Federal Register Vol. 81, No.244,

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).

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.

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

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.

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.

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:

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.

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.

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

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:

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.

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.

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.

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.

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.

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).

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

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

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

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

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.

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).

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.

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.

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.

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.

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.

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.

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).

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.

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.

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.

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.

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.

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.

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.

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.

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

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.

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.

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.

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.

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.

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

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.

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.

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

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.

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.

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.

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.

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).

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

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

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.

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.

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.

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.

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.

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

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

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.

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.

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

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.

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.

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

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.

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.

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

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

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 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.

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.

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

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

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).

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

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

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

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

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

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.

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.

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.

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.

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.

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.

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.

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.

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.

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.

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.

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.

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.

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

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.

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.

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.

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.

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

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.

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.

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.

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)).

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.

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.

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.

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:

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).

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.

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.

(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

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.

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).

(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.

(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.

(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).

(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.

(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.

(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.

(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).

(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.

(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.

(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.

(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.

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.

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.

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:

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.

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

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.

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.

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.

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:

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.

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

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.

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.

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.

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.

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.

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.

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.

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.

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.

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.

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.

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.

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.

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.

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.

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.

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.

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.

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.

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.

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

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.

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.

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.

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.

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.

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.

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.

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.

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.

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 (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.

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.

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:

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.

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.

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

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.

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.

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.

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

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.

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.

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

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.

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.

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.

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.

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.

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.

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.

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.

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.

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.

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).

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.

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.

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

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.

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.

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

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.

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

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.

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.

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.

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.

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.