Federal Register Vol. 81, No.71,

Background

FSIS is proposing to amend its poultry products inspection regulations to add Honduras to the list of countries eligible to export poultry products to the United States (9 CFR 381.196(b)). Honduras is not currently listed as eligible to export poultry products to the United States. Honduras is currently eligible for the export of raw and processed meat products. If this proposed rule is finalized, establishments in Honduras will be eligible to export raw poultry to the United States. However, because of animal disease restrictions, Animal and Plant Health Inspection Service (APHIS) regulations restrict Honduras from shipping raw poultry product to the U.S. Newcastle disease (ND) is considered by APHIS to exist in all regions of the world except those listed in paragraph (a)(2) of 9 CFR 94.6. Because Honduras is not listed, the APHIS regulation restricts the importation of poultry carcasses, meat, parts or products of carcasses, and eggs (other than hatching eggs) of poultry, game birds, or other birds from Honduras. Honduras has requested APHIS' recognition of their ND status as ND free, and APHIS is conducting a review and evaluation. If APHIS determines that the request can be safely granted, it will state its intent and make its evaluation available for public comment through a document published in the Federal Register.

Section 17 of the PPIA (21 U.S.C. 466) prohibits importation into the United States of slaughtered poultry, or parts or products thereof, of any kind unless they are healthful, wholesome, fit for human food, not adulterated, and contain no dye, chemical, preservative, or ingredient that renders them unhealthful, unwholesome, adulterated, or unfit for human food. Under the PPIA and the regulations that implement it, poultry products imported into the United States must be produced under standards for safety, wholesomeness, and labeling accuracy that are equivalent to those of the United States. Section 381.196 of Title 9 of the Code of Federal Regulations (CFR) sets out the procedures by which foreign countries may become eligible to export poultry and poultry products to the United States.

Section 381.196(a) requires a foreign country's poultry inspection system to include standards equivalent to those of the United States and to provide legal authority for the inspection system and its implementing regulations that is equivalent to that of the United States. Specifically, a country's legal authority and regulations must impose requirements equivalent to those of the United States with respect to: (1) Ante-mortem and post-mortem inspection by, or under the direct supervision of, a veterinarian; (2) official controls by the national government over establishment construction, facilities, and equipment; (3) direct and continuous official supervision of slaughtering of poultry and processing of poultry products by inspectors to ensure that product is not adulterated or misbranded; (4) complete separation of establishments certified to export from those not certified; (5) maintenance of a single standard of inspection and sanitation throughout certified establishments; (6) requirements for sanitation and for sanitary handling of product at establishments certified to export; (7) official controls over condemned product; (8) a Hazard Analysis and Critical Control Point (HACCP) system; and (9) any other requirements found in the PPIA and its implementing regulations (9 CFR 381.196(a)(2)(ii)).

In addition to a foreign country's legal authority and regulations, the program itself must be equivalent to the United States. Specifically, the program organized and administered by the national government must impose requirements equivalent to those of the United States with respect to: (1) Organizational structure and staffing, so as to ensure uniform enforcement of the requisite laws and regulations in all certified establishments; (2) ultimate control and supervision by the national government over the official activities of employees or licensees; (3) qualified inspectors; (4) enforcement and certification authority; (5) administrative and technical support; (6) inspection, sanitation, quality, species verification, and residue standards; and (7) any other inspection requirements (9 CFR 381.196(a)(2)(i)).

The foreign country's inspection system must ensure that establishments preparing poultry or poultry products for export to the United States, and their products, comply with requirements equivalent to those of the PPIA and the regulations promulgated by FSIS under the authority of that statute. The foreign country certifies the appropriate establishments as having met the required standards and advises FSIS of those establishments that are certified or removed from certification. Before FSIS will grant approval to the country to export poultry or poultry products to the United States, FSIS must first determine that reliance can be placed on the certification of establishments by the foreign country.

As indicated above, a foreign country's inspection system must be evaluated by FSIS before eligibility to export poultry products to the United States can be granted. This evaluation consists of two processes: A document review and an on-site review. The document review is an evaluation of the laws, regulations, and other written materials used by the country to effect its inspection program. To help the country in organizing its material, FSIS provides the country with a series of questions asking for detailed information about the country's inspection practices and procedures in six areas or equivalence components: (1) Government Oversight, (2) Statutory Authority and Food Safety Regulations, (3) Sanitation, (4) Hazard Analysis and Critical Control Point (HACCP) Systems, (5) Chemical Residue Testing Programs, and (6) Microbiological Testing Programs. FSIS evaluates the information submitted to verify that the critical points in the six equivalence components are addressed satisfactorily with respect to standards, activities, resources, and enforcement. If the document review is satisfactory, an on-site review is scheduled using a multi-disciplinary team to evaluate all aspects of the country's inspection program. This comprehensive process is described more fully on the FSIS Web site at http://www.fsis.usda.gov/wps/portal/fsis/topics/international-affairs/importing-products/equivalence/equivalence-process-overview.

