirements not applicable to a particular device do not preempt State law under section 521. Device adverse event reporting requirements, like the good manufacturing practice requirements at issue in the Medtronic case, are general requirements that do not preempt under section 521 of the FD&C Act.

    VIII. Economic Analysis of Impacts A. Introduction

    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 final rule essentially describes the application of existing postmarketing safety reporting regulations to certain combination products, 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 full analysis of economic impacts is available in the docket for this final rule at http://www.fda.gov/AboutFDA/ReportsManualsForms/Reports/EconomicAnalyses/default.htm.

    B. Summary of Costs and Benefits

    The final rule will generate one-time administrative costs from reading and understanding the rule, assessing current compliance, modifying existing standards of practice, changing storage and reporting software, and training personnel on the requirements under this rule. Firms that do not currently comply with the reporting requirements specified by the final rule will also incur annual reporting costs from the submission of field alert reports, 5-day reports, malfunction reports, correction or removal reports, and biological product deviation reports, as applicable. The annualized total costs of the rule are between $1.36 and $2.68 million at a 7 percent discount rate and between $1.35 and $2.65 million at a 3 percent discount rate.

    The final rule will benefit firms through reduced uncertainty about the reporting requirements for their specific combination product and through decreased potentially duplicative reporting. The final rule will also benefit public health by helping to ensure that important safety information is submitted and directed to the appropriate components within the Agency, so that we may receive and review this important information in a timely manner for the protection of public health.

    Table 6—Summary of Benefits, Costs, and Distributional Effects of Final Rule Category Primary
  • estimate
  • Low
  • estimate
  • High
  • estimate
  • Units Year
  • dollars
  • Discount rate
  • (%)
  • Period
  • covered
  • (years)
  • Notes
    Benefits: Annualized 2016 7 10 Monetized ($millions/year) 2016 3 10 Annualized 2016 7 10 Quantified 2016 3 10 Qualitative Firms will benefit from reduced uncertainty about reporting requirements. The rule will benefit public health by helping to ensure Agency components' timely receipt of postmarketing safety reports. Costs: Annualized $1.36 $2.68 2016 7 10 Monetized ($millions/year) $1.35 $2.65 2016 3 10 Annualized 2016 7 10 Quantified 2016 3 10 Qualitative Transfers: Federal 2016 7 10 Annualized 2016 3 10 Monetized ($millions/year) From: To: Other 2016 7 10 Annualized 2016 3 10 Monetized ($millions/year) From: To: Effects: State, Local or Tribal Government: Small Business: Wages: Growth:
    IX. References

    The following references are on display in the Division of Dockets Management, 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.

    1. FDA Regulation of Combination Products, November 25, 2002, accessed at: http://www.fda.gov/downloads/CombinationProducts/MeetingsConferencesWorkshops/UCM117123.pdf.

    2. Innovative Systems for Delivery of Drugs and Biologics: Scientific, Clinical and Regulatory Challenges, July 8, 2003, accessed at: http://www.fda.gov/ohrms/dockets/dockets/03n0203/03n0203.htm.

    3. Individual Case Study Reports, accessed at: (http://www.fda.gov/ForIndustry/DataStandards/IndividualCaseSafetyReports/default.htm).

    List of Subjects in 21 CFR Part 4

    Biological products, Combination products, Drugs, Medical devices, Regulation of combination products, Reporting and recordkeeping requirements, Safety.

    Therefore, under the Federal Food, Drug, and Cosmetic Act, the Public Health Service Act, and under authority delegated to the Commissioner of Food and Drugs, 21 CFR part 4 is amended as follows:

    PART 4—REGULATION OF COMBINATION PRODUCTS 1. The authority citation for part 4 continues to read as follows: Authority:

    21 U.S.C. 321, 331, 351, 352, 353, 355, 360, 360b-360f, 360h-360j, 360l, 360hh-360ss, 360aaa-360bbb, 371(a), 372-374, 379e, 381, 383, 394; 42 U.S.C. 216, 262, 263a, 264, 271.

    2. Add subpart B, consisting of §§ 4.100 through 4.105, to read as follows: Subpart B—Postmarketing Safety Reporting for Combination Products Sec. 4.100 What is the scope of this subpart? 4.101 How does FDA define key terms and phrases in this subpart? 4.102 What reports must you submit to FDA for your combination product or constituent part? 4.103 What information must you share with other constituent part applicants for the combination product? 4.104 How and where must you submit postmarketing safety reports for your combination product or constituent part? 4.105 What are the postmarketing safety reporting recordkeeping requirements for your combination product or constituent part? Subpart B—Postmarketing Safety Reporting for Combination Products
    § 4.100 What is the scope of this subpart?

    (a) This subpart identifies postmarketing safety reporting requirements for combination product applicants and constituent part applicants.

    (b) This subpart does not apply to investigational combination products, combination products that have not received marketing authorization, or to persons other than combination product applicants and constituent part applicants.

    (c) This subpart supplements and does not supersede other provisions of this chapter, including the provisions in parts 314, 600, 606, 803, and 806 of this chapter, unless a regulation explicitly provides otherwise.

    § 4.101 How does the FDA define key terms and phrases in this subpart?

    Abbreviated new drug application (ANDA) has the same meaning given the term “abbreviated application” in § 314.3(b) of this chapter.

    Agency or we means Food and Drug Administration.

    Applicant means, for the purposes of this subpart, a person holding an application under which a combination product or constituent part of a combination product has received marketing authorization (such as approval, licensure, or clearance). For the purposes of this subpart, applicant is used interchangeably with the term “you.”

    Application means, for purposes of this subpart, a BLA, an NDA, an ANDA, or a device application, including all amendments and supplements to them.

    Biological product has the meaning given the term in section 351 of the Public Health Service Act (42 U.S.C. 262).

    Biological product deviation report (BPDR) is a report as described in §§ 600.14 and 606.171 of this chapter.

    Biologics license application (BLA) has the meaning given the term in section 351 of the Public Health Service Act (42 U.S.C. 262) and § 601.2 of this chapter.

    Combination product has the meaning given the term in § 3.2(e) of this chapter.

    Combination product applicant means an applicant that holds the application(s) for a combination product.

    Constituent part has the meaning given the term in § 4.2.

    Constituent part applicant means the applicant for a constituent part of a combination product the constituent parts of which are marketed under applications held by different applicants.

    Correction or removal report is a report as described in § 806.10 of this chapter.

    De novo classification request is a submission requesting de novo classification under section 513(f)(2) of the Federal Food, Drug, and Cosmetic Act.

    Device has the meaning given the term in section 201(h) of the Federal Food, Drug, and Cosmetic Act.

    Device application means a PMA, PDP, premarket notification submission, de novo classification request, or HDE.

    Drug has the meaning given the term in section 201(g)(1) of the Federal Food, Drug, and Cosmetic Act.

    Field alert report is a report as described in § 314.81 of this chapter.

    Fifteen-day report is a report required to be submitted within 15 days as described in § 314.80 of this chapter or § 600.80 of this chapter, as well as followup reports to such a report.

    Five-day report is a report as described in §§ 803.3 and 803.53 of this chapter, as well as supplemental or followup reports to such a report as described in § 803.56 of this chapter.

    Humanitarian device exemption (HDE) has the meaning given the term in § 814.3 of this chapter.

    Malfunction report is a report as described in § 803.50 of this chapter as well as supplemental or followup reports to such a report as described in § 803.56 of this chapter.

    New drug application (NDA) has the meaning given the term “application” in § 314.3(b) of this chapter.

    Premarket approval application (PMA) has the meaning given the term in § 814.3 of this chapter.

    Premarket notification submission is a submission as described in § 807.87 of this chapter.

    Product Development Protocol (PDP) is a submission as set forth in section 515(f) of the Federal Food, Drug, and Cosmetic Act.

    § 4.102 What reports must you submit to FDA for your combination product or constituent part?

    (a) In general. If you are a constituent part applicant, the reporting requirements applicable to you that are identified in this section apply to your constituent part, and if you are a combination product applicant, the reporting requirements applicable to you that are identified in this section apply to your combination product as a whole.

    (b) Reporting requirements applicable to both combination product applicants and constituent part applicants. If you are a combination product applicant or constituent part applicant, you must comply with the reporting requirements identified in paragraphs (b)(1), (b)(2), or (b)(3) of this section for your product based on its application type. If you are a combination product applicant, you are required to submit a report as specified in this paragraph unless you have already submitted a report in accordance with paragraph (c) of this section for the same event that: Includes the information required under the applicable regulations identified in this paragraph, is required to be submitted in the same manner under § 4.104, and meets the deadlines under the applicable regulations identified in this paragraph.

    (1) If your combination product or device constituent part received marketing authorization under a device application, you must comply with the requirements for postmarketing safety reporting described in parts 803 and 806 of this chapter with respect to your product.

    (2) If your combination product or drug constituent part received marketing authorization under an NDA or ANDA, you must comply with the requirements for postmarketing safety reporting described in part 314 of this chapter with respect to your product.

    (3) If your combination product or biological product constituent part received marketing authorization under a BLA, you must comply with the requirements for postmarketing safety reporting described in parts 600 and 606 of this chapter with respect to your product.

    (c) Reporting requirements applicable only to combination product applicants. If you are a combination product applicant, in addition to compliance with paragraph (a) of this section, you must also comply with the reporting requirements identified under this paragraph as applicable to your product based on its constituent parts. If you are a combination product applicant, you are required to submit a report as specified in this paragraph unless you have already submitted a report in accordance with paragraph (b) of this section for the same event that: Includes the information required under the applicable regulations for the report identified in this paragraph; is required to be submitted in the same manner under § 4.104 of this chapter; and, unless otherwise specified in this paragraph, meets the deadlines under the applicable regulations for the report identified in this paragraph.

    (1) If your combination product contains a device constituent part, you must submit:

    (i) Five-day reports;

    (ii) Malfunction reports; and

    (iii) Correction or removal reports, and maintain records as described in § 806.20 of this chapter for corrections and removals not required to be reported.

    (2) If your combination product contains a drug constituent part, you must submit:

    (i) Field alert reports; and

    (ii) Fifteen-day reports as described in § 314.80 of this chapter, which must be submitted within 30 calendar days instead of 15 calendar days if your combination product received marketing authorization under a device application.

    (3) If your combination product contains a biological product constituent part, you must submit:

    (i) Biological product deviation reports; and

    (ii) Fifteen-day reports as described in § 600.80 of this chapter, which must be submitted within 30 calendar days instead of 15 calendar days if your combination product received marketing authorization under a device application.

    (d) Other reporting requirements for combination product applicants. (1) If you are the combination product applicant for a combination product that contains a device constituent part and that received marketing authorization under an NDA, ANDA, or BLA, in addition to the information otherwise required in the periodic safety reports you submit under § 314.80 or § 600.80 of this chapter, your periodic safety reports must also include a summary and analysis of the reports identified in paragraphs (c)(1)(i) and (ii) of this section that were submitted during the report interval.

    (2) If you are the combination product applicant for a combination product that received marketing authorization under a device application, in addition to the reports required under paragraphs (b) and (c) of this section, you must submit reports regarding postmarketing safety events if notified by the Agency in writing that the Agency requires additional information. We will specify what safety information is needed and will require such information if we determine that protection of the public health requires additional or clarifying safety information for the combination product. In any request under this section, we will state the reason or purpose for the safety information request, specify the due date for submitting the information, and clearly identify the reported event(s) related to our request.

    § 4.103 What information must you share with other constituent part applicants for the combination product?

    (a) When you receive information regarding an event that involves a death or serious injury as described in § 803.3 of this chapter, or an adverse experience as described in § 314.80(a) of this chapter or § 600.80(a) of this chapter, associated with the use of the combination product, you must provide the information to the other constituent part applicant(s) for the combination product no later than 5 calendar days of your receipt of the information.

    (b) With regard to information you must provide to the other constituent part applicant(s) for the combination product, you must maintain records that include:

    (1) A copy of the information you provided,

    (2) The date the information was received by you,

    (3) The date the information was provided to the other constituent part applicant(s), and

    (4) The name and address of the other constituent part applicant(s) to whom you provided the information.

    § 4.104 How and where must you submit postmarketing safety reports for your combination product or constituent part?

    (a) If you are a constituent part applicant, you must submit postmarketing safety reports in accordance with the regulations identified in § 4.102(b) that are applicable to your product based on its application type.

    (b) If you are a combination product applicant, you must submit postmarketing safety reports required under § 4.102 in the manner specified in the regulation applicable to the type of report, with the following exceptions:

    (1) You must submit the postmarketing safety reports identified in § 4.102(c)(1)(i) and (ii) in accordance with § 314.80(g) of this chapter if your combination product received marketing authorization under an NDA or ANDA or in accordance with § 600.80(h) of this chapter if your combination product received marketing authorization under a BLA.

    (2) You must submit the postmarketing safety reports identified in § 4.102(c)(2)(ii) and (c)(3)(ii) in accordance with § 803.12(a) of this chapter if your combination product received marketing authorization under a device application.

    § 4.105 What are the postmarketing safety reporting recordkeeping requirements for your combination product or constituent part?

    (a) If you are a constituent part applicant:

    (1) You must maintain records in accordance with the recordkeeping requirements in the applicable regulation(s) described in § 4.102(b).

    (2) You must maintain records required under § 4.103(b) for the longest time period required for records under the postmarketing safety reporting regulations applicable to your product under § 4.102(b).

    (b) If you are a combination product applicant, you must maintain records in accordance with the longest time period required for records under the regulations applicable to your product under § 4.102.

    Dated: December 14, 2016. Leslie Kux, Associate Commissioner for Policy.
    [FR Doc. 2016-30485 Filed 12-19-16; 8:45 am] BILLING CODE 4164-01-P
    DEPARTMENT OF HOUSING AND URBAN DEVELOPMENT 24 CFR Parts 5, 92, 93, 570, 574, 578, 880, 881, 883, 884, 886, 891, 905, 983 [Docket No. FR 5890-F-02] RIN 2501-AD75 Narrowing the Digital Divide Through Installation of Broadband Infrastructure in HUD-Funded New Construction and Substantial Rehabilitation of Multifamily Rental Housing AGENCY:

    Office of the Secretary, HUD.

    ACTION:

    Final rule.

    SUMMARY:

    Through this rule, HUD continues its efforts to narrow the digital divide in low-income communities served by HUD by providing, where feasible and with HUD funding, broadband infrastructure to communities in need of such infrastructure. In this final rule, HUD requires installation of broadband infrastructure at the time of new construction or substantial rehabilitation of multifamily rental housing that is funded or supported by HUD, the point at which such installation is generally easier and less costly than when undertaken as a stand-alone effort. The rule, however, recognizes that installation of broadband infrastructure may not be feasible for all new construction or substantial rehabilitation, and, therefore, it allows limited exceptions to the installation requirements. Installing unit-based broadband infrastructure in multifamily rental housing that is newly constructed or substantially rehabilitated with or supported by HUD funding will provide a platform for individuals and families residing in such housing to participate in the digital economy and increase their access to economic opportunities.

    DATES:

    Effective date: January 19, 2017.

    FOR FURTHER INFORMATION CONTACT:

    If you have any questions, please contact the following people (the telephone numbers are not toll-free):

    Office of Community Planning and Development programs: Clifford Taffet, General Deputy Assistant Secretary for Community Planning and Development, Room 7100, 202-708-2690.

    Office of Multifamily Housing programs: Katie Buckner, Office of Recapitalization, Office of Housing, Room 6226, 202-402-7140.

    Office of Public and Indian Housing programs: Dominique Blom, Deputy Assistant Secretary for Public Housing Investments, Office of Public and Indian Housing, Room 4130, 202-402-4181.

    The address for all individuals is Department of Housing and Urban Development; 451 7th Street SW.; Washington, DC 20410-0500. Persons with hearing or speech impairments may access these numbers through TTY by calling the Federal Relay Service at 800-877-8339 (this is a toll-free telephone number).

    SUPPLEMENTARY INFORMATION:

    I. Executive Summary A. Purpose of this Rule

    The purpose of this rule is to require installation of broadband infrastructure at the time of new construction or substantial rehabilitation of multifamily rental housing that is funded or supported by HUD. This rule does not require a funding recipient to undertake new construction or substantial rehabilitation, but when a funding recipient does choose to pursue such activity for multifamily rental housing with HUD funding, this rule requires installation of broadband infrastructure. While the rule only requires affected funding recipients to install one form of broadband infrastructure, HUD suggests that funding recipients consider whether installing more than one form of broadband infrastructure would be beneficial to encourage competition among service providers on quality and price. Installing unit-based broadband infrastructure in multifamily rental housing that is newly constructed or substantially rehabilitated with or supported by HUD funding will provide a platform for individuals and families residing in such housing to participate in the digital economy, and increase their access to economic opportunities.

    B. Summary of Major Provisions of this Rule

    This rule requires installation of broadband infrastructure at the time of new construction or substantial rehabilitation of multifamily rental units funded by the following programs:

    1. Choice Neighborhoods Implementation Grant program;

    2. Community Development Block Grant (CDBG) program, including the CDBG Disaster Recovery program;

    3. Continuum of Care program;

    4. HOME Investment Partnerships program;

    5. Housing Opportunities for Persons With AIDS program;

    6. Housing Trust Fund program;

    7. Project-Based Voucher program;

    8. Public Housing Capital Fund program;

    9. Section 8 project-based housing assistance payments programs, including, but not limited to, the Section 8 New Construction, Substantial Rehabilitation, Loan Management Set-Aside, and Property Disposition programs; 1 and

    1 This rule applies to all projects with project-based Section 8 housing assistance payment (HAP) contracts (other than Mod Rehab or Mod Rehab Single Room Occupancy (SRO) projects), regardless of whether the properties receive specific funding to pay directly for substantial rehabilitation or new construction, as defined in this rule.

    10. Section 202 and Section 811 Supportive Housing for the Elderly and Persons with Disabilities programs.

    The requirements of the rule do not apply to multifamily rental housing that only has a mortgage insured by HUD's Federal Housing Administration or with a loan guaranteed under a HUD loan guarantee program.

    HUD defines broadband infrastructure as cables, fiber optics, wiring, or other permanent (integral to the structure) infrastructure—including wireless infrastructure—as long as the installation results in broadband infrastructure in each dwelling unit meeting the Federal Communications Commission's (FCC's) definition in effect at the time the pre-construction estimates are generated. Currently, the FCC defines broadband speeds as 25 Megabits per second (Mbps) download, 3 Mbps upload.2 In addition, for programs that do not already have a definition of substantial rehabilitation, HUD defines substantial rehabilitation as work on the electrical system with estimated costs equal to or greater than 75 percent of the cost of replacing the entire electrical system, or when the estimated cost of the rehabilitation is equal to or greater than 75 percent of the total estimated cost of replacing the multifamily rental housing after the rehabilitation is complete. The definition of substantial rehabilitation for purpose of the installation of broadband infrastructure does not affect definitions of rehabilitation already in place for other purposes.

    2 Federal Communications Commission, 2015 Broadband Progress Report and Notice of Inquiry on Immediate Action to Accelerate Deployment, GN Docket No. 14-126, Rel. Feb. 4, 2015, at para. 45 (available at https://apps.fcc.gov/edocs_public/attachmatch/FCC-15-10A1.pdf).

    C. Costs and Benefits of This Rule

    The costs and benefits of this rule are difficult to quantify, but they can be described qualitatively. This rule only requires that the broadband infrastructure provided be able to receive high-speed Internet that is “accessible” in each unit. It does not require those recipients of funding undertaking new construction or substantial rehabilitation to provide broadband service to current or future residents even if residents pay for such service. Furthermore, the definition of broadband infrastructure in the rule includes coaxial cable television (TV) wiring that supports cable modem access or even permanent infrastructure that would provide broadband speeds to dwelling units wirelessly. The rule also provides for exceptions to the installation requirements where the installation is too costly to provide due to location or building characteristics.

    A recent survey by the National Association of Homebuilders found that 4 percent of the surveyed multifamily housing developers never installed landline wires and jacks in multifamily units completed in the past 12 months.3 In recent years, HUD's competitive grants for new construction under the Choice Neighborhoods program have sought the provision of broadband access. Therefore, this rule would simply codify what is considered common practice in the private market today when new construction or substantial rehabilitation is undertaken.

    3 NAHB, Multifamily Market Survey 3rd Quarter 2015. November 2015. There were 90 responses, and of the responses, 18 percent indicated it was not applicable, presumably because they had not completed any projects in the past 12 months. The survey covers all multifamily construction including lower quality Class B and Class C. It does not provide details on the developers or projects that did not install landlines.

    Given the wide range of technologies that may be employed to meet the requirements of this rule, it is not possible to specify the cost of the technology and how much additional burden this may be for owners or developers building or providing substantial rehabilitation to HUD-assisted rental housing. If the broadband infrastructure consists of wiring connected to proximate telephone or cable company networks, the cost is not expected to be significant, as all electrical work in a multifamily project is estimated to be only about 10 percent of the construction cost; 4 thus, running an additional cable through existing electrical conduits would be a minimal incremental cost. If the broadband infrastructure is wireless, the cost will be for the equipment, which varies greatly by the design and size of the project, as does the cost per unit. Given that the costs of installation of broadband infrastructure are only a portion of the 10 percent of construction costs, the requirement imposed by this rule is not expected to measurably reduce the size of the housing or the number of units to be constructed. At most, installation of broadband infrastructure may reduce the provision of other amenities or nonessential finishes, but HUD considers even these reductions unlikely. Additionally, the rule only applies to new construction or substantial rehabilitation that is supported with HUD-provided resources, not to existing buildings where substantial rehabilitation is not contemplated.

    42015 National Building Cost Manual. Ed. Ben Moselle. Carlsbad, CA: Craftsman Book Company. https://www.craftsman-book.com/media/static/previews/2015_NBC_book_preview.pdf,, pg. 19.

    Materials on the benefits of narrowing the digital divide are voluminous. Having broadband Internet in the home increases household income 5 and yields higher education achievement for students.6 On July 2015, the Council of Economic Advisers issued the report “Mapping the Digital Divide,” which examines progress in the United States in narrowing the digital divide and the work that still needs to be done, especially in the Nation's poorest neighborhoods and most rural communities.7 However, this rule's limited scope in only requiring the installation of infrastructure instead of providing Internet access also limits the benefits of the rule. The benefit of the rule is that where broadband Internet service can be made available, the tenant, residing in housing with broadband infrastructure, will be assured of the ability to access broadband Internet service, whether they choose and are able to afford Internet service or not. This puts broadband Internet service within reach, especially where other charitable and public social programs, including HUD's ConnectHome program, provide free or reduced-cost service.

    5 Ericsson, Arthur D. Little, and Chalmers University of Technology. Socioeconomic Effects of Broadband Speed. September 2013. http://www.ericsson.com/res/thecompany/docs/corporate-responsibility/2013/ericsson-broadband-final-071013.pdf.

    6 Davidson, Charles M. and Michael J. Santorelli. “The Impact of Broadband on Education.” December 2010. https://www.uschamber.com/sites/default/files/legacy/about/US_Chamber_Paper_on_Broadband_and_Education.pdf, pg. 24.

    7 See Council of Economic Advisers. “Mapping the Digital Divide.” Issue Brief. July 2015. https://www.whitehouse.gov/sites/default/files/wh_digital_divide_issue_brief.pdf.

    II. Background

    On March 23, 2015, President Obama issued a Presidential memorandum on “Expanding Broadband Deployment and Adoption by Addressing Regulatory Barriers and Encouraging Investment and Training.” 8 In this memorandum, the President noted that access to high-speed broadband is no longer a luxury, but it is a necessity for American families, businesses, and consumers. The President further noted that the Federal Government has an important role to play in developing coordinated policies to promote broadband deployment and adoption, including promoting best practices, breaking down regulatory barriers, and encouraging further investment.

    8 See Barack Obama. “Presidential Memorandum—Expanding Broadband Deployment and Adoption by Addressing Regulatory Barriers and Encouraging Investment and Training.” March 23, 2015. https://www.whitehouse.gov/the-press-office/2015/03/23/presidential-memorandum-expanding-broadband-deployment-and-adoption-addr.

    On May 18, 2016, at 81 FR 31181, HUD published a proposed rule seeking to require the installation of broadband infrastructure on all new construction or substantial rehabilitation in multifamily projects supported by HUD. This proposed rule was an outgrowth of the President's memorandum and HUD's own Digital Opportunity Demonstration, known as “ConnectHome.” The comment period on the proposed rule closed on July 18, 2016. HUD received 25 comments on the proposed rule from a variety of commenters, including State or local government economic development offices, the National Association of Home Builders, Internet service providers, housing authorities, and nonprofit organizations.

    III. Changes From the Proposed Rule

    HUD is not changing any of the substantive requirements that were in the proposed rule. Rather, in response to questions raised by public comments, HUD is offering two clarifications in the regulatory text.

    First, in the definition in 24 CFR 5.100, HUD is basing the threshold for substantial rehabilitation on the pre-rehabilitation estimates for the work. HUD recognizes that, in the course of rehabilitation, certain cost or work changes may result in the project exceeding the threshold to be defined (for the purposes of installing broadband infrastructure) as substantial rehabilitation. However, in these instances, the funding recipients are already facing higher costs than expected, and to add additional, unplanned-for requirements would be an undue burden.

    Second, HUD has clarified the point in the planning process for new construction or substantial rehabilitation at which a project must be, as of the effective date of this rule, to not be subject to the rule's requirements. Due to the different nature of each program covered by this rule, a tailored approach was necessary, instead of a single declaration for all of the programs.

    In addition to these two regulatory changes, HUD will offer some future clarifying guidance on how funding recipients are to determine whether installing broadband infrastructure would be infeasible for a given project. This is to be a case-by-case determination, and is very fact-specific. The ultimate decision, however, will be up to the funding recipient, who will also have to maintain adequate documentation of the determination.

    IV. Public Comments and HUD Responses Adoption of the Internet Franchise Policy Framework

    A commenter urged HUD to adopt the policy framework of the Internet Franchise (found at https://webpass.net/franchise), which the commenter stated directly addresses the issues in HUD's rule and would eliminate the need for rulemaking in this area. The commenter stated that creating a new set of rules for a small subset of properties—those supported by HUD—is not helpful. HUD should adopt broadly applicable Internet access rules that can be a model for the whole country.

    HUD Response: HUD appreciates the suggestion but believes the approach provided in HUD's rule is the appropriate approach for HUD programs. In addition, HUD is not able to regulate Internet access for housing not assisted by HUD.

    Capacity or Speed

    Commenters asked that HUD encourage the installation of infrastructure that is “future-proofed” against higher Internet speeds than what meets the current broadband definition, perhaps by encouraging fiber optic connections to accomplish that goal or by requiring that the infrastructure have capacity of 150 percent of the current standards. Commenters also suggested that, rather than just considering bandwidth capacity, HUD should require that the technology allow for the use of common Internet applications (including voice-over-Internet protocols, or VOIP, and other streaming services). Commenters suggested that HUD find ways to provide incentives to provide the highest level of broadband capacity.

    Commenters also asked how HUD intended to communicate and implement new speed standards from the FCC.

    HUD Response: HUD is not mandating that funding recipients install a specific type of infrastructure. Rather, HUD has specifically written the definition of broadband infrastructure to allow funding recipients to choose the form of infrastructure that is most appropriate for their circumstances, including future technologies that we cannot imagine today.

    HUD believes that, rather than requiring installation of infrastructure meeting a standard higher than the FCC's then-current definition of “advanced telecommunications capability,” it is enough to install infrastructure that meets that definition, especially as in some areas that speed is more than what may be currently available. Further, HUD believes that by requiring that each unit has access to infrastructure that allows broadband speeds, every family will be able to use Internet applications, such as VOIP, as desired. However, this is established as the minimum. Nothing prevents funding recipients from aiming higher, and nothing prevents other local authorities from establishing higher standards as a local requirement for funding or from using HUD funding to pay for the cost differential of getting to that higher level.

    In addition, by tying the infrastructure requirements to the FCC's definition, future changes by the FCC will automatically be incorporated into HUD's requirements. When the definition is revised in the future, HUD will evaluate the most appropriate way to notify its funding recipients covered by this rule of the change.

    Costs

    Commenters responded to HUD's estimates on the cost of installing broadband infrastructure. Many commented that the estimates of the costs of labor and material were too low, particularly when a project is undergoing rehabilitation. Commenters stated that the costs would vary widely across the country, depending on the construction type, the number of units involved, and the regional labor costs. Commenters also stated that HUD should account for operation and maintenance costs for the infrastructure, which may be significant. Commenters stated that the study by the National Association of Home Builders did not specifically address broadband access, and, therefore, it should not be used as evidence that installing broadband is already current practice.

    Commenters also suggested that HUD has not justified the costs of compliance with the rule with enough benefits. Some commenters stated that in rural areas, limited access to broadband equipment installers can inflate installation and service costs.

    HUD Response: The benefits of narrowing the digital divide through expansion of Internet service are well documented. The Council of Economic Advisers Brief, issued in March 2016, and entitled “The Digital Divide and Economic Benefits of Broadband Access,” demonstrates such benefits. (See https://www.whitehouse.gov/sites/default/files/page/files/20160308_broadband_cea_issue_brief.pdf.) HUD understands that the costs of installing broadband infrastructure will vary given the geographic area in which the construction or substantial rehabilitation is to take place and that, given such variations, the costs of labor and materials will not be uniform across the Nation. Some costs may be lower because the jurisdiction in which the installation is occurring may already have a strong broadband infrastructure in place that would reduce the cost of a HUD funding recipient to provide such infrastructure. However, given the comments received, HUD has revised its costs analyses found in Section V of this preamble.

    Whatever the cost of the installation of a broadband infrastructure, that cost is borne by HUD in the funds awarded to the funding recipient, or the HUD funds are taken into account when leveraging them for rehabilitation funding. There is no mandate in any of the HUD programs covered by this rule to undertake new construction or substantial rehabilitation.

    While HUD funds will cover the cost of installation of the broadband infrastructure, HUD understands that, in tight budgetary times, installing broadband infrastructure may be too expensive for the construction budget to incorporate, given other construction or rehabilitation requirements such as energy efficiency features or improvements or accessible housing features needed by the elderly or persons with disabilities. In such cases, the final rule provides that a funding recipient may be exempted from compliance if the cost of installing broadband infrastructure would result in a fundamental alteration in the nature of its program or activity or in an undue financial burden.

    HUD will continue to explore the possibilities of reducing the cost of broadband infrastructure, including allowing HUD funds to be used for operation or maintenance costs or facilitating group purchases to reduce the costs of the infrastructure itself.

    Exceptions

    Many commenters weighed in on the exceptions to the broadband infrastructure requirements. Several requested examples of projects that would fall under the listed exceptions or more detailed definitions of the provided exceptions. Commenters suggested that, in addition to the exemptions currently included, HUD provide an exception for scattered-site properties with 1 to 4 units.

    Some commenters stated that having a building in a rural location should not exempt the housing provider from providing broadband infrastructure as, while the connection to the building may be more expensive, a rural location does not increase the price of installing infrastructure in the building itself. Other commenters stated that requiring the installation of infrastructure where broadband is not currently available could result in the buildings having obsolete infrastructure when broadband access is provided.

    Regarding the feasibility determination, some commenters believed that the owner should be the proper entity to determine whether installing broadband infrastructure is feasible, while others stated that HUD should make that determination, moving as quickly as possible to avoid delays in projects. Commenters also requested additional information on the infeasibility exception, particularly what documentation developers should maintain about any determination of feasibility, and any specific formula or source of pre-rehabilitation estimates that HUD will require. Commenters asked at what point a project would be considered infeasible; some stated that the threshold of feasibility should be set such that costs of broadband installation that are over 5 percent of the construction budget should be considered infeasible.

    Commenters suggested that HUD should consider the costs of maintaining and operating the infrastructure in determining feasibility. Commenters reminded HUD that, in the future, increased speed requirements could impact the feasibility of installing broadband infrastructure. Commenters also suggested that HUD encourage installation of broadband infrastructure in common areas if it is too expensive to install in every unit.

    HUD Response: This rule only applies to buildings with more than 4 rental units, so HUD does not believe an exemption for scattered-site properties is needed.

    For the existing exemptions from the rule's requirements, this rule places the burden of determining whether or not an exemption applies and documenting the basis for the determination on the funding recipient. HUD will provide additional guidance with examples and possible ways to make such determinations. HUD also appreciates and supports the suggestion that if a funding recipient determines that providing broadband infrastructure to every unit is too expensive, the funding recipient should consider providing broadband infrastructure to common areas at the property.

    HUD notes that a building's location in a rural area not currently served by broadband does not necessarily mean that broadband will not be available in the foreseeable future. In addition, the current unavailability of broadband service to a property does not automatically mean that installing the broadband infrastructure is cost prohibitive. However, HUD acknowledges that, in some situations, the fact that broadband will not be available to a property for an extended time period could be a legitimate justification for meeting the “location” exemption, particularly if the window before broadband service is available is long enough to potentially render any infrastructure installed now obsolete by the time such service is available.

    In some programs, maintenance and operating costs are considered eligible expenses of the funding program, and, therefore, there is no need to consider those costs when determining the cost feasibility of installing the broadband infrastructure in the first place. At this time, it is beyond the scope of this rulemaking to amend other program regulations (which are sometimes based on statutory limitations) to allow such costs when it is not currently allowable. However, HUD will continue to look for situations in which program regulations can be revised to allow Internet operation and maintenance costs to be eligible uses of program funds.

    Effectiveness Timeline

    Commenters also asked for additional detail on the timing of when the requirements of the new rule would apply. Some stated that for substantial rehabilitation, HUD should state that any project beyond the earliest stage of project budget development should be exempted from the rule. Commenters also suggested that the rule should not apply if a request for proposals (RFP) has been issued for a given project.

    HUD Response: HUD fully recognizes that imposing additional requirements on projects that have already established budgets would have negative impacts on those new construction or substantial rehabilitation plans. HUD has, therefore, put specific applicability language into each program's regulations specifying the date or point in the development process after which projects will be subject to these new requirements. HUD intends in particular to issue additional guidance for the Project-Based Voucher (PBV) program and any substantial rehabilitation that may occur after a Housing Assistance Payments (HAP) contract has been signed.

    However, HUD encourages funding recipients who are currently developing projects for new construction or substantial rehabilitation that would not be covered by this rule to seriously consider whether they can include broadband infrastructure in those construction or rehabilitation plans.

    Infrastructure Design

    Commenters suggested other changes to HUD's requirements for the broadband infrastructure. Several stated that the broadband wiring should enter the building at a central point and then flow to each unit and common space in the building. Commenters stated that HUD should encourage building owners to consider ways to future proof the infrastructure, including how to replace broken wires and how to make access points easily accessible. Others wrote that HUD should specify that buildings using wireless should have sufficient access points to ensure that each unit has fast, reliable service.

    Commenters also stated that HUD should require broadband infrastructure be provided for common areas and meeting spaces.