The PPIA and implementing regulations require that foreign countries be listed in the CFR as eligible to export poultry products to the United States. FSIS must engage in rulemaking to list a country as eligible. Countries found eligible to export poultry or poultry products to the United States are listed in the poultry inspection regulations at 9 CFR 381.196(b). Once listed, it is the responsibility of the eligible country to certify that establishments meet the requirements to export poultry or poultry products to the United States and to ensure that products from these establishments are safe, wholesome, and not misbranded. To verify that products imported into the United States are safe, wholesome, and properly labeled and packaged, FSIS re-inspects and randomly samples those products before they enter the United States commerce.

In 2003, the government of Honduras submitted an initial equivalence application and requested that FSIS conduct a review of Honduras' poultry slaughter inspection system to establish eligibility to export raw poultry products to the United States. FSIS conducted a document review of Honduras' poultry (slaughter) inspection system to determine whether that system was equivalent to that of the United States. Honduras only expressed interest in exporting raw poultry carcasses to the United States, and Honduras does not have a poultry processing establishment. Therefore, FSIS did not obtain documentation for an equivalence review of such a system. FSIS concluded on the basis of the review of Honduras' poultry slaughter system that Honduras' laws and regulations are equivalent to the Poultry Products Inspection Act (PPIA) and implementing regulations.

Accordingly, FSIS proceeded with an initial on-site audit of Honduras' poultry slaughter system in November 2005, to verify whether Honduras' National Plant and Animal Health Service (SENASA), which is Honduras' central competent authority for food inspection, effectively implemented a poultry inspection system equivalent to that of the United States. The audit resulted in the identification of systemic deficiencies within the following three equivalence components: Government Oversight, Sanitation, and HACCP. The audit found that SENASA did not have adequate government oversight and administrative controls over the inspection system. Also SENASA did not properly stage the necessary number of post-mortem inspectors at the evisceration line. In addition, the audit found during pre-operational sanitation verification inspection, SENASA did not implement procedures to ensure all shackles checked in a 15 foot section were not free of protein residue, fat particles from the previous day's production and dried paint droplets. Likewise, the audit found that SENASA failed to verify whether establishments met HACCP requirements within the system. SENASA took corrective actions to address all of the audit findings, either at the time of the finding, or after the distribution of the Final Audit Report on March 7, 2006. FSIS reviewed the proffered corrective actions and determined that they would be sufficient to prevent re-occurrence.

FSIS conducted a second on-site audit in June 2009, to verify whether all outstanding issues identified during the previous audit had been resolved. The 2009 audit verified that the implementation of Honduras' corrective actions to the previous audit findings were implemented as described and were working as intended.

However, the 2009 audit resulted in the identification of systemic deficiencies that had not been identified in the previous audit. The deficiencies related to the equivalence components of Sanitation, HACCP, and Microbiological Testing Programs. Specifically, the 2009 audit found that, with regard to Sanitation, SENASA did not implement procedures to verify adequate sanitation programs. With regard to HACCP, SENASA did not implement procedures to verify establishments met HACCP requirements. Finally, with regard to Microbiological Testing Programs, SENASA did not provide adequate controls over the implementation of laboratory quality systems associated with microbiological testing of product which is intended for export to the U.S.

After the 2009 on-site audit, Honduras developed a comprehensive corrective action plan to address the findings identified during the 2009 on-site audit. Its corrective actions included implementing new regulations, procedures, measures, and verification activities to ensure uniformity in conducting official inspection activities. FSIS reviewed Honduras' corrective action plan and concluded that Honduras had satisfactorily addressed all audit findings.

FSIS conducted a third on-site audit in September, 2014, to verify that Honduras had satisfactorily addressed all the findings of the November 2005 and June 2009 audits, and had met the FSIS criteria for all six equivalence components. The evaluation of all documentation provided by Honduras since the 2009 audit (corrective actions taken in response to the 2009 audit findings, regulatory updates, new performance standards, new microbiological laboratory procedures/analyses) supported the decision to perform another audit. The auditor verified that all corrective actions to the 2009 audit findings were implemented as described, and working as intended. There were no new audit findings observed by the auditor during the 2014 on-site audit. The resolution of previous audit findings, and the absence of new audit findings supports the conclusion that the Honduran poultry regulatory system cumulatively achieves a level of protection equivalent to that provided by the United States' poultry inspection system.

In summary, FSIS has completed the document review, on-site audits, and verification of corrective actions as part of the equivalence process, and all outstanding issues have been resolved. FSIS has tentatively concluded that, as implemented, Honduras' poultry inspection system (slaughter) is equivalent to the United States' poultry inspection system. The full report on Honduras' poultry inspection system (slaughter) can be found on the FSIS Web site at http://www.fsis.usda.gov/wps/portal/fsis/topics/international-affairs/importing-products/eligible-countries-products-foreign-establishments/foreign-audit-reports/foreign-audit-reports.

At this time, Honduras intends to certify only one establishment as eligible to export product to the U.S. The establishment intends to export raw poultry product. Should this proposed rule become final, the government of Honduras must certify to FSIS those establishments that wish to export poultry products to the United States and that operate in accordance with requirements equivalent to that of the United States (9 CFR 381.196(a)). FSIS will verify that the establishments certified by Honduras' government are meeting the United States requirements through verification audits of Honduras' poultry inspection system.

Although a foreign country may be listed in FSIS regulations as eligible to export poultry to the United States, the exporting country's products must also comply with all other applicable requirements of the United States. These requirements include restrictions under 9 CFR part 94 of the United States Department of Agriculture's Animal and Plant Health Inspection Service (APHIS) regulations, which also regulate the exportation of poultry products from foreign countries to the United States. At this time, APHIS does not allow Honduras to export raw poultry to the US because Honduras is not recognized by APHIS as a region free of Newcastle disease (ND).

If this proposed rule is adopted and should APHIS allow Honduras to export raw poultry to the US in the future, all slaughtered poultry, or parts and products thereof, exported to the United States from Honduras will be subject to re-inspection at the U.S. ports of entry for, but not limited to, transportation damage, product and container defects, labeling, proper certification, general condition, and accurate count.

In addition, FSIS will conduct other types of re-inspection activities, such as taking product samples for laboratory analysis for the detection of drug and chemical residues, pathogens, species, and product composition. Products that pass re-inspection will be stamped with the official United States mark of inspection and allowed to enter United States commerce. If they do not meet United States requirements, they will be refused entry and within 45 days must be exported to the country of origin, destroyed, or converted to animal food (subject to approval of FDA), depending on the violation. The import re-inspection activities can be found on the FSIS Web site at http://www.fsis.usda.gov/wps/portal/fsis/topics/international-affairs/importing-products/phis-import-component/phis-implementation-letter-to-importers/ct_index.

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

If this proposed rule is finalized, establishments in Honduras will be eligible to export raw poultry to the United States. However, because of animal disease restrictions, APHIS regulations currently prohibit Honduras from immediately shipping raw poultry product to the U.S. Honduras' establishments are currently eligible to export raw and processed beef and veal, raw and processed lamb and mutton, raw and processed goat as well as processed pork. According to data from the government of Honduras, if this proposed rule is finalized, Honduras intends to certify one establishment as eligible to export raw poultry to the United States.1 The expected export volume for this establishment for the first three years is 10,211 Metric Tons (MT). This is expected to increase to 11,231 MT in year four and 12,355 MT in year five.2

The U.S. poultry industry is one of the most competitive agricultural industries in the world. U.S. establishments slaughtered 17.9 million MT of young chickens in 2014.3 Approximately 3.0 million MT of young chickens slaughtered in the U.S. were exported in 2014. U.S. exports of young chicken comprised 31 percent of the market share among major traders in 2014.4

The importation of poultry products from Honduras is expected to have a minimal impact on the United States poultry market. Should the proposed rule become final, FSIS estimates Honduras' exports would comprise 0.6 percent (10,211 MT from Honduras compared to a U.S. slaughter volume of 17.9 million MT in 2014) of the United States market annually the first three years. FSIS estimates Honduras' exports would continue to comprise 0.6 percent of the United States market the fourth year and increase 0.7 percent the fifth year. FSIS projects that Honduras would not alter the United States poultry supply and would not have an impact on domestic poultry prices. Therefore, FSIS projects that establishments in the U.S. would not see the negative effects that could come from a decrease in price as a result of increased competition.

Companies based in Honduras that export to the United States or U.S. companies that export products from Honduras to the U.S. would incur standard costs such as export fees and freight and insurance costs. However, those companies would be willing to bear these costs because of the expected benefits associated with selling their products to the U.S.

Should this proposed rule become final, we would see an increase in trade between Honduras and the United States. The volume of poultry exported from Honduras is likely to be small and is expected to have little to no effect on U.S. poultry supplies or prices. Therefore, consumers will not benefit from a decrease in price that would result from increased competition. However, Latin American preferences for dark meat compliment American preferences for white meat. Therefore, Honduras' establishments will benefit if they export surplus white meat to the United States. While the export of white meat from Honduras may be minimal compared to overall U.S. consumption, these exports may be significant enough in the long run to have an effect on domestic prices in Honduras.5

In addition, the Dominican Republic-Central America-United States Free Trade Agreement (CAFTA-DR), implemented in 2006, sought to level the playing field and increase trade between the United States and the six CAFTA-DR trading partners, including Honduras.6 If this proposed rule is finalized, we would see a fulfillment of those objectives, benefiting U.S. and Honduras' firms and consumers, especially within the agricultural sector. Providing market access in the U.S. to Honduras' establishments ensures similar access will be given to U.S. firms. American firms have already benefited from CAFTA-DR, with agricultural exports (including wheat, live animals and red meat) to Honduras nearly doubling (97 percent) between 2006 and 2014 and is expected to rise even further in the future.