    Some commenters objected to HUD allowing broadband over power lines (BPL) or very-high-bit-rate digital subscriber lines (VDSL), as the commenters felt those technologies needed significant improvements and more widespread adoption to become viable ways of receiving broadband.

    HUD Response: This final rule does not require a specific form of broadband infrastructure, as long as the infrastructure meets the speed requirements and complies with State and local building codes. This rule does not supersede any State or local building codes that may apply to the installation of broadband infrastructure. HUD expects funding recipients to consider the costs of installation, as well as operation and maintenance, when deciding which form of broadband infrastructure to install. HUD also encourages all funding recipients to include broadband infrastructure in a way that conforms to standards for resilient construction.

    In addition, HUD is not requiring the installation of broadband infrastructure in common areas and meeting spaces, but HUD highly encourages funding recipients to do so when possible. In projects where installing such infrastructure in individual units is cost prohibitive, HUD encourages funding recipients to install broadband infrastructure in common areas, unless the recipient determines that is also cost prohibitive.

    Internet Service Providers (ISPs)

    Several commenters stated that HUD should encourage housing providers to install broadband infrastructure that enables multiple competitive providers in the same project, or a managed solution to allow for subsidized services. Commenters stated that HUD should prohibit owners from entering into arrangements with providers that limit other providers' access to inside wiring, interfering with the right of residents to request or receive broadband service from a specific provider, or entering into exclusive marketing arrangements in HUD-supported housing.

    Commenters stated that infrastructure running from the street to the building should have sufficient conduit capacity to allow for use by multiple providers.

    HUD Response: As noted in response to the prior comments, HUD leaves the precise nature or manner of installation of broadband infrastructure to standards and requirements set by State and local codes. HUD does recognize that it is important to provide as much choice as possible regarding service providers. However, sometimes, exclusive contracts allow for the provision of broadband service at a much lower rate than would otherwise be available. HUD therefore declines at this time to restrict housing providers' ability to enter into limited service contracts, but would like to recommend caution for public housing agencies (PHAs) considering exclusivity contracts.

    Programs

    Commenters were divided on whether HUD should include additional programs beyond those in the proposed rule. Some wrote that HUD should not include more programs. Others asked that HUD include all programs providing housing assistance for low-income populations, which may make the regulation easier to enforce in general. Commenters also stated that HUD should include all multifamily programs, while reconsidering including Continuum of Care (CoC) programs, as they help with shelter needs, not long-term housing solutions.

    HUD Response: The number of HUD programs that provide for new construction and substantial rehabilitation has not expanded greatly over the years. HUD's Choice Neighborhoods program was the successor to HUD's HOPE VI program. HUD's Housing Trust Fund program is a new program that provides, among other things, for the production of affordable housing. If future HUD programs, whether existing or new, provide for the new construction or substantial rehabilitation of multifamily rental housing, HUD will incorporate these requirements into those programs. In addition, CoC funds long-term housing solutions as well as temporary housing solutions. Therefore, HUD finds it appropriate to include broadband infrastructure in these projects.

    Sanctions

    Commenters suggested some sanctions HUD could consider. Some stated that HUD should fine owners for inappropriate use of exemptions from the requirements, perhaps using the funds for digital literacy programs. Commenters stated that HUD could, in egregious cases, disqualify recipients from future HUD funding. Other commenters suggested that instead of sanctions, HUD could require funding recipients to develop ways to bring the Internet to a project's residents.

    HUD Response: For every HUD program, there are corrective and remedial actions available to HUD for funding recipients who do not follow their regulatory requirements. These corrective and remedial actions vary among programs, depending on existing statutory and regulatory authority. At this time, developing additional program-specific remedies is outside the scope of this rulemaking. However, in the event that a funding recipient does not follow the requirements of this rule, HUD will use the options currently available to pursue such violations.

    Substantial Rehabilitation

    Commenters suggested that HUD reconsider applying the requirements to substantial rehabilitation projects. Others suggested that HUD expand the definition to include other trigger activities, such as updating or replacing coaxial cables, installing fiber optics, or installing Ethernet. Commenters stated that the definition of substantial rehabilitation should not include the electrical system standard, because work on electrical systems does not always translate easily into providing broadband infrastructure.

    Commenters addressed HUD's question about how to determine whether a rehabilitation project rises to the level of substantial rehabilitation. Some stated that HUD should rely on pre-rehabilitation cost estimates because, if there are unexpected expenses that take the project over the substantial rehabilitation threshold, adding broadband requirements on top of those expenses may be too much for the project. However, other comments stated that HUD should use actual costs to judge the substantial threshold.

    Commenters also asked how the standard applies to scattered sites, where only a single unit or a few units are being renovated.

    HUD Response: HUD believes that it is important to include substantial rehabilitation in this rule to maximize the number of families who can benefit from the rule, while minimizing costs as much as possible. In addition, HUD believes that maintaining the electrical system standard as one way to determine substantial rehabilitation is appropriate, as such work would likely result in exposing a building's basic infrastructure in such a way as to allow for the installation of broadband infrastructure.

    HUD appreciates the responses to the question about which construction costs to use when determining whether or not work rises to the level of substantial rehabilitation. HUD has decided that the percentage-of-cost threshold for substantial rehabilitation should be based on the pre-rehabilitation cost estimates, and this has been incorporated into the substantial rehabilitation definition.

    Because this rule only affects structures with more than 4 rental units, scattered-site housing with fewer than 4 rental units is not covered by the rule.

    Additional HUD Support for Broadband

    Commenters stated that HUD should couple the rule with additional support for subsidies and digital literacy programs, including treating the provision of broadband service as an eligible expenditure in affordable rental housing. Others asked for additional funding for the infrastructure costs themselves. Commenters further stated that HUD could leverage its size and buying power to secure broadband service at lower prices. Some suggested that HUD should explore additional subsidies to use “white space” in the over-air spectrum in rural areas for wireless Internet or to subsidize seniors or families with children.

    Commenters also suggested that HUD should coordinate with the United States Department of Agriculture (USDA) to work with “last mile” connection issues.

    HUD Response: This rule, and HUD's broadband rule providing for assessing Internet service needs in the consolidated planning process, are not HUD's final responses to narrowing the digital divide. Through HUD's ConnectHome initiative, HUD is striving to narrow the digital divide in the housing arena. In addition, HUD has and will continue to work with other Federal agencies, such as the USDA and the National Telecommunications and Information Administration.

    HUD encourages funding recipients to make their own connections with other programs, or to establish local requirements to accomplish these goals. HUD will continue to seek out opportunities to foster such partnerships at the national and local level. Several HUD programs can be used to pay for such complementary services, and HUD encourages funding recipients to leverage those resources. HUD will also continue to explore ways to expand the eligibility of such complementary services and for infrastructure work in HUD programs. However, Congress, not HUD, establishes program funding levels, so we are unable to provide additional programmatic funds at this time.

    Other Comments

    Commenters asked HUD to expand the scope of the rule beyond new construction and substantial rehabilitation to also include existing facilities. Commenters also disagreed with HUD's encouragement to deploy competing infrastructure or delivery mechanisms.

    HUD Response: As noted in responses above, this rule and its companion broadband rule regarding the consolidated planning process are not HUD's final responses to narrowing the digital divide. HUD is continuing to examine other areas for which HUD has authority and oversight to determine whether there are other avenues HUD can take to narrow the digital divide. At this time, however, it is outside the scope of this rulemaking to require funding recipients to retrofit existing buildings with broadband infrastructure unless rehabilitation work is being undertaken with HUD program funding.

    V. Findings and Certifications Regulatory Review—Executive Orders 12866 and 13563

    Under Executive Order 12866 (Regulatory Planning and Review), a determination must be made whether a regulatory action is significant and, therefore, subject to review by the Office of Management and Budget (OMB) in accordance with the requirements of the order. Executive Order 13563 (Improving Regulations and Regulatory Review) directs executive agencies to analyze regulations that are “outmoded, ineffective, insufficient, or excessively burdensome, and to modify, streamline, expand, or repeal them in accordance with what has been learned.” Executive Order 13563 also directs that, where relevant, feasible, and consistent with regulatory objectives, and to the extent permitted by law, agencies are to identify and consider regulatory approaches that reduce burdens and maintain flexibility and freedom of choice for the public. This rule was determined to be a “significant regulatory action” as defined in section 3(f) of Executive Order 12866 (although not an economically significant regulatory action, as provided under section 3(f)(1) of the Executive Order).

    As discussed, this rule furthers HUD's efforts to narrow the digital divide in low-income communities served by HUD. Specifically, HUD is requiring installation of broadband infrastructure at the time of new construction or substantial rehabilitation of multifamily rental housing that is funded by HUD. As noted in the Executive Summary, the costs and benefits of this rule are difficult to quantify, but they can be described qualitatively.

    A. Benefits

    The benefits of narrowing the digital divide are well documented. In just one example, a study conducted by a former chair of the President's Council of Economic Advisers used data on the amount of time Internet users spend online to estimate that Internet access produces thousands of dollars of consumer surplus per user each year.9 As noted above, however, the benefits of Internet technology have not been evenly distributed and research shows that there remain substantial disparities in both Internet use and the quality of access. This digital deficit is generally concentrated among older, less educated, and less affluent populations,10 as well as in persons with disabilities.11

    9 Council of Economic Advisers July 2015 report, supra, citing Austan Goolsbee and Peter J. Klenow, Valuing Consumer Products by the Time Spent Using Them: An Application to the Internet National Bureau of Economic Research Working Paper No. 11995 (February 2006) available online at: http://www.nber.org/papers/w11995.

    10 Ibid.

    11 Eve Hill, Department of Justice, Testimony before the Senate Committee on Health, Education, Labor, and Pensions (February 7, 2012), available online at http://www.justice.gov/sites/default/files/testimonies//attachments/02/07/12/02-07-12-crt-hill-testimony.pdf.

    Additionally, individuals with vision, learning, and physical disabilities affecting manual dexterity rely on assistive technologies to interact with computers and the Internet, and such technologies function best on broadband Internet. Without access to broadband infrastructure, these individuals may have limited access to basic services that are now offered online.

    HUD recognizes that the rule's limited scope in only requiring the installation of infrastructure, instead of providing Internet access, also limits the benefits of the rule. Specifically, the benefit of the rule is that where broadband Internet can be made available at a limited price, the tenants, residing in housing with broadband infrastructure, will be assured of the ability to access broadband Internet service, whether they choose and are able to afford Internet service or not. This rule, therefore, would put broadband Internet service within reach where other charitable and public social programs, including HUD's ConnectHome program, provide free or reduced-cost service.

    B. Costs

    It is not possible to specify the exact costs that recipients and owners may incur as a result of the rule, given the variety of available technologies that may be used to satisfy the new broadband requirements. However, available data indicate that any costs associated with this rule will be minimal.

    As is displayed on Table I, broadband Internet access can be provided using two general technologies: Wired and wireless, each with several specific technologies. Broadband can be delivered over wired lines using very-high-bit-rate digital subscriber lines (VDSL), cable lines, power lines (BPL), or fiber optic platforms. Using wireless technologies, broadband can be provided using satellite, fixed wireless, mobile wireless, and Wi-Fi platforms.

    Table I—Types of Broadband Technologies Platform Connection type Access requirement Part of infrastructure Not part of
  • infrastructure
  • Wired: Digital Subscriber Line (VDSL) Copper wire Yes Router & Modem. Cable Modem Copper wire Yes Router & Modem. Fiber Fiber Optic wire Yes Router & Modem. Broadband over Power Lines (BPL) Copper wire Yes Router & Modem. Wireless: Satellite Over the Air—satellite None Router & Modem. Fixed Wireless Over the Air—Longer Range Directional Equipment None Router & Modem. Mobile Wireless Over the Air—Cellular None Router & Modem. Wireless Fidelity (Wi-Fi) Over the Air—Short-Range Wireless Technology None Router & Modem.

    Whereas wired lines technologies may require some sort of physical infrastructure consisting of internal wiring within the dwelling unit, wireless technologies do not require any additional physical infrastructure within the building. With wireless technology, the signal travels through the air to the customer, who uses a connection technology, such as a modem, to access the services. For wireless technologies, the infrastructure cost to the property boundary (connection to the service provider) is nil ($0.00). However, the availability of wireless broadband service is limited and evolving, so HUD expects many builders will install wired broadband infrastructure to ensure that the requirements of this rule are met.

    Building costs of installing wired infrastructure are limited to in-dwelling wiring, as this is all that is required by the rule. Within the unit or the building, the electrical work consists of running cable (meeting the requirements of category (Cat) 5e or Cat 6 wire), installing jacks and plates, and minor construction work (such as drilling and patching walls). Fiber optic cables are rarely run in the dwelling unit but are installed by the service provider outside the unit; the non-fiber optic wiring then makes broadband accessible within the unit. Depending on the market, some of the cost is also borne by the service provider.

    The average per-unit cost for wiring for broadband Internet is approximately $200 (see Table II). These costs are simply estimates of one method of complying with the requirements of the rule. Labor costs will also vary based on the region and whether the installation is being done as part of substantial rehabilitation or new construction. At most, installation of broadband infrastructure may reduce the provision of other amenities or nonessential finishes, but even these reductions are considered unlikely.

    12http://www.homewyse.com/services/cost_to_install_electrical_wiring.html.

    Table II—Sample Cost to Install Electrical Wiring (1 Wiring) 12 Item Quantity Low High Electrical Wiring Labor (Hours)—Labor estimate to install electrical wiring, route, secure, and connect new NMB-B wiring run for single receptacle, up to a 40′ run. Includes planning, equipment, and material acquisition, area preparation and protection, setup, and cleanup 2.1 hours $160.07 $205.10 Electrical Wiring Materials and Supplies—Cost of related materials and supplies typically required to install electrical wiring including connectors, fittings, and mounting hardware 1 Wiring (unit) 20.00 25.00 Total Costs (1 Wiring) 180.07 230.10

    HUD also notes that the rule is drafted so as to minimize the costs of the new installation requirements. For example, the rule does not mandate any rehabilitation or construction, and the decision to undertake such activities appropriately remains with recipients and owners. Rather, the scope of the regulatory changes is limited to requiring the installation of broadband infrastructure if the recipient or owner elects to undertake new construction or substantial rehabilitation. The rule minimizes the economic impacts on recipients and owners by recognizing that the installation of broadband infrastructure is generally less burdensome and costly at the time of new construction or substantial rehabilitation than when such installation is undertaken as a stand-alone effort.

    Moreover, this rule only requires the installation of broadband infrastructure that is “accessible” in each unit. The rule does not require recipients or owners to provide a regular subscription to broadband Internet service (even at a cost) to residents. Also minimizing the economic costs of the regulatory changes is the fact that the definition of broadband infrastructure includes cable television, fiber optic cabling, and wireless infrastructure providing appropriate broadband connectivity to the individual units. As discussed above in this Executive Summary, multifamily HUD or standard-market new construction typically provides telephone landline and cable TV connectivity. Further, HUD's competitive grants for new construction under the Choice Neighborhoods program have, in recent years, sought the provision of broadband.

    A review of HUD internal databases, summarized on Table III, shows that, in 2013, 58,677 units within the targeted programs were newly constructed or rehabilitated. However, HUD's data did not contain specific information to be able to determine how many of the units that underwent rehabilitation met the definition of “substantial rehabilitation” contained in the rule, so the number of affected units would be smaller than is contained in the table. In addition, data on affected units newly constructed using CDBG funding are unavailable, as grantee reports do not separate multifamily from single-unit new construction.

    Table III—HUD-Assisted New Construction and Substantial Rehabilitation Sec. 8 RAD 811 PRAC 202 PRAC Sec. 8 202 HOPE VI PIH CDBG HOME Rental Totals New Construction 2012 506 2,405 146 703 2013 110 583 2,034 44 297 19,424 22,492 2014 100 482 1,592 11,596 Rehabilitation 2012 25 36 2013 199 15 109 16 20,918 14,928 36,185 2014 28 15 15,716 6,965 FY 2013 Totals 58,677

    Further, a review found that multifamily (5-plus units) HUD or standard-market new construction typically provides telephone landlines and many provide cable TV connectivity.13 A recent survey by the National Association of Homebuilders found that just 4 percent of the surveyed multifamily housing developers did not install landline wires and jacks in multifamily units completed in the past 12 months.14 15 In recent years, HUD's competitive grants for new construction under the Choice Neighborhoods program have required the provision of broadband.16 Therefore, this rule simply codifies what is considered common practice in at least one program.

    13 For example, under “Class 4 Low Average Quality” the Craftsman 2015 National Building Cost Manual lists cable TV as a standard feature. Only “Class 5” minimum quality does not list cable or a computer network as a standard feature. All electrical work is estimated to be 10 percent of project cost. 2015 National Building Cost Manual, supra, p. 19.

    14 NAHB, Multifamily Market Survey, supra.

    15 Note that HUD's definition of accessibility is more restrictive than the FCC's because HUD considers only the building itself.

    16 United States Department of Housing and Urban Development. “Choice Neighborhoods Planning Grants Notice of Funding Availability,” supra, p. 32. “Broadband Access. All FY2014 and FY2015 Implementation Grantees will be required, as part of their Transformation Plan, to include infrastructure that permits unit-based access to broadband Internet connectivity in all new units. Grantees may use Choice Neighborhoods funds to provide unit-based broadband Internet connectivity, which includes the costs of installing broadband infrastructure and hardware in units, but not the costs of Internet service for residents. Regular and informed Internet adoption can increase access to the job market, as well as health, education, financial and other services. Further, in-home broadband Internet access is an attractive, and in most cases, standard amenity that can be used to market the mixed-income community created through the Transformation Plan.”

    Accordingly, most recipients and owners already meet the standards established in the rule, and the new regulatory requirements will impose minimal, if any, new economic costs. HUD has addressed those rare situations where the new requirements may prove too costly by allowing exceptions to the installation requirements where the installation is documented to be economically infeasible due to location or building characteristics.

    The docket file is available for public inspection online at www.regulations.gov under the docket number and title of this rule.

    Impact on Small Entities

    The Regulatory Flexibility Act (RFA) (5 U.S.C. 601 et seq.) generally requires an agency to conduct a regulatory flexibility analysis of any rule subject to notice and comment rulemaking requirements unless the agency certifies that the rule will not have a significant economic impact on a substantial number of small entities.

    This rule provides that for new construction or substantial rehabilitation of multifamily rental housing funded by HUD, as part of the new construction or substantial rehabilitation to be undertaken, such activity must include installation of broadband infrastructure. None of the programs covered by this rule require a funding recipient to undertake new construction or substantial rehabilitation. Instead, new construction and substantial rehabilitation are eligible activities that funding recipients may take using HUD funds. Therefore, small entities will not incur any costs they would not otherwise incur by voluntarily undertaking new construction or substantial rehabilitation, since the costs of these activities, including the installation of broadband infrastructure, are funded by HUD. For these reasons, this rule will not have a significant economic impact on a substantial number of small entities.

    Unfunded Mandates Reform Act

    Title II of the Unfunded Mandates Reform Act of 1995 (UMRA) establishes requirements for Federal agencies to assess the effects of their regulatory actions on State, local, and tribal governments and the private sector. This rule will not impose any Federal mandates on any State, local, or tribal governments or the private sector within the meaning of the UMRA.

    Paperwork Reduction Act

    The information collection requirements contained in this rule were submitted to OMB under the Paperwork Reduction Act of 1995 (44 U.S.C. 3501-3520) for review and approval and are pending or are covered by OMB control numbers 2577-0269, 2577-0191, 2506-0165, 2506-0077, 2506-0085, 2506-0170, 2506-0199, 2506-0171, 2506-0133, 2577-0169, 2577-0157, 2502-0587, 2502-0612, 2502-0462, and 2502-0608. In accordance with the Paperwork Reduction Act, an agency may not conduct or sponsor, and a person is not required to respond to, a collection of information unless the collection displays a currently valid OMB control number.

    Environmental Review

    A Finding of No Significant Impact (FONSI) with respect to the environment was made at the proposed rule stage in accordance with HUD regulations in 24 CFR part 50 that implement section 102(2)(C) of the National Environmental Policy Act of 1969 (42 U.S.C. 4332(2)(C)). That FONSI remains applicable to this final rule and is available for public inspection online at www.regulations.gov under the docket number and title of this rule.

    Executive Order 13132, Federalism

    Executive Order 13132 (entitled “Federalism”) prohibits an agency from publishing any rule that has federalism implications if the rule either imposes substantial direct compliance costs on State and local governments and is not required by statute, or the rule preempts State law, unless the agency meets the consultation and funding requirements of section 6 of the Executive order. This rule does not have federalism implications and does not impose substantial direct compliance costs on State and local governments nor preempts State law within the meaning of the Executive order.

    Catalog of Federal Domestic Assistance

    The Catalog of Federal Domestic Assistance numbers applicable to the programs that would be affected by this rule are: 14.218, 14.225, 14.228, 14.239, 14.241, 14.267, 14.850, 14.871, and 14.872.

    List of Subjects 24 CFR Part 5

    Administrative practice and procedure, Aged, Claims, Crime, Government contracts, Grant programs-housing and community development, Individuals with disabilities, Intergovernmental relations, Loan programs-housing and community development, Low and moderate income housing, Mortgage insurance, Penalties, Pets, Public housing, Rent subsidies, Reporting and recordkeeping requirements, Social security, Unemployment compensation, Wages.

    24 CFR Part 92

    Administrative practice and procedure, Low and moderate income housing, Manufactured homes, Rent subsidies, Reporting and recordkeeping requirements.

    24 CFR Part 93

    Administrative practice and procedure, Grant programs-housing and community development, Low and moderate income housing, Manufactured homes, Rent subsidies, Reporting and recordkeeping requirements.

    24 CFR Part 570

    Administrative practice and procedure, American Samoa, Community development block grants, Grant programs-education, Grant programs-housing and community development, Guam, Indians, Loan programs-housing and community development, Low and moderate income housing, Northern Mariana Islands, Pacific Islands Trust Territory, Puerto Rico, Reporting and recordkeeping requirements, Student aid, Virgin Islands.

    24 CFR Part 574

    Community facilities, Grant programs-housing and community development, Grant programs-social programs, HIV/AIDS, Low and moderate income housing, Reporting and recordkeeping requirements.

    24 CFR Part 578

    Community development, Community facilities, Grant programs-housing and community development, Grant programs-social programs, Homeless, Reporting and recordkeeping requirements.

    24 CFR Part 880

    Grant programs-housing and community development, Rent subsidies, Reporting and recordkeeping requirements.

    24 CFR Part 881

    Grant programs-housing and community development, Rent subsidies, Reporting and recordkeeping requirements.

    24 CFR Part 883

    Grant programs-housing and community development, Rent subsidies, Reporting and recordkeeping requirements.

    24 CFR Part 884

    Grant programs-housing and community development, Rent subsidies, Reporting and recordkeeping requirements, Rural areas.

    24 CFR Part 886

    Grant programs-housing and community development, Lead poisoning, Rent subsidies, Reporting and recordkeeping requirements.

    24 CFR Part 891

    Aged, Grant programs-housing and community development, Individuals with disabilities, Loan programs-housing and community development, Rent subsidies, Reporting and recordkeeping requirements.

    24 CFR Part 905

    Grant programs-housing and community development, Public housing, Reporting and recordkeeping requirements.

    24 CFR Part 983

    Grant programs-housing and community development, Low and moderate income housing, Rent subsidies, Reporting and recordkeeping requirements.

    Accordingly, for the reasons stated in the preamble, HUD amends 24 CFR parts 5, 92, 93, 570, 574, 578, 880, 881, 883, 884, 886, 891, 905, and 983 as follows:

    PART 5—GENERAL HUD PROGRAM REQUIREMENTS; WAIVERS 1. The authority citation for part 5 continues to read as follows: Authority:

    42 U.S.C. 1437a, 1437c, 1437f, 1437n, 3535(d), Sec. 327, Pub. L. 109-115, 119 Stat. 2936, Sec. 607, Pub. L. 109-162, 119 Stat. 3051, E.O. 13279, and E.O. 13559.

    2. In § 5.100, add the definitions of “Broadband infrastructure” and “Substantial rehabilitation” in alphabetical order, to read as follows:
    § 5.100 Definitions.

    Broadband infrastructure means cables, fiber optics, wiring, or other permanent (integral to the structure) infrastructure, including wireless infrastructure, that is capable of providing access to Internet connections in individual housing units, and that meets the definition of “advanced telecommunications capability” determined by the Federal Communications Commission under section 706 of the Telecommunications Act of 1996 (47 U.S.C. 1302).

    Substantial rehabilitation, for the purposes of determining when installation of broadband infrastructure is required as part of substantial rehabilitation of multifamily rental housing, unless otherwise defined by a program, means work that involves:

    (1) Significant work on the electrical system of the multifamily rental housing. “Significant work” means complete replacement of the electrical system or other work for which the pre-construction cost estimate is equal to or greater than 75 percent of the cost of replacing the entire electrical system. In the case of multifamily rental housing with multiple buildings with more than 4 units, “entire system” refers to the electrical system of the building undergoing rehabilitation; or

    (2) Rehabilitation of the multifamily rental housing in which the pre-construction estimated cost of the rehabilitation is equal to or greater than 75 percent of the total estimated cost of replacing the multifamily rental housing after the rehabilitation is complete. In the case of multifamily rental housing with multiple buildings with more than 4 units, the replacement cost must be the replacement cost of the building undergoing rehabilitation.

    PART 92—HOME INVESTMENT PARTNERSHIPS PROGRAM 3. The authority citation for part 92 continues to read as follows: Authority:

    42 U.S.C. 3535(d) and 12701-12839.

    4. Amend § 92.251 by revising the introductory text of paragraph (a)(2) and adding paragraphs (a)(2)(vi) and (b)(1)(x) to read as follows:
    § 92.251 Property standards.

    (a) * * *

    (2) HUD requirements. All new construction projects must also meet the requirements described in this paragraph:

    (vi) Broadband infrastructure. For new commitments made after January 19, 2017 for a new construction housing project of a building with more than 4 rental units, the construction must include installation of broadband infrastructure, as this term is defined in 24 CFR 5.100, except where the participating jurisdiction determines and, in accordance with § 92.508(a)(3)(iv), documents the determination that:

    (A) The location of the new construction makes installation of broadband infrastructure infeasible; or

    (B) The cost of installing the infrastructure would result in a fundamental alteration in the nature of its program or activity or in an undue financial burden.

    (b) * * *

    (1) * * *

    (x) Broadband infrastructure. For new commitments made after January 19, 2017 for a substantial rehabilitation project of a building with more than 4 rental units, any substantial rehabilitation, as defined in 24 CFR 5.100, must provide for installation of broadband infrastructure, as this term is also defined in 24 CFR 5.100, except where the participating jurisdiction determines and, in accordance with § 92.508(a)(3)(iv), documents the determination that:

    (A) The location of the substantial rehabilitation makes installation of broadband infrastructure infeasible;

    (B) The cost of installing broadband infrastructure would result in a fundamental alteration in the nature of its program or activity or in an undue financial burden; or

    (C) The structure of the housing to be substantially rehabilitated makes installation of broadband infrastructure infeasible.

    PART 93—HOUSING TRUST FUND 5. The authority citation for part 93 continues to read as follows: Authority:

    42 U.S.C. 3535(d), 12 U.S.C. 4568.

    6. Amend § 93.301 by revising the introductory text of paragraph (a)(2) and adding paragraphs (a)(2)(vi) and (b)(1)(x) to read as follows:
    § 93.301 Property standards.

    (a) * * *

    (2) HUD requirements. All new construction projects must also meet the requirements described in this paragraph:

    (vi) Broadband infrastructure. For new commitments made after January 19, 2017 for a new construction housing project of a building with more than 4 rental units, the construction must include installation of broadband infrastructure, as this term is defined in 24 CFR 5.100, except where the grantee determines and, in accordance with § 93.407(a)(2)(iv), documents the determination that:

    (A) The location of the new construction makes installation of broadband infrastructure infeasible; or

    (B) The cost of installing broadband infrastructure would result in a fundamental alteration in the nature of its program or activity or in an undue financial burden.

    (b) * * *

    (1) * * *

    (x) Broadband infrastructure. For new commitments made after January 19, 2017 for a substantial rehabilitation project of a building with more than 4 rental units, any substantial rehabilitation, as defined in 24 CFR 5.100, must provide for installation of broadband infrastructure, as this term is also defined in 24 CFR 5.100, except where the grantee determines and, in accordance with § 93.407(a)(2)(iv), documents the determination that:

    (A) The location of the substantial rehabilitation makes installation of broadband infrastructure infeasible;

    (B) The cost of installing broadband infrastructure would result in a fundamental alteration in the nature of its program or activity or in an undue financial burden; or

    (C) The structure of the housing to be substantially rehabilitated makes installation of broadband infrastructure infeasible.

    PART 570—COMMUNITY DEVELOPMENT BLOCK GRANTS 7. The authority citation for part 570 continues to read as follows: Authority:

    42 U.S.C. 3535(d) and 5301-5320.

    8. In § 570.202, add paragraph (g) to read as follows:
    § 570.202 Eligible rehabilitation and preservation activities.

    (g) Broadband infrastructure. Any substantial rehabilitation, as substantial rehabilitation is defined by 24 CFR 5.100, of a building with more than 4 rental units, for which CDBG funds are first obligated by the recipient on or after April 19, 2017, must include installation of broadband infrastructure, as this term is also defined in 24 CFR 5.100, except where the recipient determines and, in accordance with § 570.506, documents the determination that:

    (1) The location of the substantial rehabilitation makes installation of broadband infrastructure infeasible;

    (2) The cost of installing broadband infrastructure would result in a fundamental alteration in the nature of its program or activity or in an undue financial burden; or

    (3) The structure of the housing to be substantially rehabilitated makes installation of broadband infrastructure infeasible.

    9. In § 570.204 add paragraph (a)(5) to read as follows:
    § 570.204 Special activities by Community-Based Development Organizations (CBDOs).

    (a) * * *

    (5) Any new construction or substantial rehabilitation, as substantial rehabilitation is defined by 24 CFR 5.100, of a building with more than 4 rental units, for which CDBG funds are first obligated by the recipient on or after April 19, 2017, must include installation of broadband infrastructure, as this term is also defined in 24 CFR 5.100, except where the recipient determines and, in accordance with § 570.506, documents the determination that:

    (i) The location of the new construction or substantial rehabilitation makes installation of broadband infrastructure infeasible;

    (ii) The cost of installing broadband infrastructure would result in a fundamental alteration in the nature of its program or activity or in an undue financial burden; or

    (iii) The structure of the housing to be substantially rehabilitated makes installation of broadband infrastructure infeasible.

    10. Add paragraph (c)(5) to § 570.482 to read as follows:
    § 570.482 Eligible activities.

    (c) * * *

    (5) Broadband infrastructure in housing. Any new construction or substantial rehabilitation, as substantial rehabilitation is defined by 24 CFR 5.100, of a building with more than 4 rental units, for which CDBG funds are first obligated by the State's grant recipient on or after July 18, 2017, must include installation of broadband infrastructure, as this term is also defined in 24 CFR 5.100, except where the State or the State's grant recipient determines and documents the determination that:

    (i) The location of the new construction or substantial rehabilitation makes installation of broadband infrastructure infeasible;

    (ii) The cost of installing broadband infrastructure would result in a fundamental alteration in the nature of its program or activity or in an undue financial burden; or

    (iii) The structure of the housing to be substantially rehabilitated makes installation of broadband infrastructure infeasible.

    11. In § 570.506, redesignate paragraph (c) as paragraph (c)(1) and add a new paragraph (c)(2) to read as follows:
    § 570.506 Records to be maintained.

    (c) * * *

    (2) Where applicable, records which either demonstrate compliance with the requirements of § 570.202(g) or § 570.204(a)(5) or document the State's or State's grant recipient's basis for an exception to the requirements of those paragraphs.

    PART 574—HOUSING OPPORTUNITIES FOR PERSONS WITH AIDS 12. The authority citation for part 574 continues to read as follows: Authority:

    42 U.S.C. 3535(d) and 12901-12912.

    13. Add § 574.350 to subpart D to read as follows:
    § 574.350 Additional standards for broadband infrastructure.

    Any new construction or substantial rehabilitation, as substantial rehabilitation is defined by 24 CFR 574.3, of a building with more than 4 rental units, for which HOPWA funds are first obligated by the grantee or project sponsor on or after January 19, 2017 must include installation of broadband infrastructure, as this term is defined in 24 CFR 5.100, except where the grantee or project sponsor determines and, in accordance with § 574.530, documents the determination that:

    (a) The location of the new construction or substantial rehabilitation makes installation of broadband infrastructure infeasible;

    (b) The cost of installing broadband infrastructure would result in a fundamental alteration in the nature of its program or activity or in an undue financial burden; or

    (c) The structure of the housing to be substantially rehabilitated makes installation of broadband infrastructure infeasible.

    PART 578—CONTINUUM OF CARE PROGRAM 14. The authority citation for part 578 continues to read as follows: Authority:

    42 U.S.C. 11371 et seq., 42 U.S.C. 3535(d).

    15. In § 578.45, add paragraph (d) to read as follows:
    § 578.45 Rehabilitation.

    (d) Broadband infrastructure. Any substantial rehabilitation, as defined by 24 CFR 5.100, of a building with more than 4 rental units and funded by a grant awarded after January 19, 2017 must include installation of broadband infrastructure, as this term is also defined in 24 CFR 5.100, except where the grantee determines and, in accordance with § 578.103, documents the determination that:

    (1) The location of the substantial rehabilitation makes installation of broadband infrastructure infeasible;

    (2) The cost of installing broadband infrastructure would result in a fundamental alteration in the nature of its program or activity or in an undue financial burden; or

    (3) The structure of the housing to be substantially rehabilitated makes installation of broadband infrastructure infeasible.

    16. In § 578.47, add paragraph (c) to read as follows:
    § 578.47 New construction.

    (c) Broadband infrastructure. Any new construction of a building with more than 4 rental units and funded by a grant awarded after January 19, 2017 must include installation of broadband infrastructure, as this term is defined in 24 CFR 5.100, except where the grantee determines and, in accordance with § 578.103, documents the determination that:

    (1) The location of the new construction makes installation of broadband infrastructure infeasible; or

    (2) The cost of installing broadband infrastructure would result in a fundamental alteration in the nature of its program or activity or in an undue financial burden.