The FSIS Administrator has made a preliminary determination that this proposed rule will not have a significant economic impact on a substantial number of small entities in the United States, as defined by the Regulatory Flexibility Act (5 U.S.C. 601 et seq.) because, as stated above, the proposed rule would not have a significant effect on an U.S. establishments.

No new paperwork requirements are associated with this proposed rule. Foreign countries wanting to export poultry and poultry products to the United States are required to provide information to FSIS certifying that their inspection system provides standards equivalent to those of the United States, and that the legal authority for the system and their implementing regulations are equivalent to those of the United States. FSIS provided Honduras with questionnaires asking for detailed information about the country's inspection practices and procedures to assist that country in organizing its materials. This information collection was approved under OMB number 0583-0153. The proposed rule contains no other paperwork requirements.

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

Public awareness of all segments of rulemaking and policy development is important. Consequently, FSIS will announce this Federal Register publication and officially notify the World Trade Organization's Committee on Sanitary and Phytosanitary Measures (WTO/SPS Committee) in Geneva, Switzerland, of this proposal on-line through the FSIS Web page located at: http://www.fsis.usda.gov/federal-register.

FSIS also will make copies of this publication available through the FSIS Constituent Update, which is used to provide information regarding FSIS policies, procedures, regulations, Federal Register notices, FSIS public meetings, and other types of information that could affect or would be of interest to our constituents and stakeholders. The Update is available on the FSIS Web page. Through the Web page, FSIS is able to provide information to a much broader, more diverse audience. In addition, FSIS offers an email subscription service which provides automatic and customized access to selected food safety news and information. This service is available at: http://www.fsis.usda.gov/subscribe. Options range from recalls to export information, regulations, directives, and notices. Customers can add or delete subscriptions themselves, and have the option to password protect their accounts.

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

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

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

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

Fax: (202) 690-7442.

Email: [email protected].

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

For the reasons set out in the preamble, FSIS is proposing to amend 9 CFR part 381 as follows:

Comments Invited

We invite you to send any written relevant data, views, or arguments about this proposed AD. Send your comments to an address listed under the ADDRESSES section. Include “Docket No. FAA-2014-0571; Directorate Identifier 2014-NM-059-AD” at the beginning of your comments. We specifically invite comments on the overall regulatory, economic, environmental, and energy aspects of this proposed AD. We will consider all comments received by the closing date and may amend this proposed AD because of those comments.

We will post all comments we receive, without change, to http://www.regulations.gov, including any personal information you provide. We will also post a report summarizing each substantive verbal contact we receive about this proposed AD.

We issued an NPRM to amend 14 CFR part 39 by adding an AD that would apply to certain The Boeing Company Model 767-200, -300, and -400ER series airplanes. The NPRM published in the Federal Register on August 14, 2014 (79 FR 47597) (“the NPRM”). The NPRM proposed to require an inspection for plastic couplings, corrective actions if necessary, and installation of new spray shrouds.

Since we issued the NPRM, Boeing has issued Boeing Alert Service Bulletin 767-38A0073, Revision 2, dated August 10, 2015. Boeing Alert Service Bulletin 767-38A0073, Revision 2, dated August 10, 2015, adds, for certain airplanes, a general visual inspection of the spray shield to determine if it has two slits and is installed correctly, and related investigative and corrective actions if necessary. We added a new paragraph (h) to require this inspection and, if necessary, related investigative and corrective actions as applicable. We redesignated subsequent paragraphs accordingly.

We gave the public the opportunity to comment on the NPRM. The following presents the comments received on the NPRM and the FAA's response to each comment.

Aviation Partners Boeing (APB) stated that the installation of winglets per supplemental type certificate ST01920SE (http://rgl.faa.gov/Regulatory_and_Guidance_Library/rgstc.nsf/0/59027f43b9a7486e86257b1d006591ee/$FILE/ST01920SE.pdf) does not affect the accomplishment of the manufacturer's service instructions. APB also expressed that it would provide supporting data to the FAA upon request.

We agree with the commenter that STC ST01920SE (http://rgl.faa.gov/Regulatory_and_Guidance_Library/rgstc.nsf/0/59027f43b9a7486e86257b1d006591ee/$FILE/ST01920SE.pdf) does not affect the accomplishment of the manufacturer's service instructions. Therefore, the installation of STC ST01920SE does not affect the ability to accomplish the actions required by this proposed AD. We have not changed this proposed AD in this regard.

Boeing requested that we revise the NPRM to refer to Boeing Service Bulletin 767-38A0073, Revision 1, dated November 5, 2014, and to note that no more work is necessary on any airplanes on which the actions specified in Boeing Alert Service Bulletin 767-38A0073, dated November 12, 2013, have been done (the NPRM referred to Boeing Alert Service Bulletin 767-38A0073, dated November 12, 2013, as the appropriate source of service information). Boeing also stated that the revision includes some minor changes in the Work Instructions and corrects some part numbers in the Material Information section. Boeing noted that the revised service information includes the statement “no more work is necessary on any airplane(s) changed in accordance with the original issue of the service bulletin.”

We agree to include the latest revision of the service information in this proposed AD. As stated previously, Boeing Alert Service Bulletin 767-38A0073, Revision 2, dated August 10, 2015, has been issued. This proposed AD would require that all actions be completed using Boeing Alert Service Bulletin 767-38A0073, Revision 2, dated August 10, 2015. We have also added a new paragraph (k) to this proposed AD to give credit for actions done before a certain date using Boeing Alert Service Bulletin 767- 38A0073, dated November 12, 2013, and Boeing Service Bulletin 767-38A0073, Revision 1, dated November 5, 2014. We have redesignated subsequent paragraphs accordingly.

Boeing requested that we revise the “Inspection and Installation” paragraph (paragraph (g) of the proposed AD (in the NPRM)) to delete the following sentence:

We do not agree to revise this proposed AD to delete the sentence as requested because the sentence is necessary to indicate the compliance time for the corrective actions. We have made no changes to this proposed AD in this regard.

Boeing requested that we revise the Costs of Compliance section of the NPRM to account for the hours to perform the leak test on each airplane. Boeing explained that Boeing Alert Service Bulletin 767-38A0073, dated November 12, 2013, contains estimates of 3 work-hours for the leak test. Boeing reasoned that the hours to perform the leak test following any coupling replacement were not included in the cost estimate.

We agree to revise the Costs of Compliance section of this SNPRM to add the costs to perform a leak test, for the reason indicated by Boeing. We have included this cost in the “Related investigative actions” row of the on-condition costs.

United Airlines (UA) requested that we revise the “Parts Installation Prohibition” paragraph (paragraph (i) of the proposed AD (in the NPRM)) to refer to part number (P/N) “CA620 series” or P/N “CA625 series,” instead of simply “P/N CA620” or “P/N CA625.” UA explained that calling out P/N CA620 or P/N CA625 comprises only a portion of the part number.

We agree to revise the “Parts Installation Prohibition” paragraph (paragraph (j) of this proposed AD, which was referred to as paragraph (i) of the proposed AD (in the NPRM)) to specify P/N “CA620 series” or P/N “CA625 series,” for the reason explained by UA. A complete part number is formatted to provide information; e.g., for “CA620XX-YYZZ,” XX identifies the size, YY identifies the material, and ZZ is a color code; this proposed AD would prohibit P/N CA620 and P/N CA625 regardless of size, material, and color.

UA explained that Boeing Alert Service Bulletin 767-38A0073, dated November 12, 2013, refers to Subject 38-10-00, Potable Water System, of Chapter 38, Water/Waste, of the Boeing 767 AMM as an accepted procedure to do a potable water system leak test on any replaced coupling and repair any leak. UA stated that the leak test on “any replaced coupling” in the potable water supply lines is only a portion of the referenced procedure, yet Subject 38-10-00, Potable Water System, of Chapter 38, Water/Waste, of the Boeing 767 AMM encompasses the water system as a whole. Steps (a) through (c) of paragraph G.9 in AMM 38-10-10 apply to the fill, drain, and overflow port, whereas step (d) applies to the water lines that supply lavatory and galley water. UA interpreted this requirement as referencing the steps in the Subject 38-10-00, Potable Water System, of Chapter 38, Water/Waste, of the Boeing 767 AMM that apply to any replaced coupling for compliance purposes.

We agree to clarify. Only the steps in the AMM for a leak test that apply to any replaced coupling must be done for compliance purposes. We have made no changes to this proposed AD in this regard.

UA requested that we revise paragraph (g) of the proposed AD (in the NPRM) to add an alternative leak test, or protection of the electronics during the leak test. UA stated that Boeing Alert Service Bulletin 767-38A0073, dated November 12, 2013, specifies a potable water supply line leak test in the electronic/equipment (EE) bay after repairs, which may produce leaks into the EE. UA advised providing protection from water spray in the event of a leak, since the shrouds may not have been installed at this point. When a sleeve is installed over the O-rings, sometimes the sleeve tends to “walk” or jam unevenly over the O-rings, causing an unexpected leak.