    PART 880—SECTION 8 HOUSING ASSISTANCE PAYMENTS PROGRAM FOR NEW CONSTRUCTION 17. The authority citation for part 880 continues to read as follows: Authority:

    42 U.S.C. 1437a, 1437c, 1437f, 3535(d), 12701, and 13611-13619.

    18. Add § 880.212 to subpart B to read as follows:
    § 880.212 Broadband infrastructure.

    Any new construction or substantial rehabilitation, as substantial rehabilitation is defined by 24 CFR 5.100, of a building with more than 4 rental units and that is subject to a Housing Assistance Payments contract executed or renewed after January 19, 2017 must include installation of broadband infrastructure, as this term is also defined in 24 CFR 5.100, except where the owner determines and documents the determination that:

    (a) The location of the new construction or substantial rehabilitation makes installation of broadband infrastructure infeasible;

    (b) The cost of installing broadband infrastructure would result in a fundamental alteration in the nature of its program or activity or in an undue financial burden; or

    (c) The structure of the housing to be substantially rehabilitated makes installation of broadband infrastructure infeasible.

    PART 881—SECTION 8 HOUSING ASSISTANCE PAYMENTS PROGRAM FOR SUBSTANTIAL REHABILITATION 19. The authority citation for part 881 continues to read as follows: Authority:

    42 U.S.C. 1437a, 1437c, 1437f, 3535(d), 12701, and 13611-13619.

    20. Add § 881.212 to subpart B to read as follows:
    § 881.212 Broadband infrastructure.

    Any new construction or substantial rehabilitation, as substantial rehabilitation is defined by 24 CFR 5.100, of a building with more than 4 rental units and that is subject to a Housing Assistance Payments contract executed or renewed after January 19, 2017 must include installation of broadband infrastructure, as this term is also defined in 24 CFR 5.100, except where the owner determines and documents the determination that:

    (a) The location of the new construction or substantial rehabilitation makes installation of broadband infrastructure infeasible;

    (b) The cost of installing broadband infrastructure would result in a fundamental alteration in the nature of its program or activity or in an undue financial burden; or

    (c) The structure of the housing to be substantially rehabilitated makes installation of broadband infrastructure infeasible.

    PART 883—SECTION 8 HOUSING ASSISTANCE PAYMENTS PROGRAM—STATE HOUSING AGENCIES 21. The authority citation for part 883 continues to read as follows: Authority:

    42 U.S.C. 1437a, 1437c, 1437f, 3535(d), and 13611-13619.

    22. Add § 883.314 to subpart C to read as follows:
    § 883.314 Broadband infrastructure.

    Any new construction or substantial rehabilitation, as substantial rehabilitation is defined by 24 CFR 5.100, of a building with more than 4 rental units and that is subject to a Housing Assistance Payments contract executed or renewed after January 19, 2017 must include installation of broadband infrastructure, as this term is also defined in 24 CFR 5.100, except where the owner determines and documents the determination that:

    (a) The location of the new construction or substantial rehabilitation makes installation of broadband infrastructure infeasible;

    (b) The cost of installing broadband infrastructure would result in a fundamental alteration in the nature of its program or activity or in an undue financial burden; or

    (c) The structure of the housing to be substantially rehabilitated makes installation of broadband infrastructure infeasible.

    PART 884—SECTION 8 HOUSING ASSISTANCE PAYMENTS PROGRAM, NEW CONSTRUCTION SET-ASIDE FOR SECTION 515 RURAL RENTAL HOUSING PROJECTS 23. The authority citation for part 884 continues to read as follows: Authority:

    42 U.S.C. 1437a, 1437c, 1437f, 3535(d), and 13611-13619.

    24. Add § 884.125 to subpart A to read as follows:
    § 884.125 Broadband infrastructure.

    Any new construction or substantial rehabilitation, as substantial rehabilitation is defined by 24 CFR 5.100, of a building with more than 4 rental units and that is subject to a Housing Assistance Payments contract executed or renewed after January 19, 2017 must include installation of broadband infrastructure, as this term is also defined in 24 CFR 5.100, except where the owner determines and documents the determination that:

    (a) The location of the new construction or substantial rehabilitation makes installation of broadband infrastructure infeasible;

    (b) The cost of installing broadband infrastructure would result in a fundamental alteration in the nature of its program or activity or in an undue financial burden; or

    (c) The structure of the housing to be substantially rehabilitated makes installation of broadband infrastructure infeasible.

    PART 886—SECTION 8 HOUSING ASSISTANCE PAYMENTS PROGRAM—SPECIAL ALLOCATIONS 25. The authority citation for part 886 continues to read as follows: Authority:

    42 U.S.C. 1437a, 1437c, 1437f, 3535(d), and 13611-13619.

    26. Add § 886.140 to subpart A to read as follows:
    § 886.140 Broadband infrastructure.

    Any new construction or substantial rehabilitation, as substantial rehabilitation is defined by 24 CFR 5.100, of a building with more than 4 rental units and that is subject to a Housing Assistance Payments contract executed or renewed after January 19, 2017 must include installation of broadband infrastructure, as this term is also defined in 24 CFR 5.100, except where the owner determines and documents the determination that:

    (a) The location of the new construction or substantial rehabilitation makes installation of broadband infrastructure infeasible;

    (b) The cost of installing broadband infrastructure would result in a fundamental alteration in the nature of its program or activity or in an undue financial burden; or

    (c) The structure of the housing to be substantially rehabilitated makes installation of broadband infrastructure infeasible.

    27. Add § 886.340 to subpart C to read as follows:
    § 886.340 Broadband infrastructure.

    Any new construction or substantial rehabilitation, as substantial rehabilitation is defined by 24 CFR 5.100, of a building with more than 4 rental units and that is subject to a Housing Assistance Payments contract executed or renewed after January 19, 2017 must include installation of broadband infrastructure, as this term is also defined in 24 CFR 5.100, except where the owner determines and documents the determination that:

    (a) The location of the new construction or substantial rehabilitation makes installation of broadband infrastructure infeasible;

    (b) The cost of installing broadband infrastructure would result in a fundamental alteration in the nature of its program or activity or in an undue financial burden; or

    (c) The structure of the housing to be substantially rehabilitated makes installation of broadband infrastructure infeasible.

    PART 891—SUPPORTIVE HOUSING FOR THE ELDERLY AND PERSONS WITH DISABILITIES 28. The authority citation for part 891 continues to read as follows: Authority:

    12 U.S.C. 1701q; 42 U.S.C. 1437f, 3535(d), and 8013.

    29. In § 891.120, add paragraph (f) to read as follows:
    § 891.120 Project design and cost standards.

    (f) Broadband infrastructure. Any new construction or substantial rehabilitation, as substantial rehabilitation is defined by 24 CFR 5.100, of a building with more than 4 rental units and funded by a grant awarded after January 19, 2017 must include installation of broadband infrastructure, as this term is also defined in 24 CFR 5.100, except where the owner determines and documents the determination that:

    (a) The location of the new construction or substantial rehabilitation makes installation of broadband infrastructure infeasible;

    (b) The cost of installing broadband infrastructure would result in a fundamental alteration in the nature of its program or activity or in an undue financial burden; or

    (c) The structure of the housing to be substantially rehabilitated makes installation of broadband infrastructure infeasible.

    30. Add § 891.550 to subpart E to read as follows:
    § 891.550 Broadband infrastructure.

    Any new construction or substantial rehabilitation, as substantial rehabilitation is defined by 24 CFR 5.100, of a building with more than 4 rental units and funded by a grant awarded after January 19, 2017 must include installation of broadband infrastructure, as this term is also defined in 24 CFR 5.100, except where the owner determines and documents the determination that:

    (a) The location of the new construction or substantial rehabilitation makes installation of broadband infrastructure infeasible;

    (b) The cost of installing broadband infrastructure would result in a fundamental alteration in the nature of its program or activity or in an undue financial burden; or

    (c) The structure of the housing to be substantially rehabilitated makes installation of broadband infrastructure infeasible.

    PART 905—THE PUBLIC HOUSING CAPITAL FUND PROGRAM 31. The authority citation for part 905 continues to read as follows: Authority:

    42 U.S.C. 1437g, 42 U.S.C. 1437z-2, 42 U.S.C. 1437z-7, and 3535(d).

    32. In § 905.312, add paragraph (e) to read as follows:
    § 905.312 Design and construction.

    (e) Broadband infrastructure. Any new construction or substantial rehabilitation, as substantial rehabilitation is defined in 24 CFR 5.100, of a building with more than 4 rental units and funded by a grant awarded or Capital Funds allocated after January 19, 2017 must include installation of broadband infrastructure, as this term is also defined in 24 CFR 5.100, except where the PHA determines and, in accordance with § 905.326, documents the determination that:

    (1) The location of the new construction or substantial rehabilitation makes installation of broadband infrastructure infeasible;

    (2) The cost of installing broadband infrastructure would result in a fundamental alteration in the nature of its program or activity or in an undue financial burden; or

    (3) The structure of the housing to be rehabilitated makes installation of broadband infrastructure infeasible.

    PART 983—PROJECT-BASED VOUCHER (PBV) PROGRAM 33. The authority citation for part 983 continues to read as follows: Authority:

    42 U.S.C. 1437f and 3535(d).

    34. Add § 983.157 to subpart D to read as follows:
    § 983.157 Broadband infrastructure.

    Any new construction or substantial rehabilitation, as substantial rehabilitation is defined by 24 CFR 5.100, of a building with more than 4 rental units and where the date of the notice of owner proposal selection or the start of the rehabilitation while under a HAP contract is after January 19, 2017 must include installation of broadband infrastructure, as this term is also defined in 24 CFR 5.100, except where the owner determines and documents the determination that:

    (a) The location of the new construction or substantial rehabilitation makes installation of broadband infrastructure infeasible;

    (b) The cost of installing broadband infrastructure would result in a fundamental alteration in the nature of its program or activity or in an undue financial burden; or

    (c) The structure of the housing to be substantially rehabilitated makes installation of broadband infrastructure infeasible.

    Dated: December 15, 2016. Nani A. Coloretti, Deputy Secretary.
    [FR Doc. 2016-30708 Filed 12-19-16; 8:45 am] BILLING CODE 4210-67-P
    DEPARTMENT OF LABOR Employee Benefits Security Administration 29 CFR Part 2510 RIN 1210-AB76 Savings Arrangements Established by Qualified State Political Subdivisions for Non-Governmental Employees AGENCY:

    Employee Benefits Security Administration, Department of Labor.

    ACTION:

    Final rule.

    SUMMARY:

    This document contains an amendment to a final regulation that describes how states may design and operate payroll deduction savings programs for private-sector employees, including programs that use automatic enrollment, without causing the states or private-sector employers to have established employee pension benefit plans under the Employee Retirement Income Security Act of 1974 (ERISA). The amendment expands the final regulation beyond states to cover qualified state political subdivisions and their programs that otherwise comply with the regulation. This final rule affects individuals and employers subject to such programs.

    DATES:

    This rule is effective 30 days after the date of publication in the Federal Register.

    FOR FURTHER INFORMATION CONTACT:

    Janet Song, Office of Regulations and Interpretations, Employee Benefits Security Administration, (202) 693-8500. This is not a toll-free number.

    SUPPLEMENTARY INFORMATION:

    I. Background A. The 2016 Final Safe Harbor Regulation

    On August 30, 2016, the Department issued a final regulation establishing a safe harbor pursuant to which state governments can establish payroll deduction savings programs for private-sector employees, including programs with automatic enrollment, without causing either the state or the employers of those employees to have established employee pension benefit plans subject to ERISA. The Department published the safe harbor regulation in response to legislation in some states, and strongly-expressed interest in others, to encourage private-sector employees to save for retirement by giving those employees broader access to retirement savings arrangements through their employers. The safe harbor regulation became effective on October 31, 2016.

    As the Department noted in the final regulation's preamble, concerns that tens of millions of America's workers do not have access to workplace retirement savings arrangements led some states to establish state-administered programs that allow private-sector employees to contribute salary withholdings to tax-favored individual retirement accounts described in 26 U.S.C. 408(a), individual retirement annuities described in 26 U.S.C. 408(b), and Roth IRAs described in 26 U.S.C. 408A (collectively, IRAs). California, Connecticut, Illinois, Maryland, and Oregon, for example, have adopted laws along these lines.1 Those programs generally require certain employers that do not offer workplace savings arrangements to automatically deduct a specified amount of wages from their employees' paychecks, unless an employee affirmatively chooses not to participate in the program, and to remit those payroll deductions to state-administered programs consisting of IRAs established for each participating employee. All of these state initiatives allow employees to stop payroll deductions at any time once they have begun, and they typically require that employers provide employees with program-generated information, including information on employees' rights and various program features. None of the programs, however, currently require employers to make matching or other employer contributions to employee accounts, while some programs expressly prohibit employer contributions and other programs do not address that issue.

    1 California Secure Choice Retirement Savings Trust Act, Cal. Gov't Code §§ 100000-10044 (2012); Connecticut Retirement Security Program Act, P.A. 16-29 (2016); Illinois Secure Choice Savings Program Act, 820 Ill. Comp. Stat. 80/1-95 (2015); Maryland Small Business Retirement Savings Program Act, Ch. 24 (H.B. 1378) (2016); Oregon Retirement Savings Board Act, Ch. 557 (H.B. 2960) (2015).

    The Department also noted in the 2016 final safe harbor regulation's preamble that some stakeholders had expressed concern that their payroll deduction savings programs might cause either the state or the covered employers to inadvertently establish ERISA-covered plans, despite the states' express intent to avoid such a result. The states' concern is based in part on ERISA's broad definition of “employee pension benefit plan” and “pension plan,” which ERISA defines, in relevant part, as “any plan, fund, or program which was heretofore or is hereafter established or maintained by an employer or by an employee organization, or by both, to the extent that by its express terms or as a result of surrounding circumstances such plan, fund, or program . . .provides retirement income toemployees . . . .” 2 That definition's broad scope is further evident in the fact that the Department and the courts have broadly interpreted the phrase “established or maintained” as requiring only minimal involvement by an employer or employee organization.3 Thus, for example, it is possible for an employer to establish an ERISA plan simply by purchasing insurance products for an individual employee or employees. Given these expansive definitions, which Congress deemed essential to ERISA's purpose of protecting plan participants by ensuring the security of promised benefits, ERISA applies to nearly all benefit arrangements that private-sector employers establish for their employees.

    2 29 U.S.C. 1002(2)(A). ERISA's Title I provisions “shall apply to any employee benefit plan if it is established or maintained . . . by any employer engaged in commerce or in any industry or activity affecting commerce . . . .” 29 U.S.C. 1003(a). Section 4(b) of ERISA includes express exemptions from coverage under Title I for governmental plans, church plans, plans maintained solely to comply with applicable state laws regarding workers compensation, unemployment, or disability, certain foreign plans, and unfunded excess benefit plans. 29 U.S.C. 1003(b).

    3Donovan v. Dillingham, 688 F.2d 1367 (11th Cir. 1982); Harding v. Provident Life and Accident Ins. Co., 809 F. Supp. 2d 403, 415-419 (W.D. Pa. 2011); DOL Adv. Op. 94-22A (July 1, 1994).

    The states' desire to avoid inadvertently creating ERISA plans through their payroll deduction savings programs stems from the fact that, with certain exceptions, ERISA preempts state laws that relate to ERISA-covered employee benefit plans.4 Thus, if a state program requires private employers to take actions that effectively cause those employers to establish ERISA-covered plans, the state law underlying the program would likely be preempted. Similarly, if the state-sponsored program itself were deemed to be an ERISA plan, ERISA would likely preempt any state law that mandates private-sector employers to enroll their employees in that program. It is important to note in this regard that although ERISA does exempt from its scope benefit plans that states establish for their own employees, the state payroll deduction savings programs at issue here would not fit that definition.5

    4 ERISA section 514(a), 29 U.S.C. 1144(a).

    5 ERISA section (3)(32), 29 U.S.C. 1002(32).

    The Department responded to these concerns by publishing the 2016 final safe harbor regulation, which described specific conditions pursuant to which state payroll deduction savings programs, including those with automatic enrollment, would not result in the state or private-sector employers having established ERISA-covered employee pension benefit plans. The 2016 final safe harbor regulation thus helps states to establish and operate payroll deduction savings programs in a manner that reduces the risk that ERISA would preempt their laws and programs. That final regulation did not, however, include within its scope payroll deduction savings programs established by state political subdivisions.

    B. Proposed Amendment to the 2016 Safe Harbor Regulation 1. Expanding the Safe Harbor To Include Political Subdivisions

    On August 30, 2016, the Department published in the Federal Register a proposed rule amending the 2016 final safe harbor regulation to include within its scope laws and programs established by certain state political subdivisions.6 The proposed amendment addressed certain public comments the Department received after it first published the safe harbor regulation in 2015 as a proposed rule.7 In particular, several commenters had expressed the view that the Department's definition of “State” in the 2015 proposed safe harbor regulation was too narrow because it did not include political subdivisions. Some of these commenters identified New York City as being interested in offering a program. The 2015 proposal defined the term “State” by referencing section 3(10) of ERISA, which provides, in relevant part, that the term State “includes any State of the United States, the District of Columbia, Puerto Rico, the Virgin Islands, American Samoa, Guam, [and] Wake Island.” That definition excludes from the safe harbor any payroll deduction savings program established by state political subdivisions, such as a cities or counties.

    6See 81 FR 59581 (August 30, 2016).

    7Id. See also 80 FR 72006 (November 18, 2015). On the same day that the 2015 proposed rule was published, the Department also published an Interpretive Bulletin explaining the Department's views concerning the application of ERISA section 3(2)(A), 29 U.S.C. 1002(2)(A), section 3(5), 29 U.S.C. 1002(5), and section 514, 29 U.S.C. 1144, to certain state laws designed to expand retirement savings options for private-sector workers through state-sponsored ERISA-covered retirement plans. 80 FR 71936 (codified at 29 CFR 2509.2015-02). Although discussed in the context of a state as the responsible governmental body, in the Department's view the principles articulated in the Interpretive Bulletin regarding marketplace arrangements and sponsorship of ERISA-covered plans also apply with respect to laws of a political subdivision, provided applicable conditions in the bulletin can be and are satisfied by the political subdivision. A number of commenters asked the Department to amend the Interpretive Bulletin to reflect this view. Such an amendment is beyond the scope of this rulemaking.

    Although the Department retained the section 3(10) definition in the 2016 final safe harbor regulation, the Department nevertheless agreed with commenters that there may be good reasons for expanding the safe harbor, subject to certain conditions, to cover political subdivisions and their programs. While it is not clear to the Department how many such political subdivisions eventually will have an interest in establishing programs of the kind described in the final safe harbor regulation, thus far the Department has only received written letters of interest from representatives of Seattle, Philadelphia and New York City.8 Accordingly, the Department proposed amending the 2016 final safe harbor regulation to add to § 2510.3-2 paragraph (h) the term “or qualified political subdivision” wherever the term “State” appears. That change would cause the regulation's safe harbor to apply to “qualified” political subdivision payroll deduction savings programs in the same manner as it applies to state programs.

    8See, e.g., Comment Letter #4 (Seattle City Councilmember Tim Burgess); Comment letter #5 (City of Philadelphia Controller); Comment Letter #20 (New York City Mayor).

    The proposed amendment also added a new subparagraph (h)(4) to define the term “qualified political subdivision” as any governmental unit of a state, including any city, county, or similar governmental body that met three criteria. First, the political subdivision must have the authority, under state law, whether implicit or explicit, to require employers' participation in the payroll deduction savings program. Second, the political subdivision must have a population equal to or greater than the population of the least populous state.9 Third, the political subdivision cannot be within a state that has a statewide retirement savings program for private-sector employees.10

    9 For this purpose, the term “state” does not include the non-state authorities listed in section 3(10) of ERISA. Thus, it does not include the District of Columbia, Puerto Rico, the Virgin Islands, American Samoa, Guam, and Wake Island.

    10 The proposal's paragraph (h)(4) definition would not, however, apply for other purposes under ERISA, such as for determining whether an entity is a political subdivision for purposes of the definition of a “governmental plan” in section 3(32) of ERISA, 29 U.S.C. 1002(32).

    The Department's goal in defining “qualified political subdivision” in this way was to reduce the number of political subdivisions that can fit within the safe harbor and focus the authority on those subdivisions most likely to have the capacity to implement successful programs. As the Department noted in the proposed rule's preamble, the U.S. Census Bureau reports that there are approximately 90,000 local governmental units in the United States, many of which could be considered “political subdivisions” for purposes of the proposed regulation.11 Given this large number, the Department was concerned that expanding the safe harbor to all political subdivisions would result in overlapping programs within a given state.12 The Department also had some concerns about expanding the safe harbor to very small political subdivisions, as the U.S. Census Bureau has reported that approximately 83% of state subdivisions have populations of less than 10,000 people.13 These statistics led the Department to propose to further limit the types of political subdivisions that can fall within the safe harbor to those that are sufficiently large and sophisticated to have the ability to oversee and safeguard payroll deduction savings programs.

    11 This figure represents the U.S. Census Bureau's count for 2012 (the most recent data available). The U.S. Census Bureau produces data every 5 years as a part of the Census of Governments in years ending in “2” and “7.” See U.S. Census Bureau, Government Organization Summary Report: 2012 Census of Governments (http://www.census.gov/govs/cog/index.html).

    12 This could occur in situations where, for example, an employer operates in a state (or states) with multiple political subdivisions.

    13 U.S. Census Bureau, County Governments by Population-Size Group and State: 2012 Census of Governments; U.S. Census Bureau; Subcounty Governments by Population-Size Group and State: 2012 Census of Governments (http://www.census.gov/govs/cog/index.html).

    2. Criteria Limiting Political Subdivision Eligibility for the Safe Harbor

    The first proposed criterion limiting the potential number of political subdivisions eligible for the safe harbor requires that the political subdivision have either explicit or implicit authority under state law to establish and operate a payroll deduction savings program and to require employers within its jurisdiction to participate. In the case of programs with automatic enrollment, that authority must encompass the power to require employers to execute payroll deduction wage withholdings.14 This criterion will effectively limit the safe harbor's scope to so-called “general-purpose” subdivisions, which are political subdivisions that have the authority to exercise traditional sovereign powers, such as the power of taxation, the power of eminent domain, and the police power. It includes county governments, municipal governments, and township governments.15 According to the U.S. Census Bureau, there are approximately 40,000 “general-purpose” political subdivisions in the United States.16 By contrast, “special-purpose” subdivisions, such as utility districts or transit authorities, ordinarily would not have this kind of authority under state law. Thus, the Department expects that this criterion alone will reduce the universe of political subdivisions potentially eligible for the safe harbor from the approximate total of 90,000 U.S. political subdivisions to approximately 40,000.

    14 This criterion not only limits the number of political subdivisions that would be eligible for the safe harbor, it also is central to the Department's analysis under section 3(2) of ERISA and the conclusion that employers are not establishing or maintaining ERISA-covered plans. Other criteria in (h)(4) also serve this purpose by reducing the likelihood that an employer might become involved with the arrangement beyond the limits of the safe harbor.

    15See U.S. Census Bureau, Government Organization Summary Report: 2012 Census of Governments (http://www.census.gov/govs/cog/index.html).

    16 The U.S. Census Bureau's count of general-purpose political subdivisions for 2012 was 38,910 (3,031 counties, 19,519 municipalities, and 16,360 townships). Id.

    The second proposed criterion limiting the number of potentially-eligible political subdivisions requires that the political subdivision have a population equal to or greater than the population of the least populous U.S. state (excluding the District of Columbia and the territories listed in section 3(10) of the ERISA). Based on the most recent U.S. Census Bureau statistics available, the least populous U.S. state had approximately 600,000 residents.17 This criterion will significantly reduce the possibility of overlap by further limiting the universe of potentially-eligible political subdivisions from approximately 40,000 to a subset of approximately 136.18

    17 Wyoming was the least populated state in the U.S., with a population of 586,107. See U.S. Census Bureau, Annual Estimates of the Resident Population for States: 2015 Population Estimate (https://www.census.gov/popest/data/state/totals/2015/index.html).

    18 As of 2015, there were approximately 136 general-purpose political subdivisions with populations equal to or greater than the population of Wyoming.

    The proposal's third criterion further limited the safe harbor to political subdivisions in states that do not offer their own statewide retirement savings program for private-sector employees.19 As presented in the proposal, this criterion would have applied to state retirement savings programs described in the safe harbor rule itself, 29 CFR 2510.3-2(h), and also to programs described or referenced in the Department's Interpretive Bulletin found at 29 CFR 2509.2015-02. This criterion excluded from the safe harbor approximately 48 additional political subdivisions that otherwise meet the proposal's population threshold, thereby further limiting the universe of potentially eligible political subdivisions to approximately 88 as of the date of the proposed rule.

    19 Eight states have already adopted laws to implement some form of statewide retirement savings program for private-sector employees. California Secure Choice Retirement Savings Trust Act, Cal. Gov't Code §§ 100000-100044 (2012); Connecticut Retirement Security Program Act, Pub. Act. 16-29 (2016); Illinois Secure Choice Savings Program Act, 820 Ill. Comp. Stat. 80/1-95 (2015); Maryland Small Business Retirement Savings Program Act, ch. 324 (H.B. 1378) (2016); Mass. Gen. Laws Ch. 29, § 64E (2012); New Jersey Small Business Retirement Marketplace Act, Public Law 2015, Ch. 298; Oregon Retirement Savings Board Act, Ch. 557 (H.B. 2960) (2015); Washington State Small Business Retirement Savings Marketplace Act, Wash. Rev. Code §§ 43.330.730-750 (2015).

    3. Solicitation of Comments on the Proposed Amendment

    The Department solicited public comments on all aspects of the proposed amendment, including comments on criteria the Department did not specifically address in the proposal, but which might be useful in refining the qualified political subdivision definition. In addition, the Department also requested comments on other facets of the safe harbor more generally. In response to these solicitations, the Department received approximately 27 written comments, many of which are discussed under the topical headings below.

    II. Final Rule A. General Overview

    The final rule largely adopts the proposal's general structure. Specifically, it amends paragraph (h) of § 2510.3-2 by adding the term “or qualified political subdivision” wherever the term “State” appears in the regulation. Thus, with these amendments, the final regulation's safe harbor provisions generally apply in the same manner to qualified political subdivision payroll deduction savings programs as they apply to state programs.

    The final rule also adopts proposed new subparagraph (h)(4), but with modifications. In the final rule, paragraph (h)(4) defines the term “qualified political subdivision” as any governmental unit of a state, including any city, county, or similar governmental body that meets four criteria.20 First, the political subdivision must have implicit or explicit authority under state law to require employers' participation in the payroll deduction savings program. 29 CFR 2510.3-2(h)(4)(i).21 Second, the political subdivision must have a population equal to or greater than the population of the least populous state.22 29 CFR 2510.3-2(h)(4)(ii)(A). Third, the political subdivision cannot be within a state that has enacted a mandatory statewide payroll deduction savings program for private-sector employees; nor can the political subdivision have geographic overlap with another political subdivision that has enacted such a program. 29 CFR 2510.3-2(h)(4)(ii)(B).23 Fourth, the political subdivision must implement and administer a retirement plan for its employees. 29 CFR 2510.3-2(h)(4)(ii)(C).24 Compliance with the latter three conditions is determined as of the date the political subdivision's program is enacted.

    20 This new definition does not apply for other purposes under ERISA, such as for determining whether an entity is a political subdivision for purposes of the definition of a “governmental plan” in section 3(32) of ERISA, 29 U.S.C. 1002(32).

    21 This provision reduces the approximate number of potentially eligible political subdivisions from 90,000 to 40,000.

    22 This provision reduces the approximate number of potentially eligible political subdivisions from 40,000 to 128. For purposes of this provision, the term “state” does not include the non-state authorities listed in section 3(10) of ERISA. Thus, it does not include the District of Columbia, Puerto Rico, the Virgin Islands, American Samoa, Guam, and Wake Island.

    23 This provision reduces the approximate number of potentially eligible political subdivisions from 128 to 80.

    24 This provision reduces the approximate number of potentially eligible political subdivisions from 80 to 51.

    B. The Authority Test

    The final rule adopts the proposal's requirement that in order to be “qualified” a political subdivision must have the “authority, implicit or explicit, under State law to require employers' participation in the program . . . .” § 2510.3-2(h)(4)(i). This provision serves two purposes. The main purpose is to ensure that the political subdivision has the authority under state law to require employers within its jurisdiction to participate in the payroll deduction savings program and, in the case of programs with automatic enrollment, to require wage withholding. This is not to say, however, that a state law must explicitly authorize the political subdivision to establish a payroll deduction savings program; rather, it means that the political subdivision must have some measure of legal authority, even if implicit, to establish and operate the program and to compel employers to participate.25 The provision's second purpose is to limit the qualified political subdivision definition—and by extension to limit the safe harbor's scope—to general-purpose subdivisions, a limitation that greatly reduces the approximate number of potentially-eligible subdivisions from 90,000 to 40,000. For these reasons, and noting that the Department did not receive significant or notable comments on this particular provision, the Department incorporates this provision in the final rule without change.

    25 This particular purpose is central to the Department's analysis under section 3(2) of ERISA and to its conclusion that employers are not establishing or maintaining ERISA-covered plans. 81 FR 59464, 70-71 (Aug. 30, 2016).

    C. The Population Test

    The final rule adopts the proposal's population test for safe harbor qualification, with one modification. As noted above, the final rule states, in relevant part, that a political subdivision must have “a population equal to or greater than the population of the least populated State,” and defines the term “State” to have the same meaning as in section 3(10) of ERISA (excluding the District of Columbia and territories listed in that section). 29 CFR 2510.3-2(h)(4)(ii)(A).26 The final rule modifies the proposal by adding to (h)(4)(ii) the phrase “[a]t the time of the enactment of the political subdivision's payroll deduction savings program,” and applying this requirement to the population test, as well as the two other conditions that a political subdivision must satisfy to be a qualified political subdivision.

    26 The U.S. Census Bureau currently identifies Wyoming as the least populous state, with approximately 600,000 residents.

    The Department has two primary policy reasons for adopting the population test. First, it is important that the safe harbor not include political subdivisions that may not have the experience, capacity, and resources to establish and oversee payroll deduction savings programs. Second, the Department is interested in reducing the possibility that employers would be subject to a multiplicity of overlapping political subdivision programs. It is the Department's view that the population test is an important measure in achieving both of those purposes. In the preamble to the proposed rule, the Department articulated these policy considerations for public notice and comment.

    The Department received a number of comments on this issue that reflected apparently conflicting viewpoints. Some commenters supported the population test because they agree with the Department that population size correlates with a political subdivision having the experience, capacity, and resources to implement the necessary structures to establish and oversee payroll deduction savings programs and meet the safe harbor regulation's various requirements.27 These commenters state that political subdivisions with larger populations are more likely to share states' concerns about the effect of inadequate retirement savings on social welfare programs. Other commenters disagreed with the population test's underlying premise, as they believe that a population test is arbitrary and does not prove either that the least populated state has sufficient capacity to establish and oversee a payroll deduction savings program or that political subdivisions with lesser populations are per se incapable of competently overseeing such a program.

    27See Comment Letter #11 (Corporation for Enterprise Development); Comment Letter #14 (AARP); Comment Letter #17 (AFSCME).

    The Department agrees with those commenters who recognize a relationship between population, on the one hand, and resources, experience, and capacity on the other. This is because larger cities and counties (in terms of population) likely have, among other things, a larger tax base and governmental infrastructure, which provides access to greater resources, experience, and capacity than smaller cities and counties.28 In this regard, population can serve as one indicator of whether a city or county is likely to have sufficient resources, experience, and capacity to safely and competently establish and oversee a payroll deduction savings program. By keying off the least populated state, the final regulation's population test effectively establishes a federal floor, such that no political subdivision could qualify for the safe harbor unless the subdivision has a level of capacity and resources equal to or greater than the capacity and resources of the least populated state, using population as a proxy for capacity and resources.

    28 For similar reasons, the population test also would reduce the likelihood of employer involvement beyond the limits of the safe harbor regulation. For instance, larger cities and counties with greater resources, experience and capacity likely will be better able to assert and maintain complete control over their programs such that there will be few or no occasions for participating employers to exercise their own discretion or control with respect to the program.

    The provisions of the Department's safe harbor pertaining to state payroll deduction savings programs assume that even the least populated states have the capacity and resources to manage a payroll deduction savings program. In the Department's view, political subdivisions that are the population size of small states could, in the right circumstances, have similar capacity and resources as their state counterparts of the same size. For that reason, the Department has decided not to flatly exclude such entities from coverage under the safe harbor. At the same time, however, the Department notes that states necessarily have a breadth of responsibilities, administrative systems, and experience that may not be matched by political subdivisions of equal size. Accordingly, the final regulation also adopts the demonstrated capacity test for these subdivisions, as discussed below. Together these tests ensure a high likelihood that qualified political subdivisions will have sufficient resources, experience, and capacity to safely and competently establish and oversee a payroll deduction savings programs. The application of both the size restriction and the demonstrated capacity test reduce the possibility that employers would be subject to a multiplicity of overlapping political subdivision programs. The population test directly advances this important policy interest by limiting the universe of political subdivisions potentially eligible for the safe harbor from approximately 40,000 general purpose political subdivisions to a far smaller number. As of 2015, there were approximately 136 general-purpose political subdivisions with populations equal to or greater than the population of Wyoming.

    Even though the final regulation excludes smaller political subdivisions from the safe harbor, the Department acknowledges that cities and counties are not per se incapable of competently overseeing a payroll deduction savings program solely because they fail the final rule's population test. Indeed, many localities that fall below the population threshold may have sufficient experience, capacity, and resources to safely establish and oversee payroll deduction savings programs in a manner that sufficiently protects employees. Nevertheless, based on the public record, the Department's view continues to be that smaller political subdivisions do not, in general, have experience, resources, and capacity comparable to that of the least populous state, and therefore the Department chooses not to extend safe harbor status to such localities and their programs. It is also important to note that the final regulation does not—and the Department could not—bar smaller localities from establishing and maintaining payroll deduction savings programs for private-sector employees that fall outside the Department's safe harbor regulation.

    As noted above, the Department did make one technical improvement to the proposed population test. Public comments raised concerns about the possibility that fluctuating populations could cause a qualified political subdivision to fall below the required population threshold—and therefore drop outside the safe harbor—after it had already enacted a payroll deduction savings program. To eliminate this possibility and its attendant uncertainty, the final rule contains new language to clarify that such cities and counties would not lose their qualified status merely because of population fluctuations. In that regard, the final regulation adds to paragraph (h)(4)(ii) the phrase “[a]t the time of the enactment of the political subdivision's payroll deduction savings program.”

    Finally, some commenters suggested that, because population size is only a rough indicator of a political subdivision's capacity and ability to safely operate a payroll deduction savings program, the Department should consider pairing the population test with some other more refined test or indicator. As mentioned above, the Department agrees that the population test could be improved by being paired with an additional criterion to gauge whether a sufficiently-large political subdivision should nonetheless fail to qualify under the safe harbor for lack of experience. The section below discusses the changes made to accomplish this result.

    D. Demonstrated Capacity Test

    The final regulation adopts a “demonstrated capacity” test in addition to the population test. As noted in the preceding sections, the population test removed from the safe harbor a significant number of smaller political subdivisions based solely on their size. The demonstrated capacity test, on the other hand, focuses on a political subdivision's ability to operate a payroll deduction savings program by requiring direct and objectively verifiable evidence of a political subdivision's experience, capacity, and resources to operate or administer such programs. The two tests (population test and demonstrated capacity test) combine to ensure a strong likelihood that political subdivisions that meet the safe harbor have sufficient experience, capacity, and resources to safely establish and oversee payroll deduction savings programs in a manner that sufficiently protects private-sector employees and that would not require employer involvement beyond the limits of the safe harbor regulation.

    The Department adopted this new test in response to a significant number of commenters that strongly support this idea. These commenters encouraged the Department to consider two different approaches for developing a demonstrated capacity test. The first suggested approach focuses on whether the political subdivision has implemented and administers a retirement plan for its own employees.29 The second suggested approach focuses on whether the political subdivision has an existing infrastructure for assessing and collecting income, sales, use or other similar taxes.30 The apparent rationale behind these suggested approaches is that political subdivisions that are sophisticated enough to operate a retirement plan or levy and collect their own taxes should possess sufficient experience, capacity, and resources to safely establish and oversee a payroll deduction savings program. In addition, retirement plan administration and tax administration entail administrative activities that are highly comparable to the type of administrative activity that would be necessary to establish and oversee a successful payroll deduction savings program for private-sector employees.

    29See, e.g., Comment Letter #16 (Investment Company Institute).

    30See, e.g., Comment Letter #19 (Georgetown University Center for Retirement Initiatives).

    The final regulation adopts the suggested plan sponsorship approach as the sole basis for a demonstrated capacity test. Thus, in order to be qualified for the safe harbor under the final regulation, a political subdivision must implement and administer its own retirement plan. The Department agrees with the commenters that administering a public retirement plan for the political subdivision's own employees is sufficiently similar to establishing and overseeing a payroll deduction savings program for employees of other entities that successfully performing the former is strong evidence of an ability to successfully perform the latter. Both endeavors require, for example, receiving contributions, custodianship, investing assets or selecting investment options, deciding claims, furnishing account statements, meeting reporting requirements, distributing benefit payments, or selecting and overseeing others to perform some or all of these tasks. A political subdivision that does not implement and administer a retirement plan for its own employees, on the other hand, will fail to qualify under the safe harbor even if it passes the population test and all the other safe harbor conditions set forth in the qualified political subdivision definition.

    The Department declined to adopt as part of the demonstrated capacity test the second of the commenters' suggested approaches, i.e., the existence of a tax infrastructure. In support of that approach, the commenters suggested that a political subdivision's levying and collecting its own income, wage, or similar taxes may provide evidence that the political subdivision has the capacity to establish and oversee payroll deduction savings programs. The commenters noted that effective tax and program administration require political subdivisions to safely and efficiently exchange data and money with employers in a timely and ongoing fashion, usually by way of electronic payroll and other systems. In the Department's view, however, plan sponsorship is a better and more directly relevant indicator of a subdivision's ability to sponsor and administer a retirement savings program. Additionally, the Department is unable to verify the precise number of political subdivisions that both levy and collect their own income, wage, or similar taxes. Without such information, the Department is unable to assess the effect of this suggested approach on the safe harbor's scope. For these reasons, the Department declined to include this approach in the final rule's demonstrated capacity test.

    Finally, the new test does not prescribe the type or size of plan a political subdivision must implement and administer in order to meet the safe harbor's new “plan administration” criterion. Thus, a political subdivision can satisfy this criterion by administering a defined benefit plan, an individual account plan, or both. Although a number of commenters suggested that the Department consider a plan size requirement, such as a minimum level of assets under management or number of participants covered, the Department declines to adopt these suggestions in the final rule.31 As long as the plan provides retirement benefits for some or all of the political subdivision's employees, and provided that the political subdivision administers the plan directly or is responsible for selecting and overseeing others performing plan administration, the retirement plan is a “plan, fund, or program” within the meaning of paragraph (h)(4)(ii)(C) of the final regulation.

    31See, e.g., Comment Letter #9 (New York City Comptroller).

    E. Consumer Protections

    The final rule eliminates lingering ambiguity regarding the requirement in proposed paragraph (h)(1)(iii) that the state or political subdivision must assume responsibility for the security of payroll deductions. The Department previously attempted to clarify this requirement in the preamble to the final regulation dealing with state payroll deduction savings programs.32 Despite those earlier efforts, commenters on the proposal continued to ask the Department to further clarify the meaning of this requirement. A number of commenters specifically focused on the need to clarify and strengthen proposed paragraph (h)(1)(iii), with some specifically stressing the importance of clear and strong standards protecting payroll deductions.33 Many commenters also raised a generic concern that the proposal does not contain sufficient consumer protections as compared to the protections ERISA would offer.34 The Department received similar comments on the 2015 proposed rule for state payroll deduction savings programs. Many of those commenters specifically referenced and supported a rule similar to the Department's regulation at 29 CFR 2510.3-102 (defining when participant contributions become “plan assets” for the purpose of triggering ERISA's protections).

    32 81 FR 59470 (August 30, 2016).

    33See, e.g., Comment Letter #12 (AFL-CIO); Comment Letter #16 (ICI) (incorporating comments from January 19, 2016 letter pertaining to state payroll deduction savings programs); Comment Letter #22 (American Council of Life Insurers) (“The inclusion of a payroll deduction transmission timing requirement in a safe harbor—especially one that provides for auto-enrollment—will provide a powerful incentive for those seeking to use the safe harbor protection to ensure that employee payroll deductions are transmitted safely, appropriately, and in a timely manner as non-compliance will subject the plan to ERISA's Title I requirements.”).

    34See, e.g., Comment Letter #12 (AFL-CIO); Comment Letter #16 (ICI); Comment Letter #17 (AFSCME); Comment Letter #18 (U.S. Chamber of Commerce); Comment Letter #22 (American Council of Life Insurers); Comment Letter #26 (Economic Studies at Brookings).

    In response to these concerns, the final rule clarifies and strengthens the requirement that states and political subdivisions must assume responsibility for the security of payroll deductions. Specifically, paragraph (h)(1)(iii) contains a new sub-clause clarifying that this requirement—to assume responsibility for the security of payroll deductions—includes two subsidiary requirements. The first subsidiary requirement is that states and political subdivisions must require that employers promptly transmit wage withholdings to the payroll deduction savings program. The second subsidiary requirement is that states and political subdivisions must provide an enforcement mechanism to ensure employer compliance with the first subsidiary requirement. These new requirements protect employees by ensuring that their payroll deductions are transmitted to their IRAs as quickly as possible, where they become subject to applicable Internal Revenue Code provisions, including the protective prohibited transaction provisions found in section 4975 of the Code.35 States and political subdivisions may meet the new requirements in a variety of ways, including, for example, through legislation, ordinance, or administrative rulemaking.

    35See 81 FR 59469 (August 30, 2016).

    The final regulation does not prescribe what is meant for wage withholdings to be transmitted “promptly.” Instead, each state and qualified political subdivision is best positioned to calibrate the appropriate timeframe for its own program. Nevertheless, in the interest of providing certainty to states and political subdivisions, the final regulation contains a special safe harbor for promptness. Paragraph (h)(5) provides that, for purposes of paragraph (h)(1)(iii), employer wage withholdings are “deemed to be transmitted promptly” if such amounts are transmitted to the program as of the earliest date on which such contributions can reasonably be segregated from the employer's general assets, but in no event later than the last day of the month following the month in which such amounts would otherwise have been payable to the employee in cash. This standard is closely aligned with the rules in 29 CFR 2510.3-102 for plans involving SIMPLE IRAs, as described in section 408(p) of the Internal Revenue Code.36 Paragraph (h)(5) is not, however, the only method of complying with the promptness requirement in paragraph (h)(1)(iii) of the final regulation.

    36 29 CFR 2510.3-102(b)(2). See, e.g., DOL Advisory Opinion 83-25A (May 24, 1983).

    F. Overlap

    The proposed rule limited the safe harbor to political subdivisions that are not located in a state that establishes a statewide retirement savings program for private-sector employees.37 The purpose behind this criterion was to reduce the number of political subdivisions that could potentially meet the safe harbor, thereby mitigating the potential for overlap or duplication between political subdivision programs and state programs. In the proposal's preamble, the Department interpreted the term “state-wide retirement savings program” to include retirement savings programs described in the Department's Interpretive Bulletin found at 29 CFR 2509.2015-02, such as the voluntary marketplace and exchange models adopted by Washington State and New Jersey.38

    37See paragraph (h)(4)(iii) of the proposed rule; 81 FR 59581, 92 (Aug. 30, 2016).

    38 81 FR 59581, 85 (Aug. 30, 2016).

    A number of commenters expressed concern that including non-mandatory state programs within this limiting criterion is overly broad.39 The commenters noted that where a state establishes the types of voluntary programs described in the Interpretive Bulletin, such as voluntary marketplaces and exchanges, there is little risk that employers would be subject to overlapping requirements or duplication because statewide information marketplaces and exchanges are merely vehicles for providing employees access to information about retirement savings options.40 Thus, such programs would not impose upon employers any obligations that might conflict or overlap with a political subdivision's mandatory payroll deduction savings program. These commenters urged the Department to clarify in the final rule that a political subdivision is precluded from meeting this safe harbor condition only when the political subdivision is in a state that establishes a mandatory statewide payroll deduction savings program that requires employers to participate.

    39See, e.g., Comment Letter #3 (Washington State Department of Commerce); Comment Letter #4 (Seattle City Councilmember Tim Burgess); Comment Letter #7 (Economic Opportunity Institute); Comment Letter #9 (New York City Comptroller); Comment Letter #14 (AARP); Comment Letter #17 (AFSCME); Comment Letter #19 (Georgetown University Center for Retirement Initiatives); Comment Letter #20 (New York City Mayor); Comment Letter #26 (Economic Studies at Brookings).

    40See Comment Letter #9 (New York City Comptroller).

    Commenters also expressed concern that the proposed rule's provision excluding a political subdivision from the safe harbor if the state subsequently enacts its own payroll deduction savings program could, in certain circumstances, result in legitimate political subdivision programs automatically dropping out of the safe harbor.41 Specifically, the commenters pointed out that under the proposed rule, a political subdivision could be “qualified” at the time it enacts a payroll deduction savings program, but then suffer automatic disqualification if its state subsequently enacts a statewide program.42 This is because the proposed rule excludes from the safe harbor any political subdivision that is in a state that “enacts” its own program, without regard to whether the political subdivision had enacted its own program before the state acted.

    41See, e.g., Comment Letter #4 (Seattle City Councilmember Tim Burgess); Comment Letter #8 (American Retirement Association).

    42See Comment Letter #8 (American Retirement Association); Comment Letter #20 (New York City Mayor).

    1. Clarifying “Statewide Retirement Savings Program”

    The Department agrees with the commenters that this criterion was overly broad. Accordingly, the final rule modifies the proposed rule to clarify that in order to be eligible for the safe harbor a political subdivision must not be located in a state that has enacted a mandatory statewide payroll deduction savings program for private sector employees. See § 2510.3(h)(4)(ii)(B). This modified language will continue to exclude from the safe harbor political subdivisions located in states (such as California, Connecticut, Illinois, Maryland, and Oregon) that have enacted a mandatory state payroll deduction savings program, as well as other political subdivisions that seek to enact a safe harbor program after the state in which they are located has already done so. Revised paragraph (h)(4)(ii)(B) does not, however, exclude from the safe harbor political subdivisions located in states that have enacted only voluntary programs such as those Massachusetts, New Jersey, and Washington State had enacted as of the date this final rule was published.43

    43 Mass. Gen. Laws ch. 29, § 64E (2012); New Jersey Small Business Retirement Marketplace Act, Public Law 2015, ch. 298; Washington State Small Business Retirement Savings Marketplace Act, Wash. Rev. Code §§ 43.330.730-750 (2015).

    2. Timing—Political Subdivisions Enacting Programs Before the State

    The Department agrees with commenters that an otherwise-qualified political subdivision that has relied on the safe harbor to enact a payroll deduction savings program should not automatically lose its qualified status when its state subsequently enacts its own program. To allow an otherwise-qualified, pre-existing program to precipitously drop outside the safe harbor due to actions outside of its control would impose upon affected employers and participants undesirable uncertainty and complexities.44 The final rule therefore revises paragraph (h)(4) to exclude from the safe harbor political subdivisions that are located in a state that already has enacted a mandatory statewide payroll deduction savings program before the political subdivision enacts its own program. Thus, if a state enacts such a program after the political subdivision has done so, the political subdivision does not automatically fall outside the safe harbor. Rather, in such instances it is incumbent upon the state and the political subdivision to determine how to coordinate the potentially overlapping programs in a way that does not require employer involvement beyond the limits of the safe harbor regulation, whether that means carving out the political subdivision from the state program, incorporating the political subdivision's program into the state program, or employing some other alternative.

    44See, e.g., Comment Letter #8 (American Retirement Association); Comment Letter #20 (New York City Mayor).

    3. Elimination of Overlapping Political Subdivision Programs

    Some commenters asked the Department to clarify how the safe harbor would apply to political subdivisions that each enact a mandatory payroll deduction savings program for employees within their potentially overlapping jurisdictions. Some of those commenters further suggested that the Department should establish a rule that the larger political subdivision's program (e.g., a county program) should take priority over any political subdivision program within its jurisdiction (e.g., a city program), regardless of which program was first enacted.45

    45See, e.g., Comment Letter #6 (American Payroll Association); Comment Letter #15 (American Benefits Council); Comment Letter #20 (New York City Mayor); Comment Letter #23 (Financial Services Institute).

    As a practical matter, and in view of the fact that only three political subdivisions have expressed a potential interest in establishing payroll deduction savings programs, the Department does not anticipate that there will be overlapping programs among political subdivisions. After careful deliberation, however, the Department decided to address concerns regarding the potential for conflicting requirements by modifying the proposed rule to preclude potentially overlapping political subdivision programs. As explained in the proposed rule's preamble, the Department has taken substantial measures to mitigate the potential that overlapping programs could simultaneously meet the safe harbor,46 but there remains some potential for overlap. To eliminate any remaining potential for overlap, the Department has decided to extend the first-in-time coordination rule (the provisions of paragraph (h)(4)(ii)(B) of the rule that exclude from the safe harbor an otherwise qualified political subdivision when the state in which it is located has already enacted a mandatory payroll deduction savings program) to apply in situations where a mandatory payroll deduction savings program has already been enacted in another political subdivision. Thus, to the extent that a political subdivision meets the other conditions to be qualified but has a geographic overlap with another political subdivision that has already enacted a mandatory payroll deduction saving program for private-sector employees, the former political subdivision would be precluded from enacting a mandatory payroll deduction saving program that would satisfy the safe harbor. The Department has determined that this first-in-time rule will eliminate the few remaining situations in which the possibility of overlap among political subdivisions might otherwise exist.

    46See 81 FR 59581, 59585-86.

    G. Petition Process

    Some commenters suggested that political subdivisions could petition or apply to the Department for an individual opinion or decision regarding whether or not the political subdivisions qualify for the safe harbor. These commenters propose that such a process could be available for political subdivisions that meet at least some of the four conditions in paragraph (h)(4) of the final regulation, but fail to meet all of the conditions. For example, the process could be available for a city or county that satisfies the demonstrated capacity test but not the population test, or vice-versa. These commenters envision a process in which the petitioner or applicant would present to the Department its best case for safe harbor status using a list of factors or criteria to be developed by the Department. This approach would give “close-call” cities and counties an avenue to obtain qualified status, while reserving to the Department the ability to deny potentially unsafe or improper applicants.

    The Department declines to adopt this suggestion. The qualified political subdivision definition in paragraph (h)(4) of the final rule consists of four criteria, each of which is a bright-line measure that is either met or not. These objective criteria enable interested parties to readily determine whether or not they meet the definition. The commenters' suggested petition or application process, by contrast, is inherently subjective, and thus runs entirely counter to the Department's objective approach. Moreover, under the commenters' proposed model, the outcome in any particular case would depend on, among other things, the Department's view of the relevant facts and its weighing and balancing of a given list of factors or criteria. The present public record provides little, if any, direction on the type of criteria or factors the Department could or should adopt under such an approach, or whether each individual criterion or factor should be given equal weight. Apart from these significant shortcomings, the commenters' suggested proposal also raises Departmental budgetary and resource issues that are beyond the scope of this rulemaking.

    H. Responsibility and Liability for Program Operations

    The proposal required that states and political subdivisions assume and retain full responsibility for the payroll deduction savings programs they implement and administer. More specifically, the proposal provided that states and political subdivisions must assume responsibility (i) for investing employee savings or for selecting investment alternatives; (ii) for the security of payroll deductions and employee savings; and (iii) for operating and administering their programs, even if they delegate those functions to service or investment providers.47 The proposal thus made it clear that in order for a program to qualify for the safe harbor, states and political subdivisions must assume and retain responsibility for operating and administering their programs.

    47See §§ 2510.3-2(h)(1)(ii), (h)(1)(iii), and (h)(2)(ii), respectively.

    At least one commenter requested that the Department clarify what it means for a state or political subdivision to assume and retain full responsibility for program operations, especially where the state or political subdivision chooses to delegate some of its responsibilities to third-party experts.48 In the commenter's view, this requirement effectively prevents states and political subdivisions from delegating responsibilities and liabilities to third-party experts who are willing to assume such duties and liabilities. This commenter argues that this provision exposes states and political subdivisions to broader responsibility—and greater liability for third-party management—than they would have under ERISA's fiduciary standards, or possibly even under state statutes or common law. The commenter therefore asked the Department to modify the proposal to clarify that states and political subdivisions can delegate some of their management responsibility and attendant liability to third-party service or investment providers, on the condition that the state or political subdivision prudently selects and appropriately monitors those service providers.

    48See Comment Letter #20 (New York City Mayor).

    The final regulation contains no such modification. The essence of the regulation's requirement that states and political subdivisions assume and retain full responsibility for operating and administering their payroll deduction savings programs is simply that states and political subdivisions must retain ultimate authority over those programs. Such authority includes, for example, determining whether or not to hire and fire qualified third-party service providers, and determining the scope of those service providers' duties. In drafting this rule, the Department fully anticipated that states and political subdivisions might choose to delegate program administration to qualified service providers that the states or political subdivisions oversee.49 In that regard, the Department recognizes that prudently-selected third parties with relevant program administration and investment experience and expertise may, in many circumstances, be better equipped than a state or political subdivision to discharge the specialized duties associated with operating and managing payroll deduction savings programs. Thus, given that this requirement does not preclude sponsoring states and political subdivisions from delegating or assigning some or all of their administrative responsibilities to third-party service providers, states and political subdivisions would not lose their safe harbor status by doing so. It is important to note, however, that this requirement does not in any way govern the assignment of liability between states and political subdivisions and those to whom they delegate such responsibilities. Rather, issues of liability, such as whether and how states or political subdivisions and their service providers allocate liabilities among themselves, are matters for state and local law, and for applicable provisions of the Internal Revenue Code.

    49See § 2510.3-2(h)(2)(ii) (states and political subdivisions may, without falling outside the safe harbor, utilize service or investment providers to operate and administer their payroll deduction savings programs as long as the state or political subdivision retains full responsibility for operating and administering the program).

    I. Timing

    A few commenters asked the Department to delay extending the safe harbor to qualified political subdivisions until after the Department has had a chance to accumulate and fully analyze experience data on state-sponsored payroll deduction savings programs.50 Among the concerns these commenters raised are the potential for overlapping programs; the uncertainty that a political subdivision could establish a program and then drop out of the safe harbor due to fluctuating populations; political subdivisions' assumed inferior level of financial sophistication, expertise and resources to properly manage payroll deduction savings programs; the inherently subjective nature of attempting to differentiate between sophisticated and unsophisticated political subdivisions; and a perceived lack of consumer protections. The commenters also suggested that a delay in implementing the final rule would allow more time for states to establish statewide programs, thereby alleviating the need for potentially overlapping political subdivisions to establish separate programs.

    50 Comment Letter #8 (American Retirement Association); Comment Letter #15 (American Benefits Council); Comment Letter #18 (U.S. Chamber of Commerce).

    Although the Department declines the commenters' requests to delay implementing this final rule, the final rule reflects that the Department did take the commenters' concerns into account. As noted above in this preamble, the final rule addresses the commenters' concerns about potentially overlapping programs by adopting a new condition that further reduces the number of political subdivisions that can meet the safe harbor. That condition requires that in order to be eligible for the safe harbor a political subdivision must already administer a public-employee retirement program. The Department believes that this condition—which a number of commenters supported—measures, in objective terms, a political subdivision's ability to operate and administer a payroll deduction savings program for private-sector employees. The final rule also clarifies that an otherwise-qualified political subdivision will not automatically drop outside the safe harbor due to a drop in population, and it adds important consumer protections by requiring that employers remit employee wage withholdings to state and political subdivision programs in a timely manner. Moreover, the final rule does not preclude a state from moving forward with establishing its own payroll deduction savings program simply because a political subdivision within its borders has already done so.

    The Department also notes that one very large political subdivision has already taken steps to establish a payroll deduction savings program for its private-sector employee residents, and, based on the comments the Department has received, it seems two others have expressed a potential interest in doing so.51 As noted throughout this preamble, facilitating political subdivisions' ability to encourage their residents to save for retirement by enrolling them in payroll deduction savings programs furthers important state, federal, and Departmental goals and policies. For these reasons, and considering the modifications the Department already made to the final rule, the Department judges it appropriate to implement the final rule at this time.

    51See, e.g., The New York City Nest Egg: A Plan for Addressing Retirement Security in New York City, Office of the New York City Comptroller (October 2016).

    III. Regulatory Impact Analysis A. Executive Order 12866 and 13563 Statement

    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 13563 emphasizes the importance of quantifying both costs and benefits, of reducing costs, of harmonizing and streamlining rules, and of promoting flexibility. It also requires federal agencies to develop a plan under which the agencies will periodically review their existing significant regulations to make the agencies' regulatory programs more effective or less burdensome in achieving their regulatory objectives.

    Under Executive Order 12866, the Office of Management and Budget (OMB) must determine whether a regulatory action is “significant” and therefore subject to the requirements of the Executive Order and review by the OMB. Section 3(f) of the Executive Order defines a “significant regulatory action” as an action that is likely to result in a rule (1) having an annual effect on the economy of $100 million or more, or adversely and materially affecting a sector of the economy, productivity, competition, jobs, the environment, public health or safety, or state, local or tribal governments or communities (also referred to as an “economically significant” action); (2) creating serious inconsistency or otherwise interfering with an action taken or planned by another agency; (3) materially altering the budgetary impacts of entitlement grants, user fees, or loan programs or the rights and obligations of recipients thereof; or (4) raising novel legal or policy issues arising out of legal requirements, the President's priorities, or the principles set forth in the Executive Order.

    OMB has determined that this regulatory action is not economically significant within the meaning of section 3(f)(1) of the Executive Order. However, it has determined that the action is significant within the meaning of section 3(f)(4) of the Executive Order. Accordingly, OMB has reviewed the final rule and the Department provides the following assessment of its benefits and costs.

    B. Background

    As discussed in detail above in Section I of this preamble, several commenters on the 2015 proposal 52 urged the Department to expand the safe harbor for state payroll deduction savings programs to include payroll deduction savings programs established by state political subdivisions. In particular, the commenters argued that an expansion of the safe harbor is necessary, because otherwise the safe harbor would not benefit employees of employers in political subdivisions that are located in states that have not adopted a statewide program and expressed a strong interest in establishing such programs.

    52See 80 FR 72006 (November 18, 2015).

    In response, on August 30, 2016, the Department published a proposed rule 53 that would amend the 2016 final safe harbor regulation for state programs to include within its scope laws and programs established by certain state political subdivisions. The Department received and carefully reviewed the public comments submitted in response to the proposal. The Department now is publishing a final rule that amends paragraph (h) of § 2510.3-2 to cover payroll deduction savings programs of qualified political subdivisions defined in paragraph (h)(4) of the final rule. The Department discusses the benefits and costs attributable to the final rule below.

    53See 81 FR 59581 (August 30, 2016).

    C. Benefits and Costs

    In analyzing benefits and costs associated with this final rule, the Department focuses on the direct effects, which include both benefits and costs directly attributable to the rule. These benefits and costs are limited, because as stated above, the final rule would merely establish a safe harbor describing the circumstances under which qualified political subdivisions with authority under state law could establish payroll deduction savings programs that would not give rise to ERISA-covered employee pension benefit plans. It does not require qualified political subdivisions to take any actions nor employers to provide a retirement savings programs to their employees.

    The Department also addresses indirect effects associated with the final rule, which include (1) potential benefits and costs directly associated with the requirements of qualified political subdivision payroll deduction savings programs, and (2) the potential increase in retirement savings and potential cost burden imposed on covered employers to comply with the requirements of such programs. Indirect effects vary by qualified political subdivisions depending on their program requirements and the degree to which the final rule might influence how political subdivisions design their payroll deduction savings programs.

    Although the Department estimates that approximately 51 political subdivisions are potentially eligible to use this final rule,54 the Department understands that many qualified political subdivisions may not be interested in establishing payroll deduction savings programs. As noted above, commenters have identified only three cities—New York City, Philadelphia, and Seattle—as having any potential interest to date. Therefore, the direct benefits and direct costs attributable to this final rule could be quite limited.

    54 This estimate is based on the population estimates from the U.S. Census Bureau, the Census of Government data from the U.S. Census Bureau about defined benefit (DB) plans for local government employees, and BrightScope data about defined contribution (DC) plans for local government employees. For qualified political subdivision with overlapping boundaries, it counts only one per combination as the final rule precludes overlapping programs.

    1. Direct Benefits

    The Department believes that political subdivisions and other stakeholders would directly benefit from expanding the scope of the Department's final safe harbor regulation to include payroll deduction savings programs established by qualified political subdivisions. As with the states, this action will provide political subdivisions with clear guidelines to determine the circumstances under which programs they create for private-sector workers would not give rise to the establishment of ERISA-covered plans. The Department expects that the final rule will reduce legal costs, including litigation costs political subdivisions might otherwise incur, by (1) removing uncertainty about whether such political subdivision payroll deduction savings programs give rise to the establishment of plans that are covered by Title I of ERISA, and (2) creating efficiencies by eliminating the need for multiple political subdivisions to incur the same costs to determine that their programs would not give rise to the establishment of ERISA-covered plans. However, these benefits will be limited to qualified political subdivisions meeting all criteria set forth in this final rule. Those governmental units of a state, including any city, county, or similar governmental body that are not eligible to use the safe harbor may incur legal costs if they elect to establish their own payroll deduction savings programs.

    In order to constitute a “qualified political subdivision,” the proposed rule required the political subdivision to have a population equal to or greater than the population of the least populous state. Several commenters asserted that based on this provision, it is possible that fluctuating populations could cause a previously qualified political subdivision to fall below the required population threshold and fall outside the safe harbor after it has established its program. To eliminate this possibility and reduce uncertainty, the Department clarified in the final rule that political subdivisions satisfying the population threshold when they enact a payroll deduction savings program would not lose their qualified status solely due to subsequent population fluctuations. This change will especially benefit political subdivisions close to the population threshold and encourage them to establish payroll deduction savings programs, because they will not have to continuously monitor their population if their population is equal to or greater than the population of the least populous state when their program is enacted.

    In response to comments, the final rule clarifies that a qualified political subdivision would not automatically lose its qualified political subdivision status if the state establishes a payroll deduction savings program after the political subdivision has done so. Political subdivisions will benefit from this provision, because they will not have to be concerned that their programs will fall outside the safe harbor if the state subsequently establishes a program. The Department notes that in such situations, it expects that the state and qualified political subdivision will coordinate potentially overlapping programs to ensure a smooth transition. Although they may incur some costs associated with communication and coordination, these costs would be smaller compared to the costs that employers and participants may face if the qualified political subdivision's program experiences any disruptions or unexpected changes due to the lack of communication and coordination between the state and qualified political subdivision.

    The Department estimates that there are approximately eight combinations where political subdivisions could potentially establish conflicting payroll deduction savings programs due to overlapping boundaries. In the final rule, the Department mitigated the possibility that political subdivisions with overlapping geographic boundaries could each become qualified political subdivisions by providing that a political subdivision that geographically overlaps with another political subdivision cannot be qualified if the overlapping subdivision already has enacted a mandatory payroll deduction savings program for private sector employees. Thus, the final rule benefits employers by providing certainty that they will not be subject to a multiplicity of overlapping political subdivision programs. It also benefits qualified political subdivisions by providing clarity regarding the circumstances under which political subdivisions with overlapping boundaries can enact payroll deduction savings programs that qualify for the safe harbor.

    The final rule also clarifies the requirement that states and political subdivisions assume responsibility for the security of payroll deduction contributions in paragraph (h)(1)(iii). A number of commenters specifically focused on the need to clarify and strengthen this provision and some specifically stressed the importance of clear and strong standards protecting payroll deductions. The Department received similar comments on the 2015 proposed rule for state payroll deduction savings programs. In response to these comments, the Department buttressed paragraph (h)(1)(iii) in the final rule by including a new sub-clause clarifying that states and political subdivisions must (1) require that employers promptly transmit wage withholdings to the payroll deduction savings program, and (2) provide an enforcement mechanism to ensure that withheld wages are promptly transmitted.

    These new requirements will benefit employees by ensuring that their payroll deductions are transmitted as quickly as possible to their IRAs, where they become subject to applicable Internal Revenue Code provisions, including the protective prohibited transaction provisions found in section 4975 of the Code. States and political subdivisions may adopt the new required protections in a variety of ways, including, for example, through legislation, ordinance, or administrative rulemaking. The provision also benefits states and political subdivisions that create payroll deduction savings programs and employers by providing clarity regarding the specific actions that are necessary to comply with the requirement for states and political subdivisions to assume responsibility for the security of payroll deductions.55

    55 The final regulation does not specifically define what is meant for wage withholdings to be transmitted “promptly.” Instead, each state and qualified political subdivision is best positioned to calibrate the appropriate timeframe for its own program. Nevertheless, in the interest of providing certainty to states and political subdivisions, the final regulation added paragraph (h)(5) to the rule, which contains a special safe harbor for promptness. For more detailed information, see the discussion about consumer protection in the preamble.

    The Department notes that the final rule would not prevent political subdivisions from identifying and pursuing alternative policies, outside of the safe harbor, that also would not require employers to establish or maintain ERISA-covered plans. Thus, while the final rule would reduce uncertainty about political subdivision activity within the safe harbor, it would not impair political subdivision activity outside of it. This final regulation is a safe harbor and as such, it does not require employers to participate in qualified political subdivision payroll deduction savings programs; nor does it purport to define every possible program that does not give rise to the establishment of ERISA-covered plans.

    2. Direct Costs

    The final rule does not require any new action by employers or the political subdivisions. It merely establishes a safe harbor describing certain circumstances under which qualified political subdivision-required payroll deduction savings programs would not give rise to an ERISA-covered employee pension benefit plan and, therefore, would reduce the risks of being preempted by ERISA. Political subdivisions may incur legal costs to analyze the rule and determine whether their programs fall within the safe harbor. However, the Department expects that these costs will be less than the costs that would be incurred in the absence of the final rule. If a qualified political subdivision interested in developing its own payroll deduction savings program overlaps with another qualified political subdivision, it would also need to monitor the activities by the qualified political subdivision with an overlapping boundary and communicate with it to avoid any potential complications in relying on this safe harbor rule as the final rule precludes overlapping payroll deduction savings programs. Only one qualified political subdivision, out of approximately eight possible combinations, with a potentially overlapping boundary expressed interest in establishing its own payroll deduction savings program to the Department. Thus, the Department expects the monitoring and communication costs to be relatively small.

    Qualified political subdivisions may incur administrative and operating costs including mailing and form production costs. These potential costs, however, are not directly attributable to the final rule; they are attributable to the political subdivision's creation of the payroll deduction savings program pursuant to its authority under state law.

    Some commenters expressed the concern that smaller political subdivisions without the experience or capabilities to administer a payroll deduction savings program may contemplate creating and operating their own programs if the safe harbor rule is extended to all political subdivisions without any restrictions. This final rule addresses this concern by requiring political subdivisions to have a population equal to or greater than the least populous state and have a demonstrated capacity to operate a payroll deduction savings program in order to be qualified. The premise underlying these requirements is that political subdivisions that meet them are likely to have sufficient existing resources, experience, and infrastructure to create and implement payroll deduction savings programs.

    3. Uncertainty

    The Department is confident that the final rule will benefit political subdivisions and many other stakeholders otherwise beset by uncertainty by clarifying the circumstances under which qualified political subdivisions can create payroll deduction savings programs, including programs with automatic enrollment, without causing the political subdivision or employer to create an ERISA-covered employee benefit pension plan. However, the Department is unsure of the magnitude of the benefits, costs and transfer impacts of these programs, because they will depend on the qualified political subdivisions' independent decisions on whether and how best to take advantage of the safe harbor and on the cost that otherwise would have been attached to uncertainty about the legal status of the qualified political subdivisions' actions. The Department is also unsure of (1) the final rule's effects on political subdivisions that do not meet the safe harbor criteria, (2) whether any of these ineligible political subdivisions are currently developing their own payroll deduction savings programs, and (3) the extent to which ineligible political subdivisions would be discouraged from designing and implementing payroll deduction savings programs. The Department cannot predict what actions political subdivisions will take, stakeholders' propensity to challenge such actions' legal status, either absent or pursuant to the final rule, or courts' resultant decisions.

    4. Indirect Effects: Impact of Qualified Political Subdivision Payroll Deduction Savings Programs

    As discussed above, the impact of qualified political subdivision payroll deduction savings programs is directly attributable to the qualified political subdivision legislation that creates such programs. As discussed below, however, under certain circumstances, these effects could be indirectly attributable to the final rule. For example, it is conceivable that more qualified political subdivisions could create payroll deduction savings programs due to the clear guidelines provided in the final rule and the reduced risk of an ERISA preemption challenge, and therefore, the increased prevalence of such programs would be indirectly attributable to the final rule. However, such an increase would be bounded by the eligibility restrictions for political subdivisions. With the authority, population and demonstrated capacity tests, and the preclusion of overlapping programs, the number of political subdivisions that are potentially eligible to use the safe harbor is very small (51). Moreover, as stated above, the Department is aware of only three political subdivisions that have expressed an interest in creating such programs. An additional possibility is that the rule would not change the prevalence of political subdivision payroll deduction savings programs, but would accelerate the implementation of programs that would exist anyway. With any of these possibilities, there would be benefits, costs and transfer impacts that are indirectly attributable to this rule, via the increased or accelerated creation of political subdivision-level payroll deduction savings programs.