We disagree with the commenters request to add an alternative leak test, or to require protection of the electronics during the leak test. However, we agree that operators can take optional protective measures to cover or shield their equipment against water spray during the leak test. We have added note 1 to paragraph (g) of this proposed AD for clarification. We have determined that an alternative leak test is not necessary, and no requirement for electronics protection is needed. If present after the couplings have been swapped, the leak should be detected soon after the leak test is initiated, so the potential amount of water leaked would be minimal. If the sleeve was not properly installed, it should be obvious because the coupling could not be fully closed without the secondary retention strap secured. If damage to the O-ring occurred when the sleeve was installed, the leakage would be minimal. The electronics are contained inside panels and racks, and minimal water leakage should not be a problem. Only an undetected leak for extended duration, or major leaks spraying water all over, would be problematic since the racks/panels are not waterproof.

We are proposing this SNPRM because we evaluated all the relevant information and determined the unsafe condition described previously is likely to exist or develop in other products of these same type designs. Certain changes described above expand the scope of the NPRM. As a result, we have determined that it is necessary to reopen the comment period to provide additional opportunity for the public to comment on this SNPRM.

This SNPRM would require accomplishing the actions specified in the service information described previously. For information on the procedures and compliance times, see this service information at http://www.regulations.gov by searching for and locating Docket No. FAA-2014-0571.

The phrase “related investigative actions” is used in this proposed AD. “Related investigative actions” are follow-on actions that (1) are related to the primary action, and (2) further investigate the nature of any condition found. Related investigative actions in an AD could include, for example, inspections.

The phrase “corrective actions” is used in this proposed AD. “Corrective actions” are actions that correct or address any condition found. Corrective actions in an AD could include, for example, repairs.

We reviewed Boeing Alert Service Bulletin 767-38A0073, Revision 2, dated August 10, 2015. The service information describes procedures for a general visual inspection for plastic potable water couplings and applicable related investigative and corrective actions; installation of new spray shrouds; and a general visual inspection of the spray shield to determine if it has two slits, and is installed correctly, and applicable related investigative and corrective actions. This service information is reasonably available because the interested parties have access to it through their normal course of business or by the means identified in the ADDRESSES section.

We estimate that this proposed AD affects 136 airplanes of U.S. registry.

We estimate the following costs to comply with this proposed AD:

We estimate the following costs to do any necessary on-condition actions that would be required based on the results of the inspection. We have no way of determining the number of aircraft that might need these actions:

According to the manufacturer, some of the costs of this proposed AD may be covered under warranty, thereby reducing the cost impact on affected individuals. We do not control warranty coverage for affected individuals. As a result, we have included all costs in our cost estimate.

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

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

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

For the reasons discussed above, I certify this proposed regulation:

(1) Is not a “significant regulatory action” under Executive Order 12866,

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

(3) Will not affect intrastate aviation in Alaska, and

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

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

Comments Invited

We invite you to send any written relevant data, views, or arguments about this proposed AD. Send your comments to an address listed under the ADDRESSES section. Include “Docket No. FAA-2016-5467; Directorate Identifier 2015-NM-186-AD” at the beginning of your comments. We specifically invite comments on the overall regulatory, economic, environmental, and energy aspects of this proposed AD. We will consider all comments received by the closing date and may amend this proposed AD based on those comments.

We will post all comments we receive, without change, to http://www.regulations.gov, including any personal information you provide. We will also post a report summarizing each substantive verbal contact we receive about this proposed AD.

The European Aviation Safety Agency (EASA), which is the Technical Agent for the Member States of the European Union, has issued Airworthiness Directive 2015-0225, dated November 18, 2015 (referred to after this as the Mandatory Continuing Airworthiness Information, or “the MCAI”), to correct an unsafe condition for certain Airbus Defense and Space S.A. Model CN-235, CN-235-200, and CN-235-300 airplanes. The MCAI states:

Required actions include modification of the MLG access door by replacing seals in the MLG fairing and, for certain airplanes, adding an additional bolt. You may examine the MCAI in the AD docket on the Internet at http://www.regulations.gov by searching for and locating Docket No. FAA-2016-5467.

EADS CASA has issued the following service information:

• EADS CASA Service Bulletin SB-235-52-0061, Revision 1, dated October 24, 2014. The service information describes procedures for modifying the MLG access door by installing an additional bolt.

• EADS CASA Service Bulletin SB-235-52-0068, Revision 2, dated January 9, 2015. The service information describes procedures for modifying the MLG access door by installing an improved fairing seal.

This service information is reasonably available because the interested parties have access to it through their normal course of business or by the means identified in the ADDRESSES section.

This product has been approved by the aviation authority of another country, and is approved for operation in the United States. Pursuant to our bilateral agreement with the State of Design Authority, we have been notified of the unsafe condition described in the MCAI and service information referenced above. We are proposing this AD because we evaluated all pertinent information and determined an unsafe condition exists and is likely to exist or develop on other products of the same type design.