    The possibility exists that the final rule could result in an acceleration or deceleration of payroll deduction savings programs at the state level depending on the circumstances. For example, if multiple cities in a state set up robust, successful payroll deduction savings programs, a state that might otherwise create its own program could conclude that a statewide program no longer is necessary. On the other hand, states could feel pressure to create a statewide program if a city in the state does so in order to provide retirement income security for all of its citizens. However, problems could arise if the state and city programs overlap. Therefore, the Department solicited comments regarding whether the final regulation should clarify the status of a payroll deduction savings program of a qualified political subdivision when the state in which the subdivision is located establishes a statewide retirement savings program after the qualified political subdivision establishes and operates its program. Many commenters suggested that the Department should leave to the state to determine the appropriate relationship between the political subdivision's and the state's programs. Although this may appear to add another layer of complexity, the appropriate resolution would depend on the circumstances of each state and political subdivision. In some circumstances, it might be most cost effective to scale a political subdivision's payroll deduction program up to the entire state, whereas it might economically make more sense to maintain a political subdivision's program independent of the state's under different circumstances. As a commenter pointed out, it would be generally more cost effective if payroll deduction savings programs are able to take advantage of economies of scale.56 To do so, a state may decide to discontinue the program established by a political subdivision and implement its own statewide program. In this case, the Department expects the state and the political subdivision will coordinate the potentially overlapping programs.

    56 Comment Letter #6 (American Payroll Association).

    Qualified political subdivisions that elect to establish payroll deduction savings programs pursuant to the safe harbor would incur administrative and operating costs, which can be substantial especially in the beginning years until the payroll deduction savings programs become self-sustaining.

    Employers may incur costs to update their payroll systems to transmit payroll deductions to the political subdivision or its agent, develop recordkeeping systems to document their collection and remittance of payments under the payroll deduction savings program, and provide information to employees regarding the political subdivision programs. As with political subdivisions' operational and administrative costs, some portion of these employer costs would be indirectly attributable to the rule if more political subdivision payroll deduction savings programs are implemented in the rule's presence than would be in its absence. Because the final rule narrows the number of political subdivisions that are eligible for the safe harbor by the population and demonstrated capacity tests, the aggregate costs imposed on employers would be limited. Moreover, in order to satisfy the safe harbor, most associated costs for employers would be nominal because the roles of employers are limited to ministerial functions, such as withholding the required contribution from employees' wages, remitting contributions to the political subdivision program and providing information about the program to employees. These costs would be incurred disproportionately by small employers and start-up companies, which tend to be least likely to offer pensions. These small employers may incur additional costs to acquire payroll software, use on-line payroll programs, or use external payroll companies to comply with their political subdivisions' programs.57 However, some small employers may decide to use payroll software, an on-line payroll program, or a payroll service to withhold and remit payroll taxes independent of their political subdivisions' program requirement. Furthermore, compared to manually processing payroll taxes, utilizing payroll software or an on-line payroll program may be more cost effective for small employers in the long run. Therefore, the extent to which these costs can be attributable to political subdivisions' programs could be smaller than what some might estimate. Moreover such costs could be mitigated if political subdivisions exempt the smallest companies from their payroll deduction savings programs as some states do. Supporting this view, a commenter stated that complexity and administrative costs are often cited by small employers as barriers to offer retirement plans for their employees and argued that savings arrangements established by political subdivisions could in fact alleviate small employers' burdens.58

    57 According to one survey, about 60 percent of small employers do not use a payroll service. National Small Business Association, April 11, 2013, “2013 Small Business Taxation Survey.” This survey says 23% of small employers who handle payroll taxes internally have no employees. Therefore, only about 46%, not 60%, of small employers would be in fact affected by political subdivisions' payroll deduction savings programs, based on this survey. The survey does not include small employers that use payroll software or on-line payroll programs, which provide a cost effective means for such employers to comply with payroll deduction savings programs.

    58See Comment letter #5 (City of Philadelphia Controller).

    Employers, particularly those operating in multiple political subdivisions, may face potentially increased costs to comply with several political subdivision payroll deduction savings programs, depending on whether and, if so, how, the requirements of those programs differ. This can be more challenging for employers if they operate in states where not all political subdivisions have their own payroll deduction savings programs and/or where some political subdivisions' programs differ in certain ways from others. However, several states have only one qualified political subdivision. Even if states have multiple qualified political subdivisions, the final rule precludes overlapping programs. Thus, the potential burden faced by employers operating in multiple political subdivisions is limited. Moreover, employers operating across several political subdivision borders are likely to have ERISA-covered plans in place for their employees. Thus, there may be no cost burden associated with complying with multiple political subdivision payroll deduction savings programs because employers that sponsor plans typically are exempt from the law enacting such programs. Furthermore, in order to satisfy the final safe harbor rule, the role of employers would be limited to ministerial functions such as timely transmitting payroll deductions, which implies that the increase in cost burden is further likely to be restricted. By limiting eligibility to political subdivisions based on the population, authority, and demonstrated capacity conditions and precluding overlapping political subdivision programs, this final rule further addresses the concerns raised by several commenters by substantially limiting the possibility of conflicting programs among multiple political subdivisions.

    The Department believes that well-designed political subdivision-level payroll deduction savings programs have the potential to effectively reduce gaps in retirement security. The political subdivisions that expressed interest in establishing their own payroll deduction savings programs for private-sector workers in the political subdivision seem to be motivated by those workers' significantly lower access rates to employment-based retirement plans compared to the rates for workers nationwide.59 In order to successfully reduce these significant gaps in retirement savings as intended, there are several factors to consider. Relevant variables such as pension coverage, labor market conditions,60 population demographics, and elderly poverty, vary widely across the political subdivisions, suggesting a potential opportunity for progress at the political subdivision level. Many workers throughout these political subdivisions currently may save less than would be optimal due to (1) behavioral biases (such as myopia or inertia), (2) labor market conditions that prevent them from accessing plans at work, or (3) their employers' failure to offer retirement plans.61 Some research suggests that automatic contribution policies are effective in increasing retirement savings and wealth in general by overcoming behavioral biases or inertia.62 Well-designed political subdivisions' payroll deduction savings programs could help many savers who otherwise might not be saving enough or at all to begin to save earlier than they might have otherwise. Such workers will have traded some consumption today for more in retirement, potentially reaping net gains in overall lifetime well-being. Their additional savings may also reduce fiscal pressure on publicly financed retirement programs and other public assistance programs, such as Supplemental Security Income (SSI), which support low-income Americans, including older Americans.

    59 According to the comment letter submitted by the city of Philadelphia, in May 2016, 54% of employees in Philadelphia do not have access to workplace retirement plans. Similarly, 57% of New York City private-sector workers lack access to a retirement plan at their employment place according to the comment letter submitted by the office of Comptroller of the City of New York. These statistics are significantly higher than the nation-wide average of 34% lacking access to a retirement plan through employment for private-sector workers, according to the National Compensation Study in June of 2016.

    60See, e.g., U.S. Bureau of Labor Statistics, “Metropolitan Area Employment and Unemployment—May 2016,” USDL-16-1291 (June 29, 2016).

    61 According to the National Compensation Survey, March 2016, only 66% of private-sector workers have access to retirement benefits—including defined benefit and defined contribution plans—at work.

    62See Chetty, Friedman, Leth-Petresen, Nielsen & Olsen, “Active vs. Passive Decisions and Crowd-out in Retirement Savings Accounts: Evidence from Denmark,” 129 Quarterly Journal of Economics 1141-1219 (2014). See also Madrian and Shea, “The Power of Suggestion: Inertia in 401(k) Participation and Savings Behavior,” 116 Quarterly Journal of Economics 1149-1187 (2001).

    The Department believes that well-designed political subdivision payroll deduction savings programs can achieve their intended, positive effects of fostering retirement security. However, the potential benefits—primarily increases in retirement savings—might be somewhat limited, because the final safe harbor does not allow employer contributions to political subdivisions' payroll deduction savings programs. Additionally, the initiatives potentially might have some unintended consequences. Those workers least equipped to make good retirement savings decisions arguably stand to benefit most from these programs, but also arguably could be at greater risk of suffering adverse unintended effects. Workers who would not benefit from increased retirement savings could opt out, but some might fail to do so. Such workers might increase their savings too much, unduly sacrificing current economic needs. Consequently, they might be more likely to cash out early and suffer tax losses (unless they receive a non-taxable Roth IRA distribution), and/or to take on more expensive debt to pay necessary bills. Similarly, political subdivisions' payroll deduction savings programs directed at workers who do not currently participate in workplace savings arrangements may be imperfectly targeted to address gaps in retirement security. For example, some college students might be better advised to take less in student loans rather than open an IRA and some young families might do well to save more first for their children's education and later for their own retirement. In general, workers without retirement plan coverage tend to be younger, lower-income or less attached to the workforce, thus these workers may be financially stressed or have other savings goals. Because only large political subdivisions can create and implement programs under the final rule, these demographic characteristics can be more pronounced, assuming large political subdivisions tend to have more diverse workforces. If so, then the benefits of political subdivisions' payroll deduction savings programs could be further limited and in some cases potentially harmful for certain workers. Although these might be valid concerns, political subdivisions are responsible for designing effective programs that minimize these types of harm and maximize benefits to participants.

    Commenters have stated another concern—that political subdivision initiatives may “crowd-out” ERISA-covered plans. The final rule may inadvertently encourage employers operating in multiple political subdivisions to switch from ERISA-covered plans to political subdivision payroll deduction savings programs in order to reduce costs, especially if they are required to cover employees currently ineligible to participate in ERISA-covered plans under political subdivision programs. This final rule makes clear that political subdivision programs directed toward employers that do not offer other retirement plans fall within this final safe harbor rule. However, employers that wish to provide retirement benefits are likely to find that ERISA-covered programs, such as 401(k) plans, have important advantages for them and their employees over participation in political subdivision programs. Potential advantages include significantly higher limits on tax-favored contributions that may be elected by employees ($18,000 in 401(k) plans and $24,000 for those age 50 or older) versus $5,500 in IRAs ($6,500 for those age 50 or older), the opportunity for employers to make tax-favored matching or nonmatching contributions on behalf of employees (allowing a total of up to $54,000 ($60,000 for those age 50 or older) of employee plus employer contributions for an employee in a 401(k) plan versus $5,500 or $6,500 in IRAs), greater flexibility in plan selection and design, ERISA protections, and larger positive recruitment and retention effects.63 Therefore it seems unlikely that political subdivision initiatives will “crowd-out” many ERISA-covered plans, although, if they do, some workers might lose ERISA-covered plans that could have been more generous than political subdivision-based (IRA) benefits.

    63 These contribution limits are for year 2017. For more details, see: https://www.irs.gov/retirement-plans/cola-increases-for-dollar-limitations-on-benefits-and-contributions.

    There is also the possibility that some workers who would otherwise have saved more might reduce their savings to the low, default levels associated with some political subdivision programs. Political subdivisions can address this concern by incorporating into their programs participant education or “auto-escalation” features that increase default contribution rates over time and/or as pay increases.

    D. Paperwork Reduction Act

    As part of its continuing effort to reduce paperwork and respondent burden, the Department of Labor conducts a preclearance consultation program to provide the general public and Federal agencies with an opportunity to comment on final and continuing collections of information in accordance with the Paperwork Reduction Act of 1995 (PRA) (44 U.S.C. 3506(c)(2)(A)). This helps to ensure that the public understands the Department's collection instructions, respondents can provide the requested data in the desired format, reporting burden (time and financial resources) is minimized, collection instruments are clearly understood, and the Department can properly assess the impact of collection requirements on respondents.

    In accordance with the requirements of the PRA, the Department solicited comments regarding its determination that the proposed rule is not subject to the requirements of the PRA, because it does not contain a “collection of information” as defined in 44 U.S.C. 3502(3). The Department's conclusion was based on the premise that the proposed rule does not require any action by or impose any requirements on employers or the political subdivisions. It merely clarifies that certain political subdivision payroll deduction savings programs that encourage retirement savings would not result in the creation of employee benefit plans covered by Title I of ERISA.

    The Department did not receive any comments regarding this assessment. Therefore, the Department has determined that the final rule is not subject to the PRA, because it does not contain a collection of information. The PRA definition of “burden” excludes time, effort, and financial resources necessary to comply with a collection of information that would be incurred by respondents in the normal course of their activities. See 5 CFR 1320.3(b)(2). The definition of “burden” also excludes burdens imposed by a state, local, or tribal government independent of a Federal requirement. See 5 CFR 1320.3(b)(3). The final rule imposes no burden on employers, because political subdivisions will customarily include notice and recordkeeping requirements when enacting their payroll deduction savings programs. Thus, employers participating in such programs are responding to political subdivision, not Federal, requirements.

    E. Regulatory Flexibility Act

    The Regulatory Flexibility Act (5 U.S.C. 601 et seq.) (RFA) imposes certain requirements with respect to Federal rules that are subject to the notice and comment requirements of section 553(b) of the Administrative Procedure Act (5 U.S.C. 551 et seq.) and which are likely to have a significant economic impact on a substantial number of small entities. Unless an agency certifies that a rule will not have a significant economic impact on a substantial number of small entities, section 604 of the RFA requires the agency to present a final regulatory flexibility analysis at the time of the publication of the final rule describing the impact of the rule on small entities. Small entities include small businesses, organizations and governmental jurisdictions.

    Although several commenters maintained that the proposed rule would impose significant costs on small employers, similar to the proposal, the final rule merely establishes a new safe harbor describing circumstances in which payroll deduction savings programs established and maintained by political subdivisions would not give rise to ERISA-covered employee pension benefit plans. Therefore, the final rule imposes no requirements or costs on small employers, and the Department believes that it will not have a significant economic impact on a substantial number of small employers. Similarly, because the final rule does not impose any requirements or costs on small governments, the Department believes that it will not have a significant economic impact on a substantial number of small government entities, either. Accordingly, pursuant to section 605(b) of the RFA, the Assistant Secretary of the Employee Benefits Security Administration hereby certifies that the final rule will not have a significant economic impact on a substantial number of small entities.

    F. Unfunded Mandates Reform Act

    For purposes of the Unfunded Mandates Reform Act of 1995 (2 U.S.C. 1501 et seq.), as well as Executive Order 12875, this final rule does not include any federal mandate that may result in expenditures by state, local, or tribal governments, or the private sector, which may impose an annual burden of $100 million as adjusted for inflation.

    G. Congressional Review Act

    The final rule is subject to the Congressional Review Act provisions of the Small Business Regulatory Enforcement Fairness Act of 1996 (5 U.S.C. 801 et seq.) and will be transmitted to Congress and the Comptroller General for review. The final rule is not a “major rule” as that term is defined in 5 U.S.C. 804, because it is not likely to result in (1) an annual effect on the economy of $100 million or more; (2) a major increase in costs or prices for consumers, individual industries, or Federal, State, or local government agencies, or geographic regions; or (3) significant adverse effects on competition, employment, investment, productivity, innovation, or on the ability of United States-based enterprises to compete with foreign-based enterprises in domestic and export markets.

    H. Federalism Statement

    Executive Order 13132 outlines fundamental principles of federalism. It also requires adherence to specific criteria by federal agencies in formulating and implementing policies that have “substantial direct effects” on the states, the relationship between the national government and states, or on the distribution of power and responsibilities among the various levels of government. Federal agencies promulgating regulations that have these federalism implications must consult with state and local officials, and describe the extent of their consultation and the nature of the concerns of state and local officials in the preamble to the final regulation.

    In the Department's view, the final rule, by clarifying that payroll deduction savings programs by certain political subdivisions will not result in creation of employee benefit plans under ERISA, would provide more latitude and certainty to political subdivisions and employers regarding the treatment of such arrangements under ERISA. Therefore, the final rule does not contain policies with federalism implications within the meaning of the Order.

    Nonetheless, in respect for the fundamental federalism principles set forth in the Order, the Department affirmatively engaged in outreach, including meetings, conference calls, and outreach events, with officials of political subdivisions and other stakeholders regarding the final rule and sought their input on the safe harbor. The Department also received comment letters from local governments and their representatives. Many of the changes in the final rule stem from suggestions contained in the comment letters.

    List of Subjects in 29 CFR Part 2510

    Accounting, Employee benefit plans, Employee Retirement Income Security Act, Coverage, Pensions, Reporting.

    For the reasons stated in the preamble, the Department of Labor amends 29 CFR part 2510 as set forth below:

    PART 2510—DEFINITION OF TERMS USED IN SUBCHAPTERS C, D, E, F, G, AND L OF THIS CHAPTER 1. The authority citation for part 2510 is revised to read as follows: Authority:

    29 U.S.C. 1002(2), 1002(21), 1002(37), 1002(38), 1002(40), 1031, and 1135; Secretary of Labor's Order No. 1-2011, 77 FR 1088 (Jan. 9, 2012); Sec. 2510.3-101 also issued under sec. 102 of Reorganization Plan No. 4 of 1978, 5 U.S.C. App. at 727 (2012), E.O. 12108, 44 FR 1065 (Jan. 3, 1979) and 29 U.S.C. 1135 note. Sec. 2510.3-38 is also issued under sec. 1, Pub. L. 105-72, 111 Stat. 1457 (1997).

    2. In § 2510.3-2, revise paragraph (h) to read as follows:
    § 2510.3-2 Employee pension benefit plan.

    (h) Certain governmental payroll deduction savings programs. (1) For purposes of title I of the Act and this chapter, the terms “employee pension benefit plan” and “pension plan” shall not include an individual retirement plan (as defined in 26 U.S.C. 7701(a)(37)) established and maintained pursuant to a payroll deduction savings program of a State or qualified political subdivision of a State, provided that:

    (i) The program is specifically established pursuant to State or qualified political subdivision law;

    (ii) The program is implemented and administered by the State or qualified political subdivision establishing the program (or by a governmental agency or instrumentality of either), which is responsible for investing the employee savings or for selecting investment alternatives for employees to choose;

    (iii) The State or qualified political subdivision (or governmental agency or instrumentality of either) assumes responsibility for the security of payroll deductions and employee savings, including by requiring that amounts withheld from wages by the employer be transmitted to the program promptly and by providing an enforcement mechanism to assure compliance with this requirement;

    (iv) The State or qualified political subdivision (or governmental agency or instrumentality of either) adopts measures to ensure that employees are notified of their rights under the program, and creates a mechanism for enforcement of those rights;

    (v) Participation in the program is voluntary for employees;

    (vi) All rights of the employee, former employee, or beneficiary under the program are enforceable only by the employee, former employee, or beneficiary, an authorized representative of such a person, or by the State or qualified political subdivision (or governmental agency or instrumentality of either);

    (vii) The involvement of the employer is limited to the following:

    (A) Collecting employee contributions through payroll deductions and remitting them to the program;

    (B) Providing notice to the employees and maintaining records regarding the employer's collection and remittance of payments under the program;

    (C) Providing information to the State or qualified political subdivision (or governmental agency or instrumentality of either) necessary to facilitate the operation of the program; and

    (D) Distributing program information to employees from the State or qualified political subdivision (or governmental agency or instrumentality of either) and permitting the State or qualified political subdivision (or governmental agency or instrumentality of either) to publicize the program to employees;

    (viii) The employer contributes no funds to the program and provides no bonus or other monetary incentive to employees to participate in the program;

    (ix) The employer's participation in the program is required by State or qualified political subdivision law;

    (x) The employer has no discretionary authority, control, or responsibility under the program; and

    (xi) The employer receives no direct or indirect consideration in the form of cash or otherwise, other than consideration (including tax incentives and credits) received directly from the State or qualified political subdivision (or governmental agency or instrumentality of either) that does not exceed an amount that reasonably approximates the employer's (or a typical employer's) costs under the program.

    (2) A payroll deduction savings program will not fail to satisfy the provisions of paragraph (h)(1) of this section merely because the program—

    (i) Is directed toward those employers that do not offer some other workplace savings arrangement;

    (ii) Utilizes one or more service or investment providers to operate and administer the program, provided that the State or qualified political subdivision (or the governmental agency or instrumentality of either) retains full responsibility for the operation and administration of the program; or

    (iii) Treats employees as having automatically elected payroll deductions in an amount or percentage of compensation, including any automatic increases in such amount or percentage, unless the employee specifically elects not to have such deductions made (or specifically elects to have the deductions made in a different amount or percentage of compensation allowed by the program), provided that the employee is given adequate advance notice of the right to make such elections, and provided, further, that a program may also satisfy this paragraph (h) without requiring or otherwise providing for automatic elections such as those described in this paragraph (h)(2)(iii).

    (3) For purposes of this paragraph (h), the term “State” shall have the same meaning as defined in section 3(10) of the Act.

    (4) For purposes of this paragraph (h), the term “qualified political subdivision” means any governmental unit of a State, including a city, county, or similar governmental body, that—

    (i) Has the authority, implicit or explicit, under State law to require employers' participation in the program as described in paragraph (h)(1)(ix) of this section; and

    (ii) At the time of the enactment of the political subdivision's payroll deduction savings program:

    (A) Has a population equal to or greater than the population of the least populated State (excluding the District of Columbia and territories listed in section 3(10) of the Act);

    (B) Has no geographic overlap with any other political subdivision that has enacted a mandatory payroll deduction savings program for private-sector employees and is not located in a State that has enacted such a program statewide; and

    (C) Has implemented and administers a plan, fund, or program that provides retirement income to its employees, or results in a deferral of income by its employees for periods extending to the termination of covered employment or beyond.

    (5) For purposes of paragraph (h)(1)(iii) of this section, amounts withheld from an employee's wages by the employer are deemed to be transmitted promptly if such amounts are transmitted to the program as of the earliest date on which such contributions can reasonably be segregated from the employer's general assets, but in no event later than the last day of the month following the month in which such amounts would otherwise have been payable to the employee in cash.

    Signed at Washington, DC, this 9th day of December, 2016. Phyllis C. Borzi, Assistant Secretary, Employee Benefits Security Administration, U.S. Department of Labor.
    [FR Doc. 2016-30069 Filed 12-19-16; 8:45 am] BILLING CODE 4510-29-P
    DEPARTMENT OF DEFENSE Office of the Secretary 32 CFR Part 89 [Docket ID: DOD-2015-OS-0020] RIN 0790-AJ33 Interstate Compact on Educational Opportunity for Military Children AGENCY:

    Under Secretary of Defense for Personnel and Readiness, DoD.

    ACTION:

    Final rule.

    SUMMARY:

    DoD is establishing policies to implement the Interstate Compact on Educational Opportunity for Military Children (referred to as the “Compact”) within the DoD, informed by the sense of Congress, and in furtherance of the operation of DoD schools. The final rule provides components with policies to support the intent of the Compact, which is to aid the transition of school-age children in military families between school districts (to include between Department of Defense Educational Activity (DoDEA) schools and state school districts). Each state joining the Compact agrees to address specific school transition issues in a consistent way and minimize school disruptions for military children transferring from one state school system to another. The Compact consists of general policies in four key areas: Eligibility, enrollment, placement, and graduation. Children of active duty members of the uniformed services, National Guard and Reserve on active duty orders, and members or veterans who are medically discharged or retired for one year are eligible for assistance under the Compact.

    DATES:

    This rule is effective on January 19, 2017.

    FOR FURTHER INFORMATION CONTACT:

    Marcus Beauregard, 571-372-5357.

    SUPPLEMENTARY INFORMATION:

    On March 7, 2016 (81 FR 11698-11706), the Department of Defense published a proposed rule titled Interstate Compact on Educational Opportunity for Military Children for a 60-day public comment period. The public comment period closed on May 6, 2016. Ten public comments were received. The preamble to this final rule addresses the comments. Due to one of the public comments received, the Department has revised the final rule to reflect that the Military Departments will nominate military representatives by position to act as liaisons to State Councils and the Deputy Assistant Secretary of Defense for Military Community and Family Policy (DASD(MC&FP)) will designate them in this manner.

    Edits were made to adjust the process established to designate DoD liaisons to State Councils, so that liaisons are designated by position rather than by individual.

    As the result of further internal coordination, administrative edits were made to the regulatory text.

    Comment: “This regulation is very beneficial for the States and as the DoD is to handle the majority of the cost, it has the promise of doing a great deal of good for the children of active duty military without being overly burdensome to the States participating. However, as the participation in the Compact is voluntary, it is possible that the degree of implementation will vary from state to state, perhaps by a large degree. This potential for variation would run against the purpose of the regulation. It is not always desirable to have penalties as part of a regulation, especially one that is voluntary, but without a clear idea of how the regulation would be enforced, the goals of the Compact may not be successful.”

    Response: All fifty states and the District of Columbia (DC) have accepted the Compact into their state statutes. Consequently, complying with the provisions of the Compact is based on compliance with state law. Additionally, the Compact (approved by all fifty states and DC) includes the oversight of the Compact by a Commission composed of member states, with rules governing non-compliance and dispute resolution. Also, support for the administration of the Compact and the Commission is funded entirely by the member states without support from the federal government.

    Comment: “This new policy will not only bring awareness to schools, but will open up a need for additional staff to require training and employment in the schools to assist these [military] families. This rule will also open doors for additional policy to be made and other services not being addressed to have priority in legislation in the upcoming years so that the military families can have less strain than they already do with having a parent serve our country.”

    Response: The fifty states and DC enacted laws approving the Compact with the understanding that implementation of the Compact would not require additional staffing in schools. Additionally, since enactment of the Compact in the 50 states and DC between 2008 and 2014, there have not been additional policies or services to address educational needs of children in military families. Instead, states have addressed other concerns, such as licensure and employment of military spouses.

    Comment: “Since most moves occur during the summer months, in between school years, many of the challenges addressed by the proposed rule can be avoided with forethought and planning. For instance, every experienced military spouse knows to contact the gaining school system and/or base to gather as much enrollment information as possible and begin setting up a smooth transition. Required immunizations are dispensed at the base clinic, soccer registration forms and payment are mailed off, copies of IEP and special needs assessment tests are made. But what about things the family cannot control, such as high school prerequisites or differences in the number of required language courses a transferring high school student must take?”

    Response: The focus of this rule is the implementation of the Compact provisions by DoDEA and facilitating the DoD liaison function on State Councils. With this said, the Compact provides broad policies to facilitate the transition of children in military families between schools. Forethought and planning can help families during these transitions, but there are elements of the transition process that the Compact addresses without requiring a school district to modify its educational standards.

    Comment: “In the definition for the children of military families, number four should be revised. I believe that children of military members who are severely wounded, ill, injured, or die on active duty or as a result of injuries sustained on active duty need to have this designation for longer than one year. I suggest they keep this designation until June 30th of their normal graduation year. This ensures the child/children will have this support until they graduate.

    Similar Comment: Eligibility needs to include recently separated (regardless of despoliation as it is not child's fault for honorable, etc.) and retired/new retirement system??? soldiers (for more than 1 year and beyond “retire” as the military is looking to drastically change retirement in the next decade, not sure what those soldiers will be called. . . . thinking ahead here).”

    Response: The suggested changes may be very worthwhile; however, the definitions included in this rule are the same as the definitions that have been enacted by the 50 states and DC, which have approved the Compact. Furthermore, the enrollment policies governing DoDEA schools is governed by 20 U.S.C. 921-932 and 10 U.S.C. 2164.

    Comment: “My high school split was awful after my dad retired between my sophomore and junior year. From KY to GA requirements. I was denied Calculus and French 3 due to GA requirements for freshmen PE & sophomore economics to graduate in their state. Guess taking Latin & biology & chemistry right off the bat in KY crowded out these GA requirements. Was such a joke to put a senior into a freshman class for a requirement not needed or looked favorably at for college transcripts. Would have been so much more streamlined if given a waiver and opt out of GA requirements to graduate.”

    Response: The Compact allows for military families more flexibility to work with schools to accommodate requirements for the graduation of their children. Section 89.8(b)(4) outlines the provisions of Article VII of the Compact on graduation requirements.

    Comment: “The pact should also provide guidance for both state-side and DoD schools to provide transition tutoring for military children transferring to new schools. States have different standards and teachers teach to different standards per their school districts. There are times when new military children transfer to a different school and they are considered “behind.” Not because they have a learning disability, but the part of the curriculum may not have been taught at the old school. If a tutoring program for possibly 90 days or more (if necessary) could be provided at no expense to the parents, this will allow transferring students time to learn any coursework they may not have been taught at their old schools. This will also make the transition less stressful on the kids.”

    Response: Adding services, such as tutoring, to the Compact would require the member states and DC to amend their laws that implement the Compact. Since enactment of the Compact in the 50 states and DC between 2008 and 2014, there have not been additional policies or services to address educational needs of children in military families.

    Comment: “Now that the Compact has been adopted by all 50 states and the District of Columbia, the next step must be to ensure each state has a functioning state council. These councils play an important role in raising awareness of the Compact among school districts, as well as answering questions and resolving conflicts. Although DoD cannot compel states to create and maintain state councils, it can and should ensure each council has one or more military representatives. While we commend DoD for its thoughtful approach to identifying military representatives, we have concerns about some of the procedures outlined in the proposed rule. Under the proposed rule, each Service will be assigned several states and will be responsible for selecting the military representative to serve on those states' councils. The military representative must be a military member or DoD civilian who can serve on the state council for two years. Given the transient nature of military life, we believe this places an undue burden on the Services, who will be required to identify a new representative each time an individual serving on a state council is reassigned to a new location. Rather than choosing an individual, we believe it makes more sense to formally attach the military representative role to a given position or billet. An assignment by billet would provide the state councils with the assurance the military representative role will be continuously occupied and reduce the burden on the Services.” 1

    1 April 14, 2016 letter from the National Military Family Association, submitted as comment on DOD-2015-OS-0020-0001.

    Response: The Department agrees with the perspective of designating military representatives by position to act as liaisons. The Department has heard informally from others within the Military Interstate Children's Compact Commission (MIC3) that designation by position would be the preferred approach. Consequently, the Department has revised the proposed rule and the DoD Instruction to reflect this change so that the Military Departments will nominate military representatives by position and the DASD(MC&FP) will designate them in this manner. These designations normally will remain in force until a State Commissioner requests a different position (or positions) be designated as the liaison to the State Council.

    Executive Summary I. Purpose of This Rulemaking

    This final rule provides components of the DoD with policies to support the intent of the Compact, which is to aid the transition of school-age children in military families between school districts. The intent of the program is to ensure children are enrolled immediately in their new school, placed in the appropriate academic program, and are able to graduate on time.

    Each state joining the Compact agrees to address specific school transition issues in a consistent way and minimize school disruptions for military children transferring from one state school system to another. The Compact consists of general policies in four key areas: Eligibility, enrollment, placement, and graduation.

    As of August 2014, 50 states and DC have passed legislation to become members of the Compact, including most of those with large numbers of military residents. DoDEA cannot be a member of the Compact, but is complying with its provisions as a matter of policy in both overseas and domestic schools. In return, the Compact member states have agreed to treat students coming from a DoDEA school as though they were transferring from a member state.

    The Compact has provisions for member states to facilitate school transition in the following areas:

    Education Records and Enrollment

    The Compact asks school districts in member states to assist military families with the transfer of education records, additional time for immunization and continuity of enrollment in kindergarten and first grade:

    • Education records. When a family leaves a school district in a member state, the parents may receive a set of unofficial records to carry to the new school in another member state. It will include all the information the new school needs to enroll and place the child until it receives the official records. In addition, the Compact requires all sending school districts within member states to send official transcripts within 10 days of a request from the receiving state school district.

    • Immunizations. If a child transferring to a member state needs additional immunizations, he or she may enroll and begin school. Parents then have 30 days to see that the child gets the required immunizations. If further immunizations are required, they must be started within 30 calendar days of enrollment. Tuberculosis testing is not covered under the Compact since the TB test is not an immunization but rather a health screening.

    • Kindergarten and first grade entrance age. If the entrance age requirement in the new school system is different, transitioning children may continue in the same grade if they have already started kindergarten or first grade where the family was previously stationed. This provision also allows children to move up to first or second grade, regardless of age requirements, if they have completed kindergarten or first grade in another state.

    Placement and Attendance

    Students from military families often miss appropriate placement in required classes, advanced placement and special-needs programs while awaiting evaluation at the new school. The Compact requires cooperation in the following areas:

    • Course and education program placement. A receiving school district in a member state must initially honor placement of a student based on his or her enrollment in the sending state, provided the new school has a similar or equivalent program. The receiving school may evaluate the student after placement to ensure it is appropriate, but the school may not put children into “holding classes” while they await assessment. The receiving school may allow the student to attend similar education courses in other schools within the district if the receiving school does not offer such courses.

    • Special education services. Students covered by the Individuals with Disabilities Education Act receive the same services (although not necessarily identical programs) identified in the individual education plan from the sending state. This is a parallel requirement under federal law.

    • Placement flexibility. School districts are encouraged to determine if course or program prerequisites can be waived for students who have completed similar coursework in the sending school district. This process allows students to take advanced courses rather than repeat similar basic courses.

    • Absence related to deployment activities. Students in member states may request additional, excused absences to visit with their parent or legal guardian immediately before, during, and after deployment. Schools have flexibility in approving absences if there are competing circumstances such as state testing or if the student already has excessive absences.

    Eligibility for Enrollment

    The Compact asks school districts in member states to examine their rules for eligibility to allow children of military parents to have the continuity they need. The Compact requires cooperation in the following areas:

    Enrollment. When a child of a deployed parent is staying with a non-custodial parent, a relative or a friend who is officially acting in place of the parents and lives outside of the home school district, the child may continue to attend his or her own school as long as the care provider ensures transportation to school. The Compact also stipulates that a power of attorney for guardianship is sufficient for enrollment and all other actions requiring parental participation or consent.

    Extracurricular participation. When children transfer to a new school, their participation in extracurricular activities is facilitated—provided they're eligible—even if application deadlines and tryouts have passed. Schools must make reasonable accommodations, but are not required to hold spaces open for military-related transferees.

    Graduation

    School transitions can be especially challenging for high school students. The Compact requires school districts to make the following accommodations to facilitate on-time graduation:

    • Course waivers. School districts in member states may waive courses required for graduation if similar coursework has been completed in another school. Such waivers are not mandatory under the Compact, but a school district must show reasonable justification to deny a waiver.

    Exit exams. Under the Compact, a school district may accept the sending state's exit exams, achievement tests or other tests required for graduation instead of requiring the student to meet the testing requirements of the receiving state. States have flexibility to determine what tests they will accept or require the student to take.

    Transfers during senior year. If a student moves during the senior year and the receiving state is unable to make the necessary accommodations for required courses and exit exams, the two school districts must work together to obtain a diploma from the sending school so the student can graduate on time.

    The Compact does not address the quality of education or require a state to change any of its standards or education criteria. MIC3 has created a variety of downloadable brochures, webinars, and other resources to help parents and educators learn more about the Compact—See more at: http://www.mic3.net.

    If a family has a concern about a provision of the Compact as it relates to a child, it's best to contact the school first. Each installation has a school liaison to help work with schools to get questions answered or to provide information on next steps to take if concerns cannot be successfully resolved.

    II. Narrative Description of Legal Authorities for This Rule

    The legal authorities for this rule clarify the definition of children in military families covered by this rule, cover the protections afforded these children, and provide the authority for establishing the policies included in this rule that describe the implementation of the principles of the Compact within DoD, including DoDEA:

    (1) 10 U.S.C. 2164—Department of Defense Domestic Dependent Elementary and Secondary Schools (DDESS). This law authorizes DoD to operate a school system within the United States for DoD dependents when it is determined that appropriate educational programs are not available through a local educational agency.

    (2) 20 U.S.C.—Education, Chapter 25A—Overseas Defense Dependents' Education. This law authorizes DoD to operate a program to provide a free public education through secondary school for dependents in overseas areas. It is the statutory basis for the DoD Dependent Schools.

    III. Summary of the Major Focus Points of This Rulemaking

    The major provisions of this regulatory action include designating military representatives as liaisons to State Councils of member states of the Compact, designating the DoD ex-officio member as a liaison to the Compact Commission (i.e., the MIC3), implementing the relevant school transition policies established in the Compact within the DoDEA school system, and establishing a committee within DoDEA to advise on compliance by DoDEA schools.

    (1) As required by the Compact, states establish Councils to oversee the implementation of the Compact within the state. The Compact prescribes membership of the State Council, which may include a representative from the military community within the state. Since this individual represents the interests of the military community to the State Council, the military representative can only fulfill a liaison role on the Council and must be designated by DoD. This rule defines the role for the military representative (§ 89.7(a)), along with the process (§ 89.7(b)) for coordinating the requests from State Commissioners and designating these military representatives.

    (2) The Compact describes how DoD may send an ex-officio liaison to the Commission meetings, and also describes how the DoD ex-officio member will participate as a liaison on the Executive Committee of the Commission. This rule provides guidelines for the DoD ex-officio member (§ 89.7(d)).

    (3) This rule establishes policies for DoDEA governing the transition of school age children in military families (§ 89.8 of this rule), which are equivalent to the following policies included in the Compact: Article IV—records and enrollment, Article V—placement and attendance, Article VI—eligibility for enrollment, and Article VII—graduation.

    (4) This rule establishes a committee to advise DoDEA on compliance with provisions in § 89.8. The DoDEA Committee also provides input to the ex-officio member of the Commission on issues arising from DoDEA school interactions with member States of the Compact, and acts as a counterpart to State Councils of member States. Policies for assigning a representative from the Military Departments to this committee are included in § 89.7(c).

    IV. Cost and Benefit Analysis

    There are no provisions in this final rule that are expected to increase costs for members of the public. Requirements included in this rule may require action to be taken by state education departments and local education agencies as a result of requirements of the state laws.

    The costs to the Department are summarized below:

    • Military representative attending State Council meetings as a liaison. State Council meetings are generally held at a central location for the state, and are expected to be held at least once per year. The military representative would be required, while on duty and at government expense, to travel to and attend the meeting. A meeting would be expected to demand an average of 1.5 days (travel and meeting time), which would cost an approximate average of $569 2 in opportunity labor cost. Additionally, intrastate travel and per diem is expected to cost an approximate average of $339.3 States vary with regards to the number of military representatives they have requested to attend; however, the estimated number of military representatives is 77.4 Applying the approximate average costs per year provides $43,810 in opportunity labor costs and $26,100 in travel and per diem.

    2 Cost estimated on the salary of a GS-14 step 5 without locality pay or percentage for benefits (average of $47.39 per hour—2016 GS Pay Scale) times approximately 12 hours.

    3 Cost of travel calculated at an average round trip requiring 300 miles times the mileage rate of $0.54 per mile (equals approximately $162), plus per diem costs of $142 per day, plus proportional meals and incidentals for the second day of $35 ($177). Unit rates based on Fiscal Year 2017 standard per diem rate for the Continental United States and 2016 GSA mileage rates.

    4 Estimated number of total military representatives for the 50 member states and the District of Columbia, based on the average of number currently designated in states with military representatives (41 reps in 27 states).

    Identifying, nominating and designating a position to act as a liaison to a State Council. DoD estimates approximately 180 hours 5 of administrative time to coordinate nominations for the first year, plus approximately 80 hours 6 to process, review, coordinate, sign and distribute the designation letters. The opportunity labor cost of coordination would be approximately $7,220 7 and completing the designation letter, with accompanying documents, would be $4,730 8 for the first year. Subsequent years would be approximately 20 percent of the time and cost associated with the first year (approximately $1,440 for coordination and $950 for completing designation letters).

    5 Estimate 3 hours of staff time to receive the request; relay the requirement to the designated Military Department and obtain approval; and provide the name to the Office of Secretary of Defense. Estimate fulfilling requests from 40 states for the first year (designating approximately 60 positions).

    6 Estimate 2 hours of staff time to prepare the letter of designation and accompanying documents and obtain a signature from the Deputy Assistant Secretary of Defense for Military Community and Family Policy. Anticipate processing 40 letters of designation for the first year (some individuals will be included on the same designation letter).

    7 Cost estimated on the salary of a GS-13 step 5, without locality pay or percentage for benefits ($40.10 per hour—2016 GS Pay Scale).

    8 Cost estimated on the salary of a GS-14 step 5 with locality pay for Washington, DC, but no percentage for benefits ($59.13 per hour—2016 GS Pay Scale).

    Ex-officio member to the MIC3. This individual participates as a liaison in the annual conference, executive committee meeting, and other standing committee meetings and would cost DoD approximately $8,610 per year.9

    9 Cost estimated on three trips per year, each involving 3 days, at a location outside of Washington, DC. The labor cost is estimated on the salary of a GS-15 step 5 with locality pay for Washington, DC and no benefits included ($69.56 per hour—2016 GS Pay Scale) times 72 hours ($5,010), plus $3,600 for travel and per diem (based on average cost for 20 similar 3-day temporary duty trips for 2015).

    Additionally, this final rule will direct DoDEA to transition children under specific policies. These are the same policies that are included in the Compact, Articles IV-VII, which have been shown to be cost-neutral (and perhaps a cost-benefit) when implemented by local education agencies within the states that are members of the Compact.10 Essentially, schools are responsible for transitioning children, and the proposed rules, based upon the transition policies included in the Compact, provide a consistent approach that schools apply in member states to the Compact. Hence, there is less variability and uncertainty in the process. Applying these policies within DoDEA is expected to produce similar results, since these policies would apply to all children within the DoDEA school system (therefore applying a consistent policy regardless of the child), and many of these proposed policies represent the existing procedures used in DoDEA schools to transition students. The DoD committee to oversee the implementation of this rule within DoDEA is expected to cost approximately $3,310 per year 11 to administer and conduct meetings.

    10 Analysis accomplished by states as part of their legislative process showed that the provisions of the Compact supporting the transition of military children were fiscally neutral. Transition occurs regardless of having an organized process, and the provisions of the Compact were considered as providing consistent expectations and administrative procedures capable of reducing the cost of administering transition for military children.

    11 Estimated on two meetings (each two hours in length) per year, attended by 12 people with an average salary of a GS-14 step 5, with Washington, DC locality pay and not including benefits ($59.13 per hour—2016 GS Pay Scale); plus 8 hours of preparation time for the two meetings by a GS-14 step 5, with Washington, DC locality pay.

    The benefits derived from DoD's participation in the Compact accrue to Service members and their families, particularly the 676,000 school-age children educated by local education agencies and DoDEA.12 These benefits have not necessarily been quantified, but can be described in qualitative terms. Military moves are stressful for the entire family, and transitioning to a new school creates stresses because of uncertainty. Military children are confronted with unknown academic and social challenges, and their parents must overcome new administrative requirements to enroll them. The provisions included in the Compact provide relief for some of the administrative requirements faced by parents and the academic issues regularly experienced by military children who generally attend six-to-nine different schools between kindergarten and 12th grade.13 The goal of the Compact is to replace the widely varying treatment of transitioning military students with a comprehensive approach that provides a uniform policy in every school district in every state that chooses to join. Through more uniform transition policies, military children have an opportunity to assimilate into their classes, extra-curricular activities and new social circles more quickly. Additionally the Compact recognizes the difficulties military children may have with being separated from a parent due to a military deployment, allowing for liberal absences for children to be with the deploying/returning parents.

    12 2014 Demographic Profile of the Military Community, DMDC Active Duty Military Family File, page 137.

    13 Council of State Governments, “Interstate Compact on Educational Opportunity for Military Children Legislative Resource Kit,” January 2008, page 1.

    The Compact Articles IV-VII were developed as a result of input from 17 representative national and state stakeholders who were asked to participate in a working group sponsored by the Council of State Governments, National Center for Interstate Compacts.14 The majority of their recommendations came from work that had previously been presented in studies, such as the Military Child Education Coalition's Secondary Education Transition Study, conducted for the U.S. Army in 2001, and the subsequent Memoranda of Agreement signed by nine school districts which addressed “the timely transfer of records, systems to ease student transition during the first 2 weeks of enrollment, practices that foster access to extracurricular programs, procedures to lessen the adverse impact of moves of juniors and seniors, [and] variations in school calendars and schedules,” among other recommendations.15

    14 Contributing individuals and groups included: National Association of Elementary School Principals; National Military Family Association; Military Child Education Coalition; U.S. Department of Education; National School Boards Association; National PTA; Office of Lt Governor Beverly Purdue, NC; Alabama State Senator; National School Superintendents Association (Local School Superintendent); National Education Association; Military Impacted Schools Association; Maryland Department of Education; Ofc of the Under Secretary of Defense; California Department of Education; Nevada State Senator; and the Florida Department of Education; Education Commission of the States.

    15 Kathleen F. Berg, “Easing Transitions of Military Dependents into Hawaii Public Schools: An Invitational Education Link,” Journal of Invitational Theory and Practice Volume 14, 2008, page 44.

    Regulatory Analysis Executive Order 12866, “Regulatory Planning and Review” and Executive Order 13563, “Improving Regulation and Regulatory Review”

    Executive Orders 13563 and 12866 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 13563 emphasizes the importance of quantifying both costs and benefits, reducing costs, harmonizing rules, and promoting flexibility. It has been determined that this rule is not a significant regulatory action. The rule does not: (1) Have an annual effect on the economy of $100 million or more or adversely affect in a material way the economy; a section of the economy; productivity; competition; jobs; the environment; public health or safety; or State, local, or tribal governments or communities; (2) Create a serious inconsistency or otherwise interfere with an action taken or planned by another Agency; (3) Materially alter the budgetary impact of entitlements, grants, user fees, or loan programs, or the rights and obligations of recipients thereof; or (4) Raise novel legal or policy issues arising out of legal mandates, the President's priorities, or the principles set forth in these Executive Orders.

    2 U.S.C. Ch. 25, “Unfunded Mandates Reform Act”

    Section 202 of the Unfunded Mandates Reform Act of 1995 (2 U.S.C. 1532) requires agencies assess anticipated costs and benefits before issuing any rule whose mandates require spending in any 1 year of $100 million in 1995 dollars. This rule will not mandate any requirements for State, local, or tribal governments, nor will it affect private sector costs.

    Public Law 96-354, “Regulatory Flexibility Act” (5 U.S.C. Ch. 6)

    DoD certifies that this rule is not subject to the Regulatory Flexibility Act (5 U.S.C. 601) because it would not, if promulgated, have a significant economic impact on a substantial number of small entities. Therefore, the Regulatory Flexibility Act, as amended, does not require us to prepare a regulatory flexibility analysis.

    Public Law 96-511, “Paperwork Reduction Act” (44 U.S.C. Chapter 35)

    This rule does not impose reporting and record keeping requirements under the Paperwork Reduction Act of 1995.

    Executive Order 13132, “Federalism”

    This rule was analyzed in accordance with the principles and criteria contained in Executive Order 13132 (“Federalism”). It has been determined that it does not have sufficient Federalism implications to warrant the preparation of a Federalism summary impact statement. This rule has no substantial effect on the States, or on the current Federal-State relationship, or on the current distribution of power and responsibilities among the various local officials. Nothing in this rule preempts any State law or regulation. Therefore, DoD did not consult with State and local officials because it was not necessary.

    List of Subjects in 32 CFR Part 89

    Children, Education, Interstate Compact.

    Accordingly 32 CFR part 89 is added to read as follows: PART 89—INTERSTATE COMPACT ON EDUCATIONAL OPPORTUNITY FOR MILITARY CHILDREN Sec. 89.1 Purpose. 89.2 Applicability. 89.3 Definitions. 89.4 Policy. 89.5 Responsibilities. 89.6 Procedures. 89.7 Representatives to State Councils, the DoDEA Committee and MIC3. 89.8 Compact provisions. Authority:

    10 U.S.C. 2164, 20 U.S.C. 921-932.

    § 89.1 Purpose.

    In accordance with the sense of Congress as set forth in section 539 of Public Law 111-84, this part establishes policy, assigns responsibilities, and provides procedures to implement the Interstate Compact on Educational Opportunity for Military Children (referred to in this part as the “Compact”) within the DoD.

    § 89.2 Applicability.

    This part applies to the Office of the Secretary of Defense, the Military Departments, the Office of the Chairman of the Joint Chiefs of Staff and the Joint Staff, the Combatant Commands, the Office of the Inspector General of the DoD, the Defense Agencies, the DoD Field Activities, and all other organizational entities within the DoD.

    § 89.3 Definitions.

    These terms and their definitions are for the purposes of this part.

    504 plan. A plan required pursuant to 29 U.S.C. 794 specifying the modifications and accommodations for a child with a disability to meet the individual educational needs of that child as adequately as the needs of children without disabilities are met. The plans can include accommodations such as wheelchair ramps, blood sugar monitoring, an extra set of textbooks, a peanut-free lunch environment, home instruction, or a tape recorder or keyboard for taking notes.

    Children of military families. School-aged children who are enrolled in kindergarten through twelfth grade and are in the households of Service members who:

    (1) Are on active duty, including members of the National Guard and Reserve on active duty orders pursuant to 10 U.S.C. 1211;

    (2) Are active duty or veterans who are severely wounded, ill, or injured; or

    (3) Die on active duty or as a result of injuries sustained on active duty;

    Children of military members who are severely wounded, ill, or injured retain this designation for 1 year after discharge or retirement. Children of military members who die on active duty or as a result of injuries sustained on active duty, retain this designation for 1 year after death.

    Deployment. The period 1 month prior to the military members' departure from their home station on military orders through 6 months after return to their home station.

    DoDEA Committee. A DoD committee established pursuant to this part by Director, DoDEA to advise DoDEA on compliance with provisions in § 89.8 by DoDEA schools. The DoDEA Committee also provides input to the ex-officio member of the Commission on issues arising from DoDEA school interactions with member States of the Compact, and acts as a counterpart to State Councils of member States.

    Education records. Those official records, files, and data directly related to a child and maintained by the school or local educational agency (LEA) or state educational agency (SEA), including but not limited to, records encompassing all the material kept in the child's cumulative folder such as general identifying data, records of attendance and of academic work completed, records of achievement and results of evaluative tests, health data, disciplinary status, test protocols, and individualized education programs (IEPs).

    Ex-officio member of the Commission. Non-voting member of the Commission who may include, but not be limited to, members of the representative organizations of military family advocates, LEA officials, parent and teacher groups, the DoD, the Education Commission of the State, the Interstate Agreement on the Qualification of Educational Personnel, and other interstate compacts affecting the education of children of military members.

    Extracurricular activity. A voluntary activity sponsored by the school or LEA or SEA or an organization sanctioned by the LEA or SEA. Extracurricular activities include, but are not limited to, preparation for and involvement in public performances, contests, athletic competitions, demonstrations, displays, and club activities.

    IEP. When a child is identified as a child with disabilities in accordance with Individuals With Disabilities Education Act (IDEA), he or she must have a written document that describes the special education supports and services the child will receive. The IEP is developed by a team that includes the child's parents and school staff.

    Interstate Compact on Education Opportunity for Military Children (the Compact). An agreement approved through State legislation that requires member States to follow provisions supporting the transition of children of military families between school systems in member States. As part of joining the Compact, States agree to participate in the Commission and pay dues to the Commission to support its oversight of the Compact.

    LEA. A public authority legally constituted by the State as an administrative agency to provide control of and direction for kindergarten through twelfth grade public educational institutions. For the purpose of administering the provisions of the Compact in § 89.8 of this part, DoDEA school districts as defined in 20 U.S.C. 932 are equivalent to an LEA.

    Member State. A State that has enacted the Compact.

    MIC3. The MIC3, also known as the Interstate Commission on Educational Opportunity for Military Children (sometimes referred to as the “Interstate Commission” or “the Commission”), is the governing body of the Compact composed of representatives from each member State, as well as various ex-officio members. The Commission provides general oversight of the agreement, creates and enforces rules governing the Compact, and promotes training and compliance with the Compact. Each member State will be allowed one vote on Compact matters, and the Commission will provide the venue for solving interstate issues and disputes.

    Military Family Education Liaison. Individual appointed or designated by State Council of each member state to assist military families and the State in facilitating the implementation of the Compact. Military members and DoD civilian employees cannot perform this function.

    Military installation. A base, camp, post, station, yard, center, homeport facility for any ship, or other activity under DoD jurisdiction, including any leased facility. (This term does not include any facility used primarily for civil works, rivers and harbors projects, or flood control projects.)

    Military representative as a liaison to a State Council. Incumbent of a position designated by the DASD(MC&FP), who performs the duties and responsibilities defined in § 89.5 of this part. The military representative is responsible for representing the interest of the DoD in fostering easier transition of children of military families according to their designation (installation representative, Military Department representative or statewide representative). The military representative will be a military member or DoD civilian who can remain in the position for at least 2 years and whose position has a direct interface with the State education system as part of official duties or has supervisory responsibility for those who do.

    Military representative to the DoDEA Committee. Individual nominated to represent all four Services by the Office of the Assistant Secretary of the Army for Manpower and Reserve Affairs (OASA(M&RA)), the Office of the Assistant Secretary of the Navy for Manpower and Reserve Affairs (OASN(M&RA)), or the Office of the Assistant Secretary of the Air Force for Manpower and Reserve Affairs (OASAF(M&RA)) on a rotational basis and appointed by the DASD(MC&FP) for a 2-year term. Because DoDEA is a DoD Component the military representative may act as a full participant in the DoDEA Committee.

    Receiving State. The State to which a child of a military family is sent, brought, or caused to be sent or brought.

    SEA. A public authority similar to an LEA, legally constituted by the State as an administrative agency to provide control of and direction for kindergarten through twelfth grade public educational institutions for the entire State.

    Sending State. The State from which a child of a military family is sent, brought, or caused to be sent or brought.

    State. State of the United States, the District of Columbia, the Commonwealth of Puerto Rico, the U.S. Virgin Islands, Guam, American Samoa, the Northern Marianas Islands and any other U.S. territory or possession. For purposes of administering the provisions of the Compact in § 89.8 of this part, DoD is considered a State and DoDEA is considered the equivalent of a State department of education for DoD.

    State Council. A body that coordinates among government agencies, LEAs, and military installations concerning the member State's participation in and compliance with the Compact and the Commission activities. A member State may determine the membership of its own Council, but membership must include at least: The State superintendent of education; superintendent of a school district with a high concentration of military children; representative (as a liaison) from a military installation; one representative each from the legislative and executive branches of State government; and other offices and stakeholder groups the State Council deems appropriate.

    Transition. The formal and physical process of transferring from school to school; or the period of time in which a child moves from a school in the sending State to a school in the receiving State.

    Veteran. A person who served in the military and who was discharged or released from the military under conditions other than dishonorable.

    § 89.4 Policy.

    In accordance with the sense of Congress as set forth in section 539 of Public Law 111-84, “National Defense Authorization Act for Fiscal Year 2010” and DoD 5500.07-R, “Joint Ethics Regulations (JER)” (available at http://www.dtic.mil/whs/directives/corres/pdf/550007r.pdf), it is DoD policy to support the intent of the Compact by reducing the difficulty children of military families (referred to in this part as “children” or “the child”) have in transferring between school systems because of frequent moves and deployment of their parents. DoD will support the Compact by:

    (a) Designating military liaisons, by position, to State Councils of member States, the DoDEA Committee, and the MIC3.

    (b) Implementing the intent of the Compact in the DoDEA to ensure:

    (1) Timely enrollment of children in school so they are not penalized due to:

    (i) Late or delayed transfers of education records from the previous school district(s); or

    (ii) Differences in entrance or age requirements.

    (2) Placement of children in educational courses and programs, including special educational services, so they are not penalized due to differences in attendance requirements, scheduling, sequencing, grading, or course content.

    (3) Flexible qualification and eligibility of children so they can have an equitable chance at participation in extracurricular, academic, athletic, and social activities.

    (4) Graduation within the same timeframe as the children's peers.

    (c) Promoting through DoDEA and the Military Departments:

    (1) Flexibility and cooperation among SEAs or LEAs, DoDEA, Military Departments, parents, and children to achieve educational success.

    (2) Coordination among the various State agencies, LEAs, and military installations regarding the State's participation in the Compact.

    § 89.5 Responsibilities.

    (a) Under the authority, direction, and control of the Under Secretary of Defense for Personnel and Readiness, the Assistant Secretary of Defense for Manpower and Reserve Affairs (ASD(M&RA)) oversees the implementation of this part.

    (b) Under the authority, direction, and control of the ASD(M&RA), the DASD(MC&FP):

    (1) Designates military representatives by position as liaisons to State councils, nominated by the Secretaries of the Military Departments by the procedures outlined in § 89.7 of this part.

    (2) Designates the DoD ex-officio member serving as a liaison to MIC3, insofar as DoD is invited to do so by MIC3.

    (3) Maintains a roster of designated liaisons to State councils in accordance with 32 CFR part 310.

    (4) Monitors issues arising under the Compact:

    (i) Affecting children of military families attending and transferring between member State schools; and

    (ii) The implementation of § 89.8 of this part, affecting children of military families transferring between member state schools and DoDEA's schools (consisting of the Department of Defense Schools (DoDDS)—Europe, DoDDS—Pacific, and DDESS.

    (c) Under the authority, direction, and control of ASD(M&RA), the Director, DoDEA:

    (1) To the extent allowable by 10 U.S.C. 2164 and 20 U.S.C. 921-932, adjusts operating policies and procedures issued pursuant to DoD Directive 1342.20, “Department of Defense Education Activity (DoDEA)” (available at http://www.dtic.mil/whs/directives/corres/pdf/134220p.pdf) to implement the provisions of the Compact described in § 89.8 of this part.

    (2) Informs boards and councils, described in DoD Instruction 1342.15, “Educational Advisory Committees and Councils” (available at http://www.dtic.mil/whs/directives/corres/pdf/134215p.pdf) and DoD Instruction 1342.25, “School Boards for Department of Defense Domestic Dependent Elementary and Secondary Schools (DDESS)” (available at http://www.dtic.mil/whs/directives/corres/pdf/134225p.pdf), of the Compact provisions in § 89.8 of this part and the DoDEA administration of these provisions.

    (3) Addresses disputes over provisions in § 89.8 of this part between member States and DoDEA. When differences cannot be resolved with a member State, works with MIC3 to resolve these disputes.

    (4) Establishes the DoDEA Committee to review compliance with the provisions in § 89.8 of this part and to address issues raised by the Secretaries of the Military Departments concerning the implementation of these provisions.

    (5) Ensures all personally identifiable information is collected, maintained, disseminated, and used in accordance with 32 CFR part 310.

    (6) Ensures that DoDEA schools comply with § 89.8 and that DoDEA school-level officials inform DoDEA students transferring to schools in member States of the benefits extended by receiving States under the Compact.

    (d) The Secretaries of the Military Departments:

    (1) Nominate military representatives by position, in accordance with the procedures outlined in § 89.7 of this part, for designation as liaisons to State Councils by the DASD(MC&FP) when such DoD liaison is requested.

    (2) Establish departmental policies and procedures to inform military communities of:

    (i) The provisions of this part as it affects children of military families attending and transferring between member State schools; and

    (ii) The provisions in § 89.8 of this part concerning students transferring between DoDEA and member State schools.

    (3) Procedures to resolve issues or challenges raised by parents concerning the provisions of § 89.8 of this part.

    § 89.6 Procedures.

    DoD implements policy in this part by:

    (a) Establishing a committee within DoDEA (referred to in this part as the “DoDEA Committee”).

    (b) Designating military representatives by position to serve as liaisons to the State Councils of the member States and the DoDEA Committee in accordance with procedures in § 89.7.

    (c) Designating the ex-officio member to serve as a liaison to MIC3 in accordance with § 89.5 and § 89.7.

    (d) Ensuring DoDEA compliance with the selected provisions of the Compact described in § 89.8.

    § 89.7 Representatives to State Councils, the DoDEA Committee and MIC3.

    (a) Military Representatives designated by position as Liaisons to State Councils. In accordance with section 3-201 of DoD 5500.07-R, incumbents of positions designated as liaisons to State Councils will:

    (1) Be a military member or a civilian employee of DoD who has a direct interface with the State education system as part of official duties or has supervisory responsibility for those who do.

    (2) Only represent DoD interests (not the interests of the State Council), and consequently may not:

    (i) Engage in management or control of the State Council (therefore, may not vote or make decisions on daily administration of council);

    (ii) Endorse or allow the appearance of DoD endorsement of the State Council or its events, products, services, or enterprises;

    (iii) Represent the State Council to third parties; or

    (iv) Represent the State Council to the U.S. Government, as prohibited by federal criminal statues.

    (3) Make clear to the State Council that:

    (i) The opinions expressed by the representative do not bind DoD or any DoD Component to any action.

    (ii) If included on State Council Web sites, all references to the representative by name or title must indicate that they are the “Military Representative” as opposed to a council member.

    (4) Notify the chain of command of issues requiring policy decisions or actions requested of the military community within the State.

    (5) When called upon to act as the spokesperson for one or more than one installation:

    (i) Get feedback from the designated points of contact at each military installation within his or her responsibility.

    (ii) Coordinate proposed input to the State Council with the appropriate points of contact for each military installation within his or her responsibility.

    (iii) Act as a conduit for information between the State Council and each military installation within his or her responsibility.

    (iv) Provide feedback through the chain of command to the points of contact for each military installation within his or her responsibility and, as appropriate, to the OASA(M&RA), the OASN(M&RA), or the OASAF(M&RA).

    (b) Nomination Process for Positions Designated as Liaisons to State Councils. (1) In accordance with DoD 5500.07-R, liaison positions are nominated by the Military Departments and designated by the DASD(MC&FP), not by State officials. Depending on the number of liaison positions required by State policy, designating liaison positions to a State Council will be accomplished according to the processes outlined in Table 1:

    Table 1—Process for Designating Liaison Positions to State Councils If State statute concerning military representatives provides for: The State Commissioner
  • contacts:
  • Who requests a selection be made by: Whereupon the official written designation is made by:
    One representative for all military children in the State DASD(MC&FP) OASA(M&RA), OASN(M&RA), or OASAF(M&RA) responsible for providing a representative for the State listed in Table 2 DASD(MC&FP). One representative for each Military Service DASD(MC&FP) OASA(M&RA), OASN(M&RA), and OASAF(M&RA) DASD(MC&FP). One representative for each military installation in the State DASD(MC&FP) OASA(M&RA), OASN(M&RA) and OASAF(M&RA) DASD(MC&FP).

    (2) When there is more than one military representative to a State Council (e.g., one per installation or one per Military Department represented in the State), the incumbent of the position nominated by the responsible Military Department (Table 2) will serve as the lead military representative when DoD must speak with a single voice.

    (3) In circumstances where the State requests an individual by name, the DASD(MC&FP) will forward the request to the individual's Military Department for consideration of designating the position which the individual encumbers. If that Military Department is different from the one designated in Table 2, the DASD(MC&FP) will first obtain the concurrence of the responsible Military Department.

    (4) In accordance with the Compact, State officials appoint or designate the Military Family Education Liaison for the State. Service members and DoD civilians cannot be appointed or designated to fill this position for the State.

    Table 2—Military Department Areas of Authority for Selecting a Single Military Representative Position To Serve as a Liaison to the State Council Military department Areas of Authority Army Alabama, Alaska, Colorado, Georgia, Hawaii, Indiana, Iowa, Kansas, Kentucky, Louisiana, Maryland, Michigan, Minnesota, Missouri, New York, Oklahoma, Pennsylvania, South Carolina, Texas, Vermont, Washington, West Virginia, Wisconsin. Navy American Samoa, California, Connecticut, District of Columbia, Florida, Guam, Maine, Mississippi, New Hampshire, North Carolina, Northern Marianas, Oregon, Puerto Rico, Rhode Island, Tennessee, Virginia, Virgin Islands. Air Force Arizona, Arkansas, Delaware, Idaho, Illinois, Massachusetts, Montana, Nebraska, Nevada, New Jersey, New Mexico, North Dakota, Ohio, South Dakota, Utah, Wyoming.

    (c) Military Representative to the DoDEA Committee. Membership of the DoDEA Committee will include a representative from one of the Military Services to represent all four Services. OASA(M&RA), OASN(M&RA), or OASAF(M&RA) will nominate a representative on a rotational basis who will be designated for a 2-year term by the DASD(MC&FP).

    (d) Ex-Officio Member Serving as a Liaison to MIC3. In accordance with section 3-201 of DoD 5500.07-R, the DoD ex-officio member to the Commission, must:

    (1) Be a military member or a civilian employee of DoD who can remain in the position for at least 2 years and who has a direct interface with DoDEA and the U.S. public education system as part of official duties or has supervisory responsibility for those who do.

    (2) Attend as a liaison meetings of MIC3, its Executive Committee, and other standing committees where requested by the Commission.

    (3) Only represent DoD interests (not the interests of MIC3), and consequently may not:

    (i) Engage in management or control of MIC3 (therefore, may not vote or make decisions on daily administration of MIC3);

    (ii) Endorse or allow the appearance of DoD endorsement of MIC3, or its events, products, services, or enterprises;

    (iii) Represent the Commission to third parties; or

    (iv) Represent MIC3 to the U.S. Government, as prohibited by criminal statutes.

    (4) Make clear to MIC3 that:

    (i) The opinions expressed by the incumbent do not bind DoD or any DoD Component to any action.

    (ii) If included on MIC3 Web sites, all references to the incumbent by name or title must indicate that they are the “DoD Ex-Officio Member” as opposed to a MIC3 member.

    (5) Notify the chain of command of issues requiring policy decisions or actions requested of DoD.

    § 89.8 Compact provisions.

    (a) DoDEA Area School Districts Relationship With SEAs or LEAs in Member States.

    (1) For the purposes of DoD's implementation of the Compact in the schools it operates, DoDEA's area offices (DoDDS—Europe, DoDDS—Pacific, and DDESS) and their schools are considered as the equivalent of LEAs and SEAs, respectively.

    (2) Each DoDEA area acts as the “receiving LEA” and “sending LEA” in working with LEAs or SEAs in member States.

    (b) Articles IV Through VII of the Compact. This section describes the specific duties that DoDEA's LEAs have as “sending” or “receiving” LEAs. DoDEA's duties under this section will reciprocate the duties assumed by member State LEAs or SEAs to children of military families, as expressed by their respective State's implementation of the Compact Articles IV through VII. DoDEA will implement the provisions described below, which, while retaining the intent of the Compact, have been modified as needed in the DoDEA context.

    (1) Article IV: Education Records and Enrollment—(i) Unofficial or “Hand-Carried” Education Records. (A) If official education records cannot be released to the parents for transfer, the DoDEA custodian of the records, as the sending LEA shall provide to the parent a complete set of unofficial education records.

    (B) Upon receipt of the unofficial education records, the DoDEA school, as the school in the receiving LEA shall enroll and appropriately place the child as quickly as possible based on the information in the unofficial records, pending validation by the official records.

    (ii) Official education records or transcripts. (A) The DoDEA school, acting as the receiving LEA shall request the child's official education record from the school in the sending State at the same time as DoDEA school enrolls and conditionally places the child.

    (B) Upon receipt of the request for a child's records, the school in DoDEA, acting as the sending LEA will provide the child's official education records to the school in the receiving State, within 10 work days. If there is a designated school staff break, records will be provided as soon as possible; however, the time will not exceed 10 work days after the return of staff. DoDEA will initiate actions to meet these deadlines without violating the disclosure rules of the Privacy Act, 5 U.S.C. 552a.

    (iii) Immunizations. (A) Parents have 30 days from the date of enrolling their child in a DoDEA school to have their child(ren) immunized in accordance with DoDEA's immunization requirements, as the receiving LEA.

    (B) For a series of immunizations, parents must begin initial vaccinations of their child(ren) within 30 days.

    (iv) Entrance age. (A) At the time of transition and regardless of the age of the child, the DoDEA school, acting as the receiving LEA, shall enroll the transitioning child at the grade level as the child's grade level (i.e., in kindergarten through grade 12) in the sending state's LEA.

    (B) A child who has satisfactorily completed the prerequisite grade level in the sending state's LEA will be eligible for enrollment in the next higher grade level in DoDEA school, acting as the receiving LEA, regardless of the child's age.

    (C) To be admitted to a school in the receiving State, the parent or guardian of a child transferring from a DoDEA (sending) LEA must provide:

    (1) Official military orders showing the military member or the member's spouse was assigned to the sending State or commuting area of the State in which the child was previously enrolled. If the child was residing with a guardian other than the military member during the previous enrollment, proof of guardianship (as specified in the Compact) should be provided by the parent or guardian to the receiving LEA or SEA to establish eligibility under the Compact.

    (2) An official letter or transcript from the sending school authority that shows the student's record of attendance, academic information, and grade placement.

    (3) Evidence of immunization against communicable diseases.

    (4) Evidence of date of birth.

    (2) Article V: Placement and Attendance—(i) Course placement. (A) As long as the course is offered by DoDEA, as the receiving LEA, it shall honor placement of a transfer student in courses based on the child's placement or educational assessment in the sending State school.

    (B) Course placement includes, but is not limited to, Honors, International Baccalaureate, Advanced Placement, vocational, technical, and career pathways courses.

    (C) Continuing the child's academic program from the previous school and promoting placement in academically and career challenging courses shall be a primary consideration when DoDEA considers the placement of a transferring child.

    (D) DoDEA, acting as the receiving LEA, may perform subsequent evaluations to ensure the child's appropriate course placement.

    (ii) Educational Program Placement. (A) As long as the program is offered by DoDEA, acting as a receiving LEA, it will honor placement of the child in educational programs based on current educational assessments and placement in like programs in the sending State. Such programs include, but are not limited to, gifted and talented programs and English language learners.

    (B) The receiving State school may perform subsequent evaluations to ensure the child's appropriate educational program placement.

    (iii) Special Education Services. (A) DoDEA, acting as the receiving LEA, will initially provide comparable services to a child with disabilities based on his or her current IEP in compliance with 20 U.S.C. chapter 33, also known and referred to in this part as the “Individuals with Disabilities Education Act (IDEA),” as amended, and the requirements of Executive Order 13160. DoDEA may perform subsequent evaluations to ensure the child's appropriate placement consistent with IDEA.