We estimate that this proposed AD affects 30 airplanes of U.S. registry.

We also estimate that it will take up to 60 work-hours per product to comply with the basic requirements of this proposed AD. The average labor rate is $85 per work-hour. Required parts would cost up to $12,684 per product. Based on these figures, we estimate the cost of this proposed AD on U.S. operators to be $533,520, or up to $17,784 per product.

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

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

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

For the reasons discussed above, I certify this proposed regulation:

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

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

3. Will not affect intrastate aviation in Alaska; and

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

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

Comments Invited

We invite you to send any written relevant data, views, or arguments about this proposal. Send your comments to an address listed under the ADDRESSES section. Include “Docket No. FAA-2016-5392; Directorate Identifier 2016-NE-10-AD” at the beginning of your comments. We specifically invite comments on the overall regulatory, economic, environmental, and energy aspects of this NPRM. We will consider all comments received by the closing date and may amend this NPRM because of those comments.

We will post all comments we receive, without change, to http://www.regulations.gov, including any personal information you provide. We will also post a report summarizing each substantive verbal contact we receive about this NPRM.

We received a report of an uncontained part release which breached an HPT case. This event resulted in an engine fire and exhaust gas temperature over-limit readings. Subsequent investigation has shown that the preliminary cause was blockage at the No. 4 bearing seal seat anti-weep grooves. Blockage of these grooves could allow oil to escape the No. 4 compartment and migrate to the HPT. Oil migration to the HPT could result in oil ignition and could eventually result in a stage 2 air-seal fracture. This condition, if not corrected, could result in failure of the HPT stage 2 seals, uncontained HPT seal release, damage to the engine, and damage to the airplane.

We reviewed IAE Non-Modification Service Bulletin (NMSB) V2500-ENG-72-0670, dated March 14, 2016. The NMSB identifies affected engines and provides guidance for replacing the No. 4 bearing front and rear seal seats and for inspecting the HPT rotor and stator assembly. This service information is reasonably available because the interested parties have access to it through their normal course of business or by the means identified in the ADDRESSES section.

We are proposing this AD because we evaluated all the relevant information and determined the unsafe condition described previously is likely to exist or develop in other products of the same type design.

This proposed AD would require removing from service the HPT No. 4 bearing front seal seat, P/Ns 2A0066, 2A1998, and 2A3432, and the HPT No. 4 bearing rear seal seat, P/Ns 2A0067, 2A1999, and 2A3433, and replacement with parts eligible for installation. This proposed AD would also require inspecting the HPT rotor and stator assembly, and, if necessary, their replacement with parts that are eligible for installation.

We estimate that this proposed AD affects 0 engines installed on airplanes of U.S. registry. We estimate that it would take about 10 hours to perform the seal seat replacement. The average labor rate is $85 per hour. We also estimate the cost of No. 4 bearing front and rear seal seats to be $13,562. Based on these figures, we estimate the cost of this proposed AD on U.S. operators to be $0.

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

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

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

For the reasons discussed above, I certify this proposed regulation:

(1) Is not a “significant regulatory action” under Executive Order 12866,

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

(3) Will not affect intrastate aviation in Alaska to the extent that it justifies making a regulatory distinction, and

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

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

We invite you to send any written relevant data, views, or arguments about this proposed AD. Send your comments to an address listed under the ADDRESSES section. Include “Docket No. FAA-2016-5466; Directorate Identifier 2015-NM-183-AD” at the beginning of your comments. We specifically invite comments on the overall regulatory, economic, environmental, and energy aspects of this proposed AD. We will consider all comments received by the closing date and may amend this proposed AD based on those comments.

We will post all comments we receive, without change, to http://www.regulations.gov, including any personal information you provide. We will also post a report summarizing each substantive verbal contact we receive about this proposed AD.

The European Aviation Safety Agency (EASA), which is the Technical Agent for the Member States of the European Union, has issued EASA Airworthiness Directive 2015-0216, dated October 28, 2015 (referred to after this as the Mandatory Continuing Airworthiness Information, or “the MCAI”), to correct an unsafe condition for certain Dassault Aviation Model FALCON 7X airplanes. The MCAI states:

You may examine the MCAI in the AD docket on the Internet at http://www.regulations.gov by searching for and locating Docket No. FAA-2016-5466.

Dassault Aviation has issued Service Bulletin 7X-245, dated June 8, 2015. The service information describes procedures for measuring fuel tank panel thickness, and repair if necessary. This service information is reasonably available because the interested parties have access to it through their normal course of business or by the means identified in the ADDRESSES section.

This product has been approved by the aviation authority of another country, and is approved for operation in the United States. Pursuant to our bilateral agreement with the State of Design Authority, we have been notified of the unsafe condition described in the MCAI and service information referenced above. We are proposing this AD because we evaluated all pertinent information and determined an unsafe condition exists and is likely to exist or develop on other products of these same type designs.