    (B) DoDEA, acting as the receiving LEA, will make reasonable accommodations and modifications to address the needs of incoming children with disabilities, in compliance with the requirements of 29 U.S.C. 794 and Executive Order 13160, and subject to an existing 504 plan to provide the child with equal access to education.

    (iv) Placement Flexibility. DoDEA's administrative officials must have flexibility in waiving course or program prerequisites or other preconditions for placement in courses or programs offered under the jurisdiction of DoDEA.

    (v) Absences Related to Deployment Activities. A child whose parent or legal guardian is an active duty Service member and has been called to duty for, is on leave from, or has immediately returned from deployment to a combat zone or combat support posting, will be granted additional excused absences under governing DoDEA rules.

    (3) Article VI: Eligibility for enrollment. (i) Eligibility in DoDEA Schools. Eligibility of dependents of military members is governed by the laws in 10 U.S.C. 2164 and 20 U.S.C. 921 through 932 and their implementing regulations. Only children who are eligible to attend DoDEA schools may do so, regardless of their transition status.

    (ii) Eligibility for extracurricular participation. DoDEA, acting as the receiving LEA, will facilitate the opportunity for transitioning children's inclusion in extracurricular activities, regardless of application deadlines, to the extent the children are otherwise qualified.

    (4) Article VII: Graduation. To facilitate the child's on-time graduation, DoDEA will incorporate the following procedures:

    (i) Waiver requirements. (A) DoDEA administrative officials will waive specific courses required for graduation if similar course work has been satisfactorily completed in another LEA or provide reasonable justification for denial.

    (B) If DoDEA, as a receiving LEA, does not grant a waiver to a child who would qualify to graduate from the sending school, DoDEA will provide an alternative means of acquiring required coursework so that graduation may occur on time.

    (C) If DoDEA, as the receiving LEA, requires a graduation project, volunteer community service hours, or other DoDEA specific requirement, DoDEA may waive those requirements.

    (ii) Exit exams. (A) DoDEA, as a receiving LEA, must:

    (1) Accept exit or end-of-course exams required for graduation from the sending State.

    (2) Accept national norm-referenced achievement tests.

    (3) Provide alternative testing in lieu of testing requirements for graduation in the receiving from a DoDEA school.

    (B) If the alternatives in paragraph (b)(2)(i) of this section cannot be accommodated by DoDEA as the receiving LEA for a child transferring in his or her senior year, then the provisions of paragraph (b)(1)(iv)(C) of this section will apply.

    (iii) Transfers during senior year. (A) If a child transferring at the beginning or during his or her senior year is ineligible to graduate from DoDEA, as the receiving LEA, after all alternatives have been considered, DoDEA will request a diploma from the sending LEA or SEA. DoDEA will ensure the receipt of a diploma from the sending LEA or SEA, if the child meets the graduation requirements of the sending LEA or SEA.

    (B) If one of the States in question is not a member of this Compact, DoDEA, as a receiving state, will use best efforts to facilitate a transferring child's on-time graduation in accordance with paragraphs (b)(1)(iv)(A) and (b)(1)(iv)(B) of this section.

    Dated: December 12, 2016. Aaron Siegel, Alternate OSD Federal Register Liaison Officer, Department of Defense.
    [FR Doc. 2016-30110 Filed 12-19-16; 8:45 am] BILLING CODE 5001-06-P
    DEPARTMENT OF HOMELAND SECURITY Coast Guard 33 CFR Part 117 [Docket No. USCG-2016-1049] Drawbridge Operation Regulation; Pearl River, LA/MS AGENCY:

    Coast Guard, DHS.

    ACTION:

    Notice of deviation from drawbridge regulations.

    SUMMARY:

    The Coast Guard has issued a temporary deviation from the operating schedule that governs the operation of the US 90 highway bridge (East Pearl River Bridge), a swing span bridge across the Pearl River, mile 8.8, between Slidell, St. Tammany Parish, Louisiana and Pearlington, Hancock County, Mississippi. The deviation is necessary to remove and repair three gear motors to allow for the continued safe operation of the bridge. This deviation allows the bridge to remain in the closed-to-navigation position for a period of 32 days, broken in to one 12-Day Period and two 10-Day periods, as repairs to each motor will be done separately.

    DATES:

    This deviation is effective from 6 a.m. on Thursday January 19, 2017, through 5 p.m. on Tuesday, March 21, 2017.

    ADDRESSES:

    The docket for this deviation, [USCG-2016-1049] is available at http://www.regulations.gov. Type the docket number in the “SEARCH” box and click “SEARCH”. Click on Open Docket Folder on the line associated with this deviation.

    FOR FURTHER INFORMATION CONTACT:

    If you have questions on this temporary deviation, call or email Donna Gagliano, Bridge Administration Branch, Coast Guard, telephone (504) 671-2128, email [email protected]

    SUPPLEMENTARY INFORMATION:

    Boh Bros. Construction Company, on behalf of the Louisiana Department of Transportation and Development, requested a temporary deviation from the operating schedule for the swing span bridge across the Pearl River, mile 8.8, between Slidell, St. Tammany Parish, Louisiana and Pearlington, Hancock County, Mississippi. The deviation was requested to accommodate necessary repairs to the swing span operation due to the complexity of the work requiring rewiring. The draw currently operates under 33 CFR 117.486(b).

    For purposes of this deviation, the bridge over the Pearl River will be closed to marine traffic for three extended periods of time from Thursday, January 19, 2017, through Tuesday, March 21, 2017. This deviation allows the bridge to remain closed-to-navigation for the duration of these Phases.

    Phase I: A 12-day closure from 6 a.m. on January 19, 2017 through 5 p.m. on January 30, 2017. Phase II: A 10-day closure from 6 a.m. on February 9, 2017 through 5 p.m. on February 18, 2017. Phase III: A 10-day closure from 6 a.m. on March 12, 2017 through 5 p.m. on March 21, 2017. During all Three Phases, the work requires the removal of gear motors #1, #2, and #3, delivery to machine shop to replace bearings and seals, sandblasting and painting, removal of motor armature from input shaft, cutting and broaching of the shafts, and repairing damaged conduit and wiring from the control house to span junction box. Due to the complexity of the work, it will require rewiring of electrical components and conducting testing and troubleshooting of the bridge to safely continue operation of the bridge.

    Any vessel with a vertical clearance requirement of less than 10 feet above mean high water in the closed-to-navigation position may pass beneath the bridge at any time. Navigation on the waterway consists of small tugs with and without tows, commercial vessels, and recreational craft, including sailboats.

    The bridge will not be able to open for emergencies, and there is no alternate route. LDOTD has coordinated these closing with the Stennis Space Center and other waterway users. The Coast Guard will also inform the users of the waterways through our Local and Broadcast Notices to Mariners of the change in operating schedule for the bridge to minimize any impact caused by the temporary deviation.

    In accordance with 33 CFR 117.35(e), the drawbridge must return to its regular operating schedule immediately at the end of the effective period of this temporary deviation. This deviation from the operating regulations is authorized under 33 CFR 117.35.

    Dated: December 14, 2016. David M. Frank, Bridge Administrator, Eighth Coast Guard District.
    [FR Doc. 2016-30572 Filed 12-19-16; 8:45 am] BILLING CODE 9110-04-P
    DEPARTMENT OF HOMELAND SECURITY Coast Guard 33 CFR Part 117 [Docket No. USCG-2016-1056] Drawbridge Operation Regulation; Calcasieu River, Westlake, LA AGENCY:

    Coast Guard, DHS.

    ACTION:

    Notice of deviation from drawbridge regulations.

    SUMMARY:

    The Coast Guard has issued a temporary deviation from the operating schedule that governs the Westlake Bridge across the Calcasieu River, mile 36.4, at Westlake, Calcasieu Parish, Louisiana. The deviation is necessary to repair and replace the existing lift rails and actuators on the east end of the bridge. These repairs are essential for the continued safe operation of the bridge. This deviation allows the bridge to remain closed-to-navigation for a total of 36 hours on four different dates in December 2016 and January 2017.

    DATES:

    This temporary deviation is effective from 6 a.m. on Sunday, December 25, 2016 through noon on Monday, January 2, 2017, as discussed in greater detail below.

    ADDRESSES:

    The docket for this deviation, [USCG-2016-1056] is available at http://www.regulations.gov. Type the docket number in the “SEARCH” box and click “SEARCH”. Click on Open Docket Folder on the line associated with this deviation.

    FOR FURTHER INFORMATION CONTACT:

    If you have questions on this temporary deviation, call or email Giselle MacDonald, Bridge Administration Branch, Coast Guard, telephone (504) 671-2128, email [email protected]

    SUPPLEMENTARY INFORMATION:

    The Union Pacific Railroad requested a temporary deviation from the operating schedule of the Westlake Swing-Span Bridge across the Calcasieu River, mile 36.4, at Westlake, Calcasieu Parish, Louisiana.

    The vertical clearance of the bridge is 1.07 feet above Mean High Water, elevation 3.56 feet Mean Gulf Level in the closed-to-navigation position and unlimited in the open-to-navigation position. The bridge will not be able to open for emergencies and there are no alternate routes available. Navigation on the waterway consists of tugs with tows, fishing vessels and recreational craft. These closures will not have a significant effect on vessels that use the waterway in the determination and coordination with waterway users.

    In accordance with 33 CFR 117.5, the draw shall open on signal for the passage of vessels. This deviation allows the drawbridge to remain in the closed-to-navigation position for 36 hours, from 6 a.m. through 6 p.m. on Sunday, December 25, 2016; from 6 a.m. through noon on Monday, December 26, 2016; from 6 a.m. through 6 p.m. on Sunday, January 1, 2017; and from 6 a.m. through noon on Monday, January 2, 2017.

    In accordance with 33 CFR 117.35(e), the drawbridge must return to its regular operating schedule immediately at the end of the effective period of this temporary deviation. This deviation from the operating regulations is authorized under 33 CFR 117.35.

    Dated: December 14, 2016. David M. Frank, Bridge Administrator, Eighth Coast Guard District.
    [FR Doc. 2016-30576 Filed 12-19-16; 8:45 am] BILLING CODE 9110-04-P
    ENVIRONMENTAL PROTECTION AGENCY 40 CFR Part 52 [EPA-R09-OAR-2016-0240; FRL-9956-65-Region 9] Approval and Limited Approval and Limited Disapproval of Air Quality Implementation Plans; California; Northern Sonoma County Air Pollution Control District; Stationary Source Permits; Correcting Amendment AGENCY:

    Environmental Protection Agency.

    ACTION:

    Final rule, correcting amendment.

    SUMMARY:

    On October 6, 2016, the Environmental Protection Agency (EPA) published a final rule in the Federal Register approving certain revisions to the Northern Sonoma County Air Pollution Control District (NSCAPCD, or the District) portion of the California State Implementation Plan (SIP), and disapproving others. The EPA indicated in this final action that these revisions would supersede certain older rules in the California SIP but inadvertently included erroneous references in the regulatory text. This document corrects the regulatory text to clarify the replacement of these superseded regulations.

    DATES:

    This action is effective on December 20, 2016.

    FOR FURTHER INFORMATION CONTACT:

    Laura Yannayon, EPA Region IX, (415) 972-3534, [email protected]

    SUPPLEMENTARY INFORMATION:

    This action corrects inadvertent errors in a rulemaking related to NSCAPCD's rules governing the issuance of permits for stationary sources. On October 6, 2015 (81 FR 69390), the EPA published a rulemaking action finalizing approval of three rules, and a limited approval and limited disapproval of two rules as revisions to the California SIP. This action contained regulatory text amendments to 40 CFR part 52, subpart F. The amendments incorporated material by reference into section 52.220, Identification of plan, paragraphs (c)(461) and (c)(480), and eleven other amendments which indicated the deletion, with or without replacement, of obsolete regulatory language. Those amendments deleting obsolete language with replacement in paragraph (c)(480) erroneously state that they are being replaced by various regulations in paragraph (c)(481). Specifically, the amendments at paragraphs (c)(124)(ix)(D), (c)(156)(vi)(B), (c)(162)(i)(B), (c)(164)(i)(B)(5), and (c)(385)(i)(B)(2) include incorrect references to (481), when they should be referring to (480). This action adds regulatory text to correct these references.

    The EPA has determined that this action falls under the “good cause” exemption in section 553(b)(3)(B) of the Administrative Procedures Act (APA) which, upon finding “good cause,” authorizes agencies to dispense with public participation where public notice and comment procedures are impracticable, unnecessary, or contrary to the public interest. Public notice and comment for this action is unnecessary because this action correcting inadvertent regulatory text errors included in the EPA's October 6, 2016 final rule is consistent with the substantive revision to the California SIP as described in the preamble of said action concerning regulations governing the issuance of permits in NSCAPCD. In addition, the EPA can identify no particular reason why the public would be interested in having the opportunity to comment on the correction prior to this action being finalized, since this correction action does not change the EPA's analysis or overall action related to the approval of NSCAPCD's revisions to their rules in the California SIP.

    The EPA also finds that there is good cause under APA section 553(d)(3) for this correction to become effective on the date of publication of this action. Section 553(d)(3) of the APA allows an effective date of less than 30 days after publication “as otherwise provided by the agency for good cause find and published with the rule.” 5 U.S.C. 553(d)(3). The purpose of the 30-day waiting period prescribed in APA section 553(d)(3) is to give affected parties a reasonable time to adjust their behavior and prepare before the final rule takes effect. This rule does not create any new regulatory requirements such that affected parties would need time to prepare before the rule takes effect. This action merely corrects inadvertent errors for the regulatory text of the EPA's prior rulemaking for the California SIP. For these reasons, the EPA finds good cause under APA section 553(d)(3) for this correction to become effective on the date of publication of this action.

    Need for Correction

    As published, the final regulations incorrectly referenced 40 CFR 52.220(c)(481) in 5 instances, when they should have referenced 40 CFR 52.220(c)(480).

    Statutory and Executive Order Reviews

    Under Executive Order 12866 (58 FR 51735, October 4, 1993), this action is not a “significant regulatory action” and is therefore not subject to review by the Office of Management and Budget. In addition, this action does not impose any enforceable duty or contain any unfunded mandate as described in the Unfunded Mandates Reform Act of 1995 (Pub. L. 104-4), or require prior consultation with state officials as specified by Executive Order 12875 (58 FR 58093, October 28, 1993), or involve special consideration of environmental justice related issues as required by Executive Order 12898 (59 FR 7629, February 16, 1994).

    Because this action is not subject to notice-and-comment requirements under the APA or any other statute, it is not subject to the provisions of the Regulatory Flexibility Act (5 U.S.C. 601 et seq.).

    Under 5 U.S.C. 801(a)(1)(A) as added by the Small Business Regulatory Enforcement Fairness Act of 1996, the EPA will submit a report containing this rule and other required information to the U.S. Senate, the U.S. House of Representatives and the Comptroller General of the General Accounting Office prior to publication of this rule in the Federal Register. This rule is not a “major rule” as defined by 5 U.S.C. 804(2).

    List of Subjects in 40 CFR Part 52

    Environmental protection, Air pollution control, Incorporation by reference, Intergovernmental relations, Carbon monoxide, Nitrogen dioxide, Ozone, Particulate matter, Sulfur oxides, Volatile organic compounds, Reporting and recordkeeping requirements.

    Dated: December 1, 2016. Alexis Strauss, Acting Regional Administrator, Region IX.

    Accordingly, 40 CFR part 52 is corrected by making the following correcting amendments:

    PART 52—APPROVAL AND PROMULGATION OF IMPLEMENTATION PLANS 1. The authority citation for part 52 continues to read as follows: Authority:

    42 U.S.C. 7401 et seq.

    Subpart F—California 2. Section 52.220 is amended by revising paragraphs (c)(124)(ix)(D), (c)(156)(vi)(B), (c)(162)(i)(B), (c)(164)(i)(B)(5), and (c)(385)(i)(B)(2) to read as follows:
    § 52.220 Identification of plan-in part.

    (c) * * *

    (124) * * *

    (ix) * * *

    (D) Previously approved on July 31, 1985 in paragraph (c)(124)(ix)(B) of this section and now deleted without replacement, Rule 130 (introductory text, b.1, n1, p5, and s2), and now deleted with replacement in paragraphs (c)(480)(i)(A)(3) and (4), Rules 220(c) and 230.

    (156) * * *

    (vi) * * *

    (B) Previously approved on July 31, 1985 in paragraph (c)(156)(vi)(A) of this section and now deleted without replacement, Rule 130 (b2, m1, p3, p3a, and s7), and now deleted with replacement in Paragraph (c)(480)(i)(A)(3) of this section, Chapter II, 220(B).

    (162) * * *

    (i) * * *

    (B) Previously approved on July 31, 1985 in paragraph (c)(162)(i)(A) of this section and now deleted with replacement in Paragraph (c)(480)(i)(A)(3) of this section, Chapter II, 220(A).

    (164) * * *

    (i) * * *

    (B) * * *

    (5) Previously approved on April 17, 1987 in paragraph (c)(164)(i)(B)(1) of this section and now deleted without replacement, Rule 130 (d1 and s5), and now deleted with replacement in paragraph (c)(480)(i)(A)(2) of this section, rule 200(a).

    (385) * * *

    (i) * * *

    (B) * * *

    (2) Previously approved on May 6, 2011 in paragraph (c)(385)(i)(B)(1) of this section and now deleted with replacement in paragraph (c)(480)(i)(A)(1) of this section, Rule 130, “Definitions,” amended December 14, 2010.

    [FR Doc. 2016-30186 Filed 12-19-16; 8:45 am] BILLING CODE 6560-50-P
    ENVIRONMENTAL PROTECTION AGENCY 40 CFR Part 141 [EPA-HQ-OW-2015-0218; FRL-9956-71-OW] RIN 2040-AF49 Revisions to the Unregulated Contaminant Monitoring Rule (UCMR 4) for Public Water Systems and Announcement of Public Meeting AGENCY:

    Environmental Protection Agency (EPA).

    ACTION:

    Final rule; notice of public meeting.

    SUMMARY:

    The U.S. Environmental Protection Agency (EPA) is finalizing a Safe Drinking Water Act (SDWA) rule that requires public water systems to collect occurrence data for contaminants that may be present in drinking water but are not yet subject to EPA's drinking water standards set under the SDWA. This rule identifies eleven analytical methods to support water system monitoring for a total of 30 chemical contaminants, consisting of nine cyanotoxins and one cyanotoxin group; two metals; eight pesticides plus one pesticide manufacturing byproduct (hereinafter collectively referred to as “pesticides”); three brominated haloacetic acid disinfection byproduct groups; three alcohols; and three semivolatile organic chemicals. EPA is also announcing a public meeting and webinar to discuss the implementation of the fourth Unregulated Contaminant Monitoring Rule.

    DATES:

    This final rule is effective on January 19, 2017, 30 days after publication in the Federal Register. The incorporation by reference of certain publications listed in the regulations is approved by the Director of the Federal Register as of January 19, 2017.

    ADDRESSES:

    The EPA has established a docket for this action under Docket ID No. EPA-HQ-OW-2015-0218. All documents in the docket are listed on the https://www.regulations.gov Web site. Although listed in the index, some information is not publicly available, e.g., confidential business information (CBI) or other information whose disclosure is restricted by statute. Certain other material, such as copyrighted material, is not placed on the Internet and will be publicly available only in hard copy form. Publicly available docket materials are available electronically through https://www.regulations.gov.

    FOR FURTHER INFORMATION CONTACT:

    Brenda D. Parris, Standards and Risk Management Division (SRMD), Office of Ground Water and Drinking Water (OGWDW) (MS 140), Environmental Protection Agency, 26 West Martin Luther King Drive, Cincinnati, OH 45268; telephone number: (513) 569-7961; or email address: [email protected]; or Melissa Simic, SRMD, OGWDW (MS 140), Environmental Protection Agency, 26 West Martin Luther King Drive, Cincinnati, Ohio 45268; telephone number: (513) 569-7864; or email address: [email protected] For general information, contact the Safe Drinking Water Hotline. Callers within the United States can reach the Hotline at (800) 426-4791. The Hotline is open Monday through Friday, excluding federal holidays, from 10:00 a.m. to 4:00 p.m., eastern time. The Safe Drinking Water Hotline can also be found on the Internet at: https://www.epa.gov/ground-water-and-drinking-water/safe-drinking-water-hotline.

    SUPPLEMENTARY INFORMATION:

    Table of Contents I. General Information A. Does this action apply to me? B. What action is the Agency taking and why? C. What is the Agency's authority for taking this action? D. What is the estimated cost of this action? E. What is the applicability date? II. Background A. How has EPA implemented the Unregulated Contaminant Monitoring Program? B. How are the Contaminant Candidate List, the UCMR program, the Regulatory Determination process and the NCOD interrelated? III. What are the key requirements of the rule, including notable changes between UCMR 3, the proposed UCMR 4 and the final UCMR 4? A. What contaminants are in UCMR 4? 1. This Rule 2. Summary of Major Comments and EPA Responses B. What are the UCMR 4 sampling design and timeline of activities? 1. Sampling Frequency, Timing a. This Rule b. Summary of Major Comments and EPA Responses 2. Phased Sample Analysis for Microcystins a. This Rule b. Summary of Major Comments and EPA Responses 3. Applicability of HAA Monitoring Requirements a. This Rule b. Summary of Major Comments and EPA Responses 4. Representative Sampling a. This Rule b. Summary of Major Comments and EPA Responses 5. Sampling Locations a. This Rule b. Summary of Major Comments and EPA Responses C. What are the reporting requirements for UCMR 4? 1. Data Elements a. This Rule b. Summary of Major Comments and EPA Responses IV. How are laboratories approved for UCMR 4 monitoring? A. Request To Participate B. Registration C. Application Package D. EPA's Review of Application Packages E. Proficiency Testing F. Written EPA Approval V. What is the past and future stakeholder involvement in the regulation process? A. What is the states' role in the UCMR program? B. What stakeholder meetings have been held in preparation for UCMR 4? C. How do I participate in the upcoming stakeholder meeting? 1. Meeting Participation 2. Meeting Materials D. How did EPA consider Children's Environmental Health? E. How did EPA address Environmental Justice? VI. What documents are being incorporated by reference? A. Methods From the U.S. Environmental Protection Agency B. Methods From American Public Health Association—Standard Methods (SM) 1. Standard Methods for the Examination of Water and Wastewater 2. Standard Methods Online C. Methods From ASTM International VII. Statutory and Executive Order Reviews A. Executive Order 12866: Regulatory Planning and Review and Executive Order 13563: Improving Regulation and Regulatory Review B. Paperwork Reduction Act (PRA) C. Regulatory Flexibility Act (RFA) D. Unfunded Mandates Reform Act (UMRA) E. Executive Order 13132: Federalism F. Executive Order 13175: Consultation and Coordination With Indian Tribal Governments G. Executive Order 13045: Protection of Children From Environmental Health Risks and Safety Risks H. Executive Order 13211: Actions Concerning Regulations That Significantly Affect Energy Supply, Distribution or Use I. National Technology Transfer and Advancement Act and 1 CFR Part 51 J. Executive Order 12898: Federal Actions To Address Environmental Justice in Minority Populations and Low-Income Populations K. Congressional Review Act (CRA) VIII. References Abbreviations and Acronyms µg/L Microgram per liter Adda (2S,3S,8S,9S,4E,6E)-3-amino-9-methoxy-2,6,8-trimethyl-10-phenyl-4,6-decadienoic acid ASDWA Association of State Drinking Water Administrators ASTM ASTM International CAS Chemical Abstract Service CBI Confidential Business Information CCC Continuing Calibration Check CCL Contaminant Candidate List CFR Code of Federal Regulations CRA Congressional Review Act CWS Community Water System D/DBPRs Disinfectants and Disinfection Byproducts Rules (including Stage 1 and Stage 2 D/DBPRs) ELISA Enzyme-linked Immunosorbent Assay EPA United States Environmental Protection Agency EPTDS Entry Point to the Distribution System ESI Electrospray Ionization FR Federal Register GC Gas Chromatography GC/ECD Gas Chromatography/Electron Capture Detection GC/MS Gas Chromatography/Mass Spectrometry GW Ground Water GWUDI Ground Water Under the Direct Influence of Surface Water HAAs Haloacetic Acids HAA5 Dibromoacetic Acid, Dichloroacetic Acid, Monobromoacetic Acid, Monochloroacetic Acid, Trichloroacetic Acid HAA6Br Bromochloroacetic Acid, Bromodichloroacetic Acid, Dibromoacetic Acid, Dibromochloroacetic Acid, Monobromoacetic Acid, Tribromoacetic Acid HAA9 Bromochloroacetic Acid, Bromodichloroacetic Acid, Chlorodibromoacetic Acid, Dibromoacetic Acid, Dichloroacetic Acid, Monobromoacetic Acid, Monochloroacetic Acid, Tribromoacetic Acid, Trichloroacetic Acid IC Ion Chromatography IC-MS/MS Ion Chromatography-Tandem Mass Spectrometry IC/ESI-MS/MS Ion Chromatography/Electrospray Ionization/Tandem Mass Spectrometry ICP-MS Inductively Coupled Plasma-Mass Spectrometry ICR Information Collection Request IDC Initial Demonstration of Capability IS Internal Standard LFB Laboratory Fortified Blank LRB Laboratory Reagent Blank LC/ESI-MS/MS Liquid Chromatography/Electrospray Ionization/Tandem Mass Spectrometry LC-MS/MS Liquid Chromatography/Tandem Mass Spectrometry LT2 Long Term 2 Enhanced Surface Water Treatment Rule M Million MAC Mycobacterium Avium Complex MRL Minimum Reporting Level NAICS North American Industry Classification System NARA National Archives and Records Administration NCOD National Contaminant Occurrence Database NPDWRs National Primary Drinking Water Regulations NTNCWS Non-transient Non-community Water System OGWDW Office of Ground Water and Drinking Water OMB Office of Management and Budget PA Partnership Agreement PRA Paperwork Reduction Act PT Proficiency Testing PWS Public Water System PWSID Public Water System Identification QC Quality Control QCS Quality Control Sample QHS Quality HAA Sample RFA Regulatory Flexibility Act SBA Small Business Administration SDWA Safe Drinking Water Act SDWARS Safe Drinking Water Accession and Review System SDWIS/Fed Federal Safe Drinking Water Information System SM Standard Methods for the Examination of Water and Wastewater SMP State Monitoring Plan SOP Standard Operating Procedure SPE Solid Phase Extraction SR Source Water SRF Drinking Water State Revolving Fund SRMD Standards and Risk Management Division SUR Surrogate Standard SVOCs Semivolatile Organic Chemicals SW Surface Water TNCWS Transient Non-community Water System TOC Total Organic Carbon UCMR Unregulated Contaminant Monitoring Rule UMRA Unfunded Mandates Reform Act of 1995 USEPA United States Environmental Protection Agency I. General Information A. Does this action apply to me?

    The fourth Unregulated Contaminant Monitoring Rule (UCMR 4) applies to public water systems (PWSs). PWSs are systems that provide water for human consumption through pipes, or other constructed conveyances, to at least 15 service connections or that regularly serve an average of at least 25 individuals daily at least 60 days out of the year. This rule applies to all large community and non-transient non-community water systems (NTNCWSs) serving more than 10,000 people. A community water system (CWS) is a PWS that has at least 15 service connections used by year-round residents or regularly serves at least 25 year-round residents. A NTNCWS is a PWS that is not a CWS and that regularly serves at least 25 of the same people over six months per year. Some examples of NTNCWS are schools, factories, office buildings and hospitals, which have their own water systems. EPA selects the nationally representative sample of small CWSs and NTNCWSs serving 10,000 or fewer people that are required to monitor (see “Statistical Design and Sample Selection for the Unregulated Contaminant Monitoring Regulation” (USEPA, 2001a) for a description of the statistical approach for the nationally representative sample). This rule does not apply to transient non-community water systems (TNCWSs) (i.e., non-community water systems that do not regularly serve at least 25 of the same people over six months per year). A TNCWSs provides water in a place such as a gas station or campground, where people do not remain for long periods of time.

    States, territories and tribes with primary enforcement responsibility (primacy) to administer the regulatory program for PWSs under the SDWA can participate in the implementation of UCMR 4 through Partnership Agreements (PAs). Primacy agencies with PAs can choose to be involved in various aspects of the UCMR 4 monitoring for the PWSs they oversee; however, the PWS remains responsible for compliance with the rule requirements. Examples of potentially regulated categories and entities are identified in the following table.

    Category Examples of potentially regulated entities NAICS a State, local & tribal governments States, local and tribal governments that analyze water samples on behalf of PWSs required to conduct such analysis; states, local and tribal governments that directly operate CWSs and NTNCWSs required to monitor 924110 Industry Private operators of CWSs and NTNCWSs required to monitor 221310 Municipalities Municipal operators of CWSs and NTNCWSs required to monitor 924110 a NAICS = North American Industry Classification System.

    This table is not intended to be exhaustive, but rather provides a guide for readers regarding entities likely to be regulated by this action. This table summarizes the types of entities that EPA is aware could potentially be regulated by this action. If you are uncertain whether your entity is regulated by this action, carefully examine the definition of a PWS found in §§ 141.2 and 141.3, and the applicability criteria found in § 141.40(a)(1) and (2) of Title 40 in the Code of Federal Regulations (CFR). If you have questions, please consult the contacts listed in the preceding FOR FURTHER INFORMATION CONTACT section.

    B. What action is the Agency taking and why?

    This final rule requires PWSs to analyze drinking water samples for 29 unregulated contaminants that do not have health based standards set under the SDWA, as well as one group of regulated contaminants (described in section I.C), and to report their results to EPA. This is the fourth national monitoring effort under the UCMR program, and builds upon the framework established under the prior three UCMR actions (see section II.A). The monitoring provides data to inform future regulatory actions to protect public health.

    The public benefits from the information about whether or not unregulated contaminants are present in their drinking water. If contaminants are not found, consumer confidence in their drinking water will improve. If contaminants are found, illnesses may be avoided when subsequent actions, such as regulations, reduce or eliminate those contaminants.

    C. What is the Agency's authority for taking this action?

    As part of its responsibilities under the SDWA, EPA implements section 1445(a)(2), “Monitoring Program for Unregulated Contaminants.” This section, as amended in 1996, requires that once every five years, beginning in August 1999, EPA issue a list of no more than 30 unregulated contaminants to be monitored by PWSs. The list can include contaminants included in previous UCMR cycles but will generally focus on contaminants not yet monitored under UCMR. SDWA section 1445(g)(7) requires that EPA enter the monitoring data into the Agency's publicly-available National Contaminant Occurrence Database (NCOD). The SDWA also requires that EPA ensures that systems serving a population larger than 10,000 people, as well as a nationally representative sample of PWSs serving 10,000 or fewer people, monitor for the unregulated contaminants. EPA must vary the frequency and schedule for monitoring based on the number of persons served, the source of supply, and the contaminants likely to be found. EPA is using this authority as the basis for monitoring 29 of the 30 contaminants.

    Section 1445(a)(1)(A) of the SDWA, as amended in 1996, requires that every person who is subject to any SDWA requirement establish and maintain such records, make such reports, conduct such monitoring and provide such information as the Administrator may reasonably require by regulation to assist the Administrator in establishing SDWA regulations. Pursuant to this provision, EPA can also require the monitoring of contaminants already subject to EPA's drinking water standards. EPA is using this authority as the basis for monitoring one of the chemical groups (Haloacetic Acids 5 (HAA5)) under this rule. Sample collection and analysis for HAA5 can be done concurrently with the unregulated HAA monitoring (for HAA6Br and HAA9) described in section III.B.3 (resulting in no significant additional burden since all three HAA groups can be measured by a single method) and will allow EPA to better understand co-occurrence between regulated and unregulated disinfection byproducts.

    Hereinafter, all 30 chemicals/groups are collectively referred to as “contaminants.”

    D. What is the estimated cost of this action?

    EPA estimates the total average national cost of this action will be $24.3 million per year from 2017-2021. EPA has documented the assumptions and data sources used in the preparation of this estimate in the Information Collection Request (ICR) (USEPA, 2016a). EPA identified eleven analytical methods (nine EPA-developed analytical methods and two alternate, equivalent, consensus organization-developed methods) to analyze samples for 30 UCMR 4 contaminants. EPA's estimate of the analytical cost for the UCMR 4 contaminants and related indicators is $2,500 per sample set. EPA calculated these costs by summing the laboratory unit cost of each method.

    Small PWSs selected for UCMR 4 monitoring sample an average of 6.7 times per PWS (i.e., number of responses per PWS) across the three-year ICR period. The estimated labor burden per response for small PWSs is 2.8 hours. Large PWSs and very large PWSs sample and report an average of 11.4 and 14.1 times per PWS, respectively, across the three-year ICR period. The estimated labor burden per response for large and very large PWSs is 6.1 and 9.9 hours, respectively.

    Exhibit 1 presents a breakdown of estimated annual average national costs. Estimated PWS (i.e., large and very large) and EPA costs reflect the analytical cost (i.e., non-labor) for all UCMR 4 methods as well as labor-related cost. EPA pays for the analytical costs for all systems serving a population of 10,000 or fewer people. Laboratory analysis and sample shipping account for approximately 79% of the total national cost for UCMR 4 implementation. EPA estimated laboratory unit costs based on consultations with multiple commercial drinking water laboratories. The cost of the laboratory methods includes shipping the sample from the facility to the laboratory as part of the cost for the analysis.

    EPA expects that states will incur labor costs associated with voluntary assistance with UCMR 4 implementation. EPA estimated state costs using the relevant assumptions from the State Resource Model, which was developed by the Association of State Drinking Water Administrators (ASDWA) (ASDWA, 2013) to help states forecast resource needs. Model estimates were adjusted to account for actual levels of state participation under UCMR 3. State participation is voluntary; thus, the level of effort is expected to vary among states and will depend on their individual agreements with EPA.

    Additional details regarding EPA's cost assumptions and estimates can be found in the “Information Collection Request for the Unregulated Contaminant Monitoring Rule (UCMR 4)” (USEPA, 2016a) EPA ICR Number 2192.08, which presents estimated cost and burden for the 2017-2019 period, consistent with the 3-year timeframe for ICRs. Estimates of costs over the entire 5-year UCMR 4 period of 2017-2021 are attached as an appendix to the ICR. Specifically, most of the burden is incurred in the second, third and fourth year (i.e., monitoring and sample analysis) of the UCMR 4 monitoring period. The first year (the planning year) involves a lesser burden, and the final fifth year involves the least burden since the program is concluding. The next ICR period will overlap with the last two years of the 5-year UCMR 4 period, and therefore will have substantially lower figures.

    Copies of the ICR and its appendix are available in the EPA public docket for this final rule, under Docket ID No. EPA-HQ-OW-2015-0218. The total estimated annual costs (labor and non-labor) are as follows:

    Exhibit 1—Estimated Average Annual Costs of UCMR 4 Respondent Avg. annual cost all
  • respondents
  • (2017-2021) 1
  • Small Systems (25-10,000), including labor 2 only (non-labor costs 3 paid for by EPA) $0.2 M Large Systems (10,001-100,000), including labor and non-labor costs 15.0 M Very Large Systems (100,001 and greater), including labor and non-labor costs 4.1 M States, including labor costs related to implementation coordination 0.5 M EPA, including labor for implementation and non-labor for small system testing 4.5 M Average Annual National Total 24.3 M 1 Totals may not equal the sum of components due to rounding. 2 Labor costs pertain to systems, states and EPA. Costs include activities such as reading the rule, notifying systems selected to participate, sample collection, data review, reporting and record keeping. 3 Non-labor costs will be incurred primarily by EPA and by very large and large PWSs. They include the cost of shipping samples to laboratories for testing and the cost of the laboratory analyses.
    E. What is the applicability date?

    The determination of whether a PWS is required to monitor under UCMR 4 is based on the type of system (e.g., CWS, NTNCWS, etc.) and its retail population served, as indicated by the Federal Safe Drinking Water Information System (SDWIS/Fed) inventory on December 31, 2015. SDWIS/Fed can be accessed at https://www.epa.gov/ground-water-and-drinking-water/safe-drinking-water-information-system-sdwis-federal-reporting. If a PWS believes its retail population served in SDWIS/Fed is inaccurate, the system should contact its state to verify its population as of the applicability date and request a correction, if necessary. The 5-year UCMR 4 program will take place from January 2017 through December 2021, with sample collection occurring between January 1, 2018, and December 31, 2020.

    II. Background A. How has EPA implemented the Unregulated Contaminant Monitoring program?

    EPA published the list of contaminants for the first UCMR (UCMR 1) in the Federal Register (FR) on September 17, 1999 (64 FR 50556, (USEPA, 1999)), the second UCMR (UCMR 2) on January 4, 2007 (72 FR 368, (USEPA, 2007)) and the third UCMR (UCMR 3) on May 2, 2012 (77 FR 26072, (USEPA, 2012a)). EPA established a three-tiered approach for monitoring contaminants under the UCMR program. Assessment Monitoring for “List 1” contaminants typically relies on analytical methods, techniques or technologies that are in common use by drinking water laboratories. Screening Survey monitoring for “List 2” contaminants typically relies on newer techniques or technologies that are not as commonly used, such that laboratory capacity to perform List 2 analyses may be limited. Finally, Pre-Screen Testing for “List 3” contaminants is often associated with techniques or technologies that are very recently developed and/or are particularly complex. In addition to method cost and complexity and laboratory capacity, EPA considers sampling frequency and the relevant universe of PWSs when deciding which of the three tiers is appropriate for the monitoring of a contaminant.

    EPA designed the Assessment Monitoring sampling approach (USEPA, 2001a) to ensure that sample results would yield a high level of confidence and a low margin of error. The design for a nationally representative sample of small systems called for the sample set to be stratified by water source type (ground water (GW) or surface water (SW)), service size category and state (where each state is allocated a minimum of two systems in its state monitoring plan (SMP)).

    This final action identifies 30 List 1 contaminants to be measured during Assessment Monitoring from 2018-2020, with pre-monitoring activity in 2017 and post-monitoring activity in 2021. EPA developed this rule after considering input from public comments. For more information on EPA's response to public comments, please see section III.

    B. How are the Contaminant Candidate List, the UCMR program, the Regulatory Determination process and the NCOD interrelated?

    Under the 1996 amendments to the SDWA, Congress established a stepwise, risk-based approach for determining which contaminants would become subject to drinking water standards. Under the first step, EPA is required to publish, every five years, a list of contaminants that are not yet regulated but which are known or anticipated to occur in PWSs; this is known as the Contaminant Candidate List (CCL). Under the second step, EPA must require, every five years, monitoring of up to 30 unregulated contaminants (many of which have been selected from the CCL for the UCMR monitoring to-date) to determine their occurrence in drinking water systems; this is known as the UCMR program. Under the third step, EPA is required to determine, every five years, whether or not to begin the process of developing a national primary drinking water regulation for at least five CCL contaminants; this is known as a Regulatory Determination and involves evaluating the following questions:

    (1) May the contaminant have an adverse effect on human health?

    (2) Is the contaminant known to occur or substantially likely to occur in PWSs with a frequency and at levels of public health concern?

    (3) In the sole judgement of the Administrator, does regulation of such contaminants present a meaningful opportunity for risk reduction for people served by PWSs?

    Finally, the SDWA requires EPA to issue national primary drinking water regulations (NPDWRs) for contaminants the Agency determines should be regulated.

    The CCL process identifies contaminants that may require regulation, while the UCMR program helps provide the data necessary for the Regulatory Determination process previously outlined. The data collected through the UCMR program are stored in the drinking water NCOD to facilitate analysis and review of contaminant occurrence, and support the Administrator's determination on whether regulation of a contaminant is in the public health interest, as required under SDWA section 1412(b)(1). UCMR results can be viewed by the public at: https://www.epa.gov/dwucmr. PWSs are also responsible for addressing UCMR results in their annual Consumer Confidence Reports, consistent with prior UCMR cycles and as required by § 141.153.

    III. What are the key requirements of the rule, including notable changes between UCMR 3, the proposed UCMR 4 and the final UCMR 4?

    EPA published “Revisions to the Unregulated Contaminant Monitoring Rule (UCMR 4) for Public Water Systems and Announcement of a Public Meeting;” Proposed Rule, on December 11, 2015 (80 FR 76897, (USEPA, 2015a)). The UCMR 4 proposal identified eleven new analytical methods to support water system monitoring for a total of 30 new contaminants, and detailed other potential changes relative to UCMR 3. Among the other changes reflected in the UCMR 4 proposal were identification of water systems subject to UCMR 4 and provisions for sampling locations, timeframe and frequency, as well as updated data elements.

    EPA received input on the UCMR 4 proposal from 34 public commenters, including state and local government, utilities and utility stakeholder organizations, laboratories, academia, non-governmental organizations and other interested stakeholders . After considering the comments, EPA made the changes described in Exhibit 2 to develop the final UCMR 4 action. Sections III A-C summarize key aspects of this final rule and the associated notable and recurring comments received in response to the proposed rule. EPA has compiled all public comments and EPA's responses in the “Response to Comments Document for the Unregulated Contaminant Monitoring Rule (UCMR 4),” (USEPA, 2016b), which can be found in the electronic docket listed in the ADDRESSES section of this notice.

    Exhibit 2—Notable Changes to UCMR 4 Between Proposed and Final Rule CFR rule section No. Title/description Description of change Corresponding preamble
  • section
  • § 141.40(a)(3) Related specifications for the analytes to be monitored Revises Table 1 to include EPA Method 546 Enzyme-linked Immunosorbent Assay (ELISA) and removes source water as a sample location for cyanotoxins III.A. & III.B. § 141.40(a)(3) and § 141.40(a)(4) Sampling design requirements—frequency Revises Table 1 to update the monitoring dates to January 2018 through December 2020 for the 20 additional contaminants, and also updates Table 2 to reflect the traditional sample collection timeframe (consecutive 12-month period) for the 20 additional contaminants. Additionally, updates Table 2 to reflect the traditional sample collection frequency (four consecutive quarters for SW and ground water under the direct influence of surface water (GWUDI) water systems, and twice, 5-7 months apart, for GW systems) for those 20 contaminants III.B. & I.E. § 141.40(a)(3) and § 141.40(a)(4) Phased sample analysis for microcystins Removes source water samples from the phased sample analysis for microcystins III.B.2 § 141.40(a)(3) Applicability of HAA monitoring requirements Removes UCMR 4 HAA requirement for water systems that are not subject to HAA5 monitoring under the Disinfectants and Disinfection Byproduct Rules (D/DBPRs) III.B.3 § 141.35(e) Reporting requirements—Data elements Updates and clarifies data elements to address disinfecting and treatment types, and adds data elements to account for the metadata collected for the cyanotoxins III.C.
    A. What contaminants are in UCMR 4? 1. This Rule

    EPA is maintaining the proposed list of unregulated contaminants and the methods associated with analyzing those contaminants, with the exception of updating the ELISA method for “total microcystins” (see Exhibit 3). Further information on the prioritization process, as well as contaminant-specific information (source, use, production, release, persistence, mobility, health effects and occurrence) that EPA used to select the contaminants is contained in “UCMR 4 Contaminants—Information Compendium for Final Rule” (USEPA, 2016c). This Information Compendium can be found in the electronic docket listed in the ADDRESSES section of this notice.

    2. Summary of Major Comments and EPA Responses

    Commenters who expressed an opinion about the proposed UCMR 4 analytes were generally supportive. Some commenters suggested alternative ways to collect the HAA information. Suggestions included collecting results for all nine HAAs individually; only collecting results for HAA9; or doing targeted research studies of HAAs independent of UCMR. EPA has concluded that monitoring for the three HAA groups (HAA5, HAA6Br and HAA9) will provide the information of interest on the relative occurrence between regulated and unregulated HAAs as well as brominated versus chlorinated HAAs. Though the targeted research proposed by some commenters is beyond the scope of today's action, EPA will take the recommendation under advisement and consider how such research may complement the UCMR data.

    Some commenters supported EPA's proposal to not include Legionella pneumophila and Mycobacterium avium Complex (MAC) in UCMR 4; others encouraged EPA to add Legionella, and in some cases MAC. The latter commenters identified several candidate methods, suggested that Legionella is not exclusively a premise plumbing issue, and pointed to concerns with health effects. While EPA recognizes the Legionella concern, the Agency has concluded that this national survey will not be able to adequately address many of the variables, complexities and uncertainties discussed by commenters. More research is needed to identify the optimal sampling location, frequency of sampling events and proper sampling population, and address biofilms and associated indicators. Further research is also needed on the dose-response ecology of Legionella in the distribution system to identify the correct method needed to monitor at a level that would be instructive and cost effective.

    Multiple commenters expressed concerns with the ELISA methodology and some of the specific elements of the ELISA Standard Operating Procedure (SOP) (Ohio EPA, 2015) identified in the proposal for cyanotoxins. In 2016, EPA finalized EPA Method 546: “Determination of Total Microcystins and Nodularins in Drinking Water and Ambient Water by Adda Enzyme-Linked Immunosorbent Assay” as the prescribed method for total microcystins (USEPA, 2016e). The fundamentals of Method 546 are quite similar to those of the Ohio EPA methodology, and Method 546 addresses concerns expressed about minimum reporting levels (MRLs), holding times and quality control.

    Exhibit 3—30 UCMR 4 Analytes List 1 Analytes One Cyanotoxin Group using EPA Method 546 (Adda ELISA):  1 “total microcystins”. Seven Cyanotoxins using EPA Method 544 (SPE LC-MS/MS):  2 microcystin-LA. microcystin-RR. microcystin-LF. microcystin-YR. microcystin-LR. nodularin. microcystin-LY. Two Cyanotoxins using EPA Method 545 (LC/ESI-MS/MS):  3 anatoxin-a. cylindrospermopsin. Two Metals using EPA Method 200.8 (ICP-MS)  4 or alternate SM5 or ASTM:6 germanium. manganese. Nine Pesticides using EPA Method 525.3 (SPE GC/MS):  7 alpha-hexachlorocyclohexane. profenofos. chlorpyrifos. tebuconazole. dimethipin. total permethrin (cis- & trans-). ethoprop. tribufos. oxyfluorfen. Three Brominated HAA Groups using EPA Method 552.3 (GC/ECD) or 557 (IC/ESI-MS/MS):  8 9 10 HAA5. HAA9. HAA6Br. Three Alcohols using EPA Method 541 (GC/MS):  11 1-butanol. 2-propen-1-ol. 2-methoxyethanol. Three Semivolatile Organic Chemicals (SVOCs) using EPA Method 530 (GC/MS):  12 butylated hydroxyanisole. quinolone. o-toluidine. 1 EPA Method 546 Adda Enzyme-Linked Immunosorbent Assay (ELISA) (USEPA, 2016e). 2 EPA Method 544 (Solid phase extraction (SPE) liquid chromatography/tandem mass spectrometry (LC-MS/MS)) (USEPA, 2015b). This method will only be used if analyses by ELISA (for “total microcystins”) yield results above reporting limits. 3 EPA Method 545 (Liquid chromatography/electrospray ionization/tandem mass spectrometry (LC/ESI-MS/MS)) (USEPA, 2015c). 4 EPA Method 200.8 (Inductively coupled plasma mass spectrometry (ICP-MS)) (USEPA, 1994). 5 Standard Methods (SM) 3125 (SM, 2005a) or SM 3125-09 (SM Online, 2009). 6 ASTM International (ASTM) D5673-10 (ASTM, 2010). 7 EPA Method 525.3 (SPE Gas chromatography/mass spectrometry (GC/MS)) (USEPA, 2012b). 8 EPA Method 552.3 (Gas chromatography/electron capture detection (GC/ECD)) (USEPA, 2003) and EPA Method 557 (Ion chromatography-electrospray ionization-tandem mass spectrometry (IC-ESI-MS/MS)) (USEPA, 2009a). HAA5 includes: Dibromoacetic acid, dichloroacetic acid, monobromoacetic acid, monochloroacetic acid, trichloroacetic acid. HAA6Br includes: Bromochloroacetic acid, bromodichloroacetic acid, dibromoacetic acid, chlorodibromoacetic acid, monobromoacetic acid, tribromoacetic acid. HAA9 includes: Bromochloroacetic acid, bromodichloroacetic acid, chlorodibromoacetic acid, dibromoacetic acid, dichloroacetic acid, monobromoacetic acid, monochloroacetic acid, tribromoacetic acid, trichloroacetic acid. 9 Regulated HAAs (HAA5) are included in the monitoring program to gain a better understanding of co-occurrence with currently unregulated disinfection byproducts. 10 Brominated HAA monitoring also includes sampling for indicators total organic carbon (TOC) and bromide using methods approved for compliance monitoring. TOC methods include: SM 5310B, SM 5310C, SM 5310D (SM, 2005b, 2005c, 2005d), or SM 5310B-00, SM 5310C-00, SM 5310D-00 (SM Online, 2000a, 2000b, 2000c), EPA Method 415.3 (Rev. 1.1 or 1.2) (USEPA, 2005, 2009b). Bromide methods include: EPA Methods 300.0 (Rev. 2.1), 300.1 (Rev. 1.0), 317.0 (Rev. 2.0), 326.0 (Rev. 1.0) (USEPA, 1993, 1997, 2001b, 2002) or ASTM D 6581-12 (ASTM, 2012). 11 EPA Method 541 (GC/MS) (USEPA, 2015d). 12 EPA Method 530 (GC/MS) (USEPA, 2015e). B. What are the UCMR 4 sampling design and timeline of activities?

    EPA is maintaining the 2018 to 2020 monitoring timeframe identified in the proposal. Preparations prior to 2018 will include coordinating laboratory approval, selecting representative small systems (USEPA, 2001a), developing SMPs and establishing monitoring schedules. Exhibit 4 illustrates the major activities that will take place in preparation for and during the implementation of UCMR 4.

    ER20DE16.002

    To minimize the impact of the rule on small systems (those serving 10,000 or fewer people), EPA pays for the sample kit preparation, sample shipping fees and analysis costs for these systems. In addition, no small system will be required to monitor for both cyanotoxins and the 20 additional UCMR contaminants. Consistent with prior UCMRs, large systems (those serving more than 10,000 people) pay for all costs associated with their monitoring. A summary of the estimated number of systems subject to monitoring is shown in Exhibit 5.

    Exhibit 5—Systems To Participate in UCMR 4 Monitoring System size
  • (number of people served)
  • National sample: Assessment monitoring design 10 List 1 cyanotoxins 20 Additional list 1 contaminants 3 Total number of systems
  • per size
  • category
  • Small Systems1 (25-10,000) 800 randomly selected SW or GWUDI systems 800 randomly selected SW, GWUDI and GW systems 1,600 Large Systems2 (10,001 and over) All SW or GWUDI systems (2,725) All SW, GWUDI and GW systems (4,292) 4,292 Total 3,525 5,092 5,892 1 Total for small systems is additive because these systems will only be selected for one component of UCMR 4 sampling (10 cyanotoxins or 20 additional contaminants). EPA will pay for all analytical costs associated with monitoring at small systems. 2 Large system counts are approximate. The number of large systems is not additive. All SW and GWUDI systems will monitor for cyanotoxins; those same systems will also monitor for the 20 additional List 1 contaminants, as will the large GW systems. 3 Water systems that are not subject to HAA5 monitoring under the D/DBPRs (§ 141.Subparts L and V) are not required to monitor for the UCMR 4 HAAs or associated indicators (TOC and bromide).
    1. Sampling Frequency, Timing a. This Rule

    Today's rule maintains the proposed increased sampling frequency and narrower monitoring timeframe for total microcystins and the nine cyanotoxins. Sampling will take place twice a month for four consecutive months (total of eight sampling events) for SW and GWUDI systems. These water systems will collect samples during the monitoring timeframe of March through November (excluding December, January and February). GW systems are excluded from cyanotoxin monitoring.

    Monitoring for the 20 additional UCMR 4 contaminants will be based on the traditional UCMR sampling frequency and timeframe. For SW and GWUDI systems, sampling will take place for four consecutive quarters over the course of 12 months (total of four sampling events). Sampling events will occur three months apart. For example, if the first sample is taken in January, the second will then occur anytime in April, the third will occur anytime in July and the fourth will occur anytime in October. For GW systems, sampling will take place twice over the course of 12 months (total of two sampling events). Sampling events will occur five to seven months apart. For example, if the first sample is taken in April, the second sample will then occur anytime in September, October or November.

    EPA, in conjunction with the states, will initially determine schedules (year and months of monitoring) for large water systems. These PWSs will then have an opportunity to modify their schedule for planning purposes or other reasons (e.g., to conduct monitoring during the months the system or the state believes are most vulnerable, spread costs over multiple years, address a situation where the sampling location will be closed during the scheduled month of monitoring, etc.). PWSs are not permitted to reschedule monitoring specifically to avoid sample collection during a suspected vulnerable period for the cyanotoxins. EPA will schedule and coordinate small system monitoring by working closely with partnering states. SMPs provide an opportunity for states to review and revise the initial sampling schedules that EPA proposes.

    b. Summary of Major Comments and EPA Responses

    Commenters generally supported the narrower timeframe for cyanotoxin sampling but disfavored the narrower March through November timeframe for the 20 additional contaminants. For the latter group of contaminants, EPA received multiple comments that recommended using the traditional sampling frequency and timing of previous UCMR cycles. Commenters cited the potential for cost savings by allowing the UCMR 4 HAAs to be sampled on the same schedule as compliance monitoring, and they also suggested that traditional 12-month monitoring would be appropriate for assessing lifetime exposure. EPA agrees with these points and today's rule includes the traditional monitoring schedule for the 20 additional contaminants. EPA's response is detailed more fully in the “Response to Comments Document for the Unregulated Contaminant Monitoring Rule (UCMR 4),” (USEPA, 2016b), which can be found in the electronic docket listed in the ADDRESSES section of this notice.

    Several commenters recommended that the Agency reduce the number of sample events for GW systems to one instead of the traditional two. Commenters provided an assessment of data on UCMR 3 contaminants in GW systems, and suggested that there is no significant statistical difference between the results for the two sample events for many of the contaminants. EPA acknowledges that based on the UCMR 3 data, the correlation between sample event 1 and sample event 2 for GW systems can be high, and the distributions of measured values can be very similar. However, when making regulatory determinations, EPA evaluates the number of systems (and populations) with means or single measured values above health levels of concern, as both values provide important information on the occurrence of UCMR contaminants in PWSs. The approach suggested by commenters would yield less accurate data for several reasons. First, the analysis provided by the commenters shows that the counts or percentage of systems above a concentration of interest can vary between sample events, and that there are individual cases where the contaminant is not detected in one sample event but occurs at significant levels in the second event. In addition, the analysis by commenters did not find a strong correlation between the two GW sampling events for chlorate, a disinfectant byproduct, likely due to the temporal variability in disinfection practices. This strongly suggests that having a single sample event may not be appropriate for temporally variable contaminants like pesticides and other anthropogenic contaminants. EPA did consider making exceptions for certain classes of contaminants (e.g., those contaminants that are not as temporally variable), however, the UCMR design must address all types of contaminants on a national scale, often without advance knowledge about the degree to which the contaminant occurrence may vary over time. Making exceptions would increase the complexity of the sample design. In addition, statistical means based on two measurements have considerably less error than a single measurement per system and provide a more robust dataset for future regulatory decisions. EPA also notes that the analysis provided by commenters only addressed a limited set of contaminants (i.e., those from UCMR 3) and did not examine the results from other UCMR cycles; if EPA were to consider reducing sampling frequency as suggested, the Agency would need more robust information. EPA will re-evaluate this issue in future UCMR cycles if new information becomes available.

    Finally, it is worth noting that the Agency does allow systems the opportunity to reduce monitoring by using approved GW representative entry points and, in the case of water systems that purchase water from the same source, by using representative connections.

    2. Phased Sample Analysis for Microcystins a. This Rule

    Today's rule utilizes a phased sample analysis approach for the microcystins to reduce analytical costs (i.e., PWSs will collect all required samples for each sampling event but not all samples may need to be analyzed). However, that phased approach has been simplified relative to the proposed approach and will begin with sample collection at the entry point to the distribution system (EPTDS). Three samples will be collected at the EPTDS for cyanotoxins. One sample will be collected for EPA Method 546 (Adda ELISA), another for potential analysis by EPA Method 544, and another for analysis by EPA Method 545. Adda ELISA is a widely used screening assay that allows for the aggregate detection of numerous microcystin congeners; it does not allow for measurement of the individual congeners (USEPA, 2015f; Fischer et al., 2001; McElhiney and Lawton, 2005; Zeck et al., 2001). If the EPTDS ELISA result is less than 0.3 micrograms per liter (µg/L) (i.e., the reporting limit for total microcystins), then the sample collected for Method 544 will not be analyzed for that sample event and only the Adda ELISA result will be reported to EPA. If the ELISA result is greater than or equal to 0.3 µg/L, the result will be reported to EPA and the EPA Method 544 sample will then be analyzed to identify and quantify nodularin and the six specific microcystin congeners identified in Exhibit 3. Cylindrospermopsin and anatoxin-a will only be monitored at the EPTDS, with analysis by EPA Method 545.

    In lieu of the proposed source-water ELISA monitoring, this final rule requires PWSs to answer four simple “metadata” questions (identifying the appropriate responses from the options provided) to help EPA understand the source water quality at the time their EPTDS samples are collected. These questions are identified in the Data Elements section III.C.1.

    b. Summary of Major Comments and EPA Responses

    EPA received multiple comments on the proposed phased approach to microcystins and the utility of measuring pH and temperature in the source water. Some commenters recommended omitting source water sampling for microcystins, suggesting that a correlation cannot be drawn between source water and finished water using the proposed approach. Commenters also suggested the following: Targeted studies should collect treatment plant metadata to support future analyses; the phased approach could potentially miss an increase in cyanotoxins released as a result of treatment (e.g., cell rupture during treatment); the inclusion of both source water data and drinking water data in NCOD and other outreach materials would confuse consumers; and more appropriate candidate indicators could be considered. EPA has considered these concerns and is not requiring source water microcystin monitoring in the final rule, nor is the Agency requiring pH and temperature data collection. UCMR 4 focuses instead on finished water cyanotoxin data collection and a more qualitative characterization of source water. EPA estimates that the final rule approach, relying on the collection of source water metadata in lieu of source water sampling, reduces $1.8 million in costs from the proposed regulation over the five-year period of the UCMR 4. The collection of source water metadata can easily be incorporated into the data reporting system and will complement the quantitative analytical drinking water data used to support future regulatory determinations.

    EPA also received comments reflecting confusion about the interpretation of results from the Adda ELISA microcystin method and Method 544 (microcystins by LC-MS/MS). EPA notes that the two methods provide different measures of microcystin occurrence and risk, and one result cannot practically be used to confirm the other. The Adda ELISA allows for an aggregate quantification of a wide spectrum of microcystin congeners based on the ability of the antibodies used in the assay to recognize microcystins, while Method 544 focuses on quantifying six specific microcystin congeners. The microcystins addressed in Method 544 may or may not be the dominant congeners in particular source waters.

    3. Applicability of HAA Monitoring Requirements a. This Rule

    If a water system is not subject to HAA5 monitoring under the D/DBPRs (see § 141.622 for D/DBPR monitoring requirements), the water systems is not required to collect and analyze UCMR 4 HAA samples.

    b. Summary of Major Comments and EPA Responses

    One commenter suggested that EPA remove the UCMR 4 requirement for water systems to monitor for HAAs if the system is not subject to HAA5 monitoring under the D/DBPRs. The logic is that non-disinfecting GW systems would not be expected to have measureable HAAs as DBPs. EPA agrees with the comment and has removed the requirement. This change reduces the UCMR 4 cost by $826,000 from the proposed rule's cost over the 5-year UCMR 4 period.

    4. Representative Sampling a. This Rule

    Consistent with previous UCMRs and as described in § 141.35(c)(3), UCMR 4 maintains the option for large GW systems that have multiple EPTDSs to sample, with prior approval, at representative sampling locations rather than at each EPTDS. Representative sampling plans approved under prior UCMRs will be recognized as valid for UCMR 4. Systems must submit a copy of documentation from their state or EPA representing the prior approval of their alternative sampling plan. Any new GW representative monitoring plans must be submitted to EPA for review (by the state or EPA) within 120 days from publication of this final rule. Once approved, these representative EPTDS locations, along with previously approved EPTDS locations from prior UCMRs, must be loaded into the Safe Drinking Water Accession and Review System (SDWARS) by the water system by December 31, 2017.

    Consistent with previous UCMRs and as described in § 141.40, Table 1, systems that purchase water with multiple connections from the same wholesaler may select one representative connection from that wholesaler. This EPTDS sampling location must be representative of the highest annual volume connections. If the connection selected as the representative EPTDS is not available for sampling, an alternate highest volume representative connection must be sampled. Water provided by multiple wholesalers will be considered different sources and will each need a representative connection.

    b. Summary of Major Comments and EPA Responses

    EPA received multiple comments about representative wholesale connections from consecutive systems. Commenters were concerned that this approach to reduce monitoring would be eliminated in UCMR 4. The proposed rule preamble explicitly highlighted the flexibility for representative ground water sampling, but did not highlight the option for representative wholesale connections (i.e., for consecutive systems). In this preamble, EPA is affirming the opportunity for water systems that purchase water (with multiple connections from the same wholesaler) to reduce monitoring; this option will continue in UCMR 4. EPA will likewise address this in future meetings, webinars and outreach materials.

    5. Sampling Locations a. This Rule

    Sample collection for the UCMR 4 contaminants will take place at the EPTDS for all contaminant groups except for the HAAs, which will take place in the distribution system. Sampling for the HAA indicators, TOC and bromide, will take place at a single source water influent for each treatment plant.

    If the system's treatment plant/water source is subject to the D/DBPR's HAA5 monitoring requirements under § 141.622, the water system will collect samples for the UCMR 4 HAAs at the D/DBPR sampling location(s). UCMR 4 HAA samples and D/DBPR HAA5 compliance monitoring samples may be collected by the PWS at the same time. However, EPA notes that PWSs are required to arrange for UCMR 4 HAA samples to be analyzed by a UCMR 4 approved laboratory using EPA Method 552.3 or 557 (both of which are compliance methods also approved for analysis of D/DBPR samples).

    For those systems subject to UCMR 4 HAA monitoring, sampling for the HAA indicators (TOC and bromide) will take place at the source water influent for each treatment plant (concurrent with UCMR 4 HAA sampling in the distribution system). This indicator-monitoring requirement does not pertain to consecutive systems (i.e., those purchasing water from other systems). For purposes of TOC and bromide sampling, EPA defines source water influent under UCMR as untreated water entering the water treatment plant (i.e., at a location prior to any treatment).

    SW and GWUDI systems subject to TOC monitoring under the D/DBPRs will use their TOC source water sampling site(s) defined at § 141.132 for UCMR 4 TOC and bromide samples. If a SW or GWUDI system is not subject to the D/DBPR TOC monitoring, it will use its Long Term 2 Enhance Surface Water Treatment Rule (LT2) source water sampling site(s) (§ 141.703) to collect UCMR 4 samples for TOC and bromide. GW systems that are subject to the D/DBPRs will take TOC and bromide samples at their influents entering their treatment train.

    b. Summary of Major Comments and EPA Responses

    With the exception of microcystin monitoring, commenters generally agreed with the sampling location approach described in the proposal. Changes made to address the microcystin comments are addressed in section III.B.2.

    C. What are the reporting requirements for UCMR 4? 1. Data Elements a. This Rule

    Today's final rule maintains the 26 data elements described in the proposed rule and updates some of the definitions for clarity and consistency in the reporting requirements. Additionally, EPA has included four data elements to address collection of the source water metadata discussed in section III.B.2.

    The four new metadata elements are all yes or no questions, with a corresponding drop down menu of options if yes is selected:

    (1) Bloom Occurrence—preceding the finished water sample collection, did you observe an algal bloom in your source waters near the intake?

    (2) Cyanotoxin Occurrence—preceding the finished water sample collection, were cyanotoxins ever detected in your source waters, near the intake and prior to any treatment (based on sampling by you or another party)?

    (3) Indicator of Possible Bloom—Treatment—preceding the finished water sample collection, did you notice any changes in your treatment system operation and/or treated water quality that may indicate a bloom in the source water?

    (4) Indicator of Possible Bloom—Source Water Quality Parameters—preceding the finished water sample collection, did you observe any notable changes in source water quality parameters (if measured)?

    Please see Table 1 of § 141.35(e) for the complete list of data elements, definitions and drop down options that will be provided in the data reporting system.

    b. Summary of Major Comments and EPA Responses

    EPA received many comments on the proposed data elements, particularly regarding the complexity and utility of collecting the new quality control (QC) parameters; concerns with how the data will be gathered and processed; and questions about how the database will function.

    EPA will collect all 30 data elements in SDWARS 4, an updated version of the data reporting system used in previous UCMR actions. More than half of these data elements (e.g., inventory and analytical results) were used in prior UCMR cycles and were included in the previous SDWARS system. The new QC data elements are already generated by the laboratory and do not constitute new analytical requirements.

    SDWARS 4 will include improvements in the user interface and new QC checks will be built into the system to review the data in real-time. Consistent with prior UCMR cycles, states and EPA will have access to data once posted by the laboratory and reviewed by the PWS (or 60 days after the laboratory posting, whichever comes first). EPA will offer two database training sessions in 2017 to help users become familiar with the new system. One training session will be for the water systems and the other training session will be for the laboratories. A future Federal Register announcement will provide more details on these training sessions.

    Other comments regarding the data elements included the following specific points: a request for a simpler classification of treatment “bins”; a recommendation that the final rule collect the primary and secondary disinfectant practice in place at the time of HAA sampling; an observation that the UCMR 4 data are more informative when there is information describing the associated treatment; a recommendation that EPA simplify the data elements and data definitions; and a recommendation that the rule not collect metadata about oxidant addition, oxidant order of application, oxidant dose and oxidant contact time.

    The final rule simplifies and clarifies the treatment options available for the PWS to select as metadata; includes the collection of all disinfectant practices and information describing the treatment in place; simplifies the data elements and data definitions; and does not include the collection of metadata about oxidant order of application, dose or contact time. EPA's response is detailed more fully in the “Response to Comments Document for the Unregulated Contaminant Monitoring Rule (UCMR 4),” (USEPA, 2016b), which can be found in the electronic docket listed in the ADDRESSES section of this notice.

    IV. How are laboratories approved for UCMR 4 monitoring?

    Consistent with the proposal, and with past practice, the final rule requires EPA approval of all laboratories conducting analyses for UCMR 4. EPA will follow the traditional Agency approach, outlined in the proposal, to approving UCMR laboratories, which requires laboratories seeking approval to: (1) Provide EPA with data that demonstrates a successful completion of an initial demonstration of capability (IDC) as outlined in each method; (2) verify successful analytical performance at or below the MRLs as specified in this action; (3) provide information about laboratory operating procedures; and (4) successfully participate in an EPA proficiency testing (PT) program for the analytes of interest. Audits of laboratories may be conducted by EPA prior to and/or following approval. The “UCMR 4 Laboratory Approval Requirements and Information Document” (USEPA, 2016d) provides guidance on the EPA laboratory approval program and the specific method acceptance criteria.

    EPA may supply analytical reference standards for select analytes to participating/approved laboratories when reliable standards are not readily available through commercial sources.

    This final rule's structure for the laboratory approval program is the same as that proposed for UCMR 4 and employed in previous UCMRs, and provides an assessment of the laboratories' ability to perform analyses using the methods listed in § 141.40(a)(3), Table 1. The UCMR 4 laboratory approval process is designed to assess whether laboratories possess the required equipment and analyst skills and can meet the laboratory-performance and data-reporting criteria described in this action. Laboratory participation in the UCMR laboratory approval program is voluntary. However, as in previous UCMRs and as proposed for UCMR 4, EPA will require PWSs to exclusively use laboratories that have been approved under the program to analyze UCMR 4 samples. EPA expects to post a list of approved UCMR 4 laboratories to https://www.epa.gov/dwucmr. Laboratories are encouraged to apply for UCMR 4 approval as early as possible, as EPA anticipates that large PWSs scheduled for monitoring in the first year will be making arrangements for sample analyses soon after the final rule is published. The steps and requirements for the laboratory approval process are listed in sections A through F below.

    A. Request To Participate

    Laboratories interested in the UCMR 4 laboratory approval program can request registration materials by emailing EPA at UCMR_Sa[email protected] to request registration materials.

    B. Registration

    Laboratory applicants will provide registration information that includes: Laboratory name, mailing address, shipping address, contact name, phone number, email address and a list of the UCMR 4 methods for which the laboratory is seeking approval. This registration step provides EPA with the necessary contact information, and ensures that each laboratory receives a customized application package. Laboratories must complete and submit the necessary registration information by February 21, 2017.

    C. Application Package

    Laboratories wishing to participate will complete and return a customized application package that includes the following: IDC data, including precision, accuracy and results of MRL studies; information regarding analytical equipment and other materials; proof of current drinking water laboratory certification (for select compliance monitoring methods); and example chromatograms for each method under review. Laboratories must complete and submit the necessary application materials by April 19, 2017.

    As a condition of receiving and maintaining approval, the laboratory is expected to confirm that it will post UCMR 4 monitoring results and quality control data that meet method criteria (on behalf of its PWS clients) to EPA's UCMR electronic data reporting system, SDWARS.

    D. EPA's Review of Application Packages

    EPA will review the application packages and,