We estimate that this proposed AD affects 6 airplanes of U.S. registry.

We also estimate that it would take about 8 work-hours per product to comply with the basic requirements of this proposed AD. The average labor rate is $85 per work-hour. Required parts would cost about $0 per product. Based on these figures, we estimate the cost of this proposed AD on U.S. operators to be $4,080, or $680 per product.

In addition, we estimate that any necessary follow-on actions would take about 20 work-hours and require parts costing $2,244, for a cost of $3,944 per product. We have no way of determining the number of aircraft that might need this action.

According to the manufacturer, some of the costs of this proposed AD may be covered under warranty, thereby reducing the cost impact on affected individuals. We do not control warranty coverage for affected individuals. As a result, we have included all costs in our cost estimate.

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

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

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

For the reasons discussed above, I certify this proposed regulation:

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

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

3. Will not affect intrastate aviation in Alaska; and

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

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

Authority for This Rulemaking

The FAA's authority to issue rules regarding aviation safety is found in Title 49 of the United States Code. Subtitle I, Section 106 describes the authority of the FAA Administrator. Subtitle VII, Aviation Programs, describes in more detail the scope of the agency's authority. This rulemaking is promulgated under the authority described in Subtitle VII, Part, A, Subpart I, Section 40103. Under that section, the FAA is charged with prescribing regulations to assign the use of airspace necessary to ensure the safety of aircraft and the efficient use of airspace. This regulation is within the scope of that authority as it would amend Class D and E airspace at Sioux Gateway/Col. Bud Day Field, Sioux City, IA.

Interested parties are invited to participate in this proposed rulemaking by submitting such written data, views, or arguments, as they may desire. Comments that provide the factual basis supporting the views and suggestions presented are particularly helpful in developing reasoned regulatory decisions on the proposal. Comments are specifically invited on the overall regulatory, aeronautical, economic, environmental, and energy-related aspects of the proposal. Communications should identify both docket numbers and be submitted in triplicate to the address listed above. Commenters wishing the FAA to acknowledge receipt of their comments on this notice must submit with those comments a self-addressed, stamped postcard on which the following statement is made: “Comments to Docket No. FAA-2015-7487/Airspace Docket No. 15-ACE-7.” The postcard will be date/time stamped and returned to the commenter.

An electronic copy of this document may be downloaded through the Internet at http://www.regulations.gov. Recently published rulemaking documents can also be accessed through the FAA's Web page at http://www.faa.gov/airports_airtraffic/air_traffic/publications/airspace_amendments/.

You may review the public docket containing the proposal, any comments received, and any final disposition in person in the Dockets Office (see the ADDRESSES section for the address and phone number) between 9:00 a.m. and 5:00 p.m., Monday through Friday, except federal holidays. An informal docket may also be examined during normal business hours at the Federal Aviation Administration, Air Traffic Organization, Central Service Center, Operations Support Group, 10101 Hillwood Parkway, Fort Worth, TX 76177.

Persons interested in being placed on a mailing list for future NPRMs should contact the FAA's Office of Rulemaking, (202) 267-9677, for a copy of Advisory Circular No. 11-2A, Notice of Proposed Rulemaking Distribution System, which describes the application procedure.

This document would amend FAA Order 7400.9Z, Airspace Designations and Reporting Points, dated August 6, 2015, and effective September 15, 2015. FAA Order 7400.9Z is publicly available as listed in the ADDRESSES section of this document. FAA Order 7400.9Z lists Class A, B, C, D, and E airspace areas, air traffic service routes, and reporting points.

The FAA is proposing an amendment to Title 14 Code of Federal Regulations (14 CFR) Part 71 by modifying Class E surface area airspace and Class E airspace extending upward from 700 feet above the surface at Sioux Gateway/Col. Bud Day Field, Sioux City, IA. The Class E airspace area designated as an extension also would be removed as the extension is no longer needed. Decommissioning of the Gateway NDB and cancellation of the NDB approaches due to advances in GPS capabilities have made airspace reconfiguration is necessary at this airport. The geographic coordinates noted in Class D and E surface area airspace for South Sioux City, Martin Field, NE, also would be adjusted.

Class D and E airspace designations are published in paragraphs 5000, 6002, 6004 and 6005, respectively, of FAA Order 7400.9Z, dated August 6, 2015, and effective September 15, 2015, which is incorporated by reference in 14 CFR 71.1. The Class E airspace designations listed in this document will be published subsequently in the Order.

The FAA has determined that this regulation only involves an established body of technical regulations for which frequent and routine amendments are necessary to keep them operationally current, is non-controversial and unlikely to result in adverse or negative comments. It, therefore: (1) Is not a “significant regulatory action” under Executive Order 12866; (2) is not a “significant rule” under DOT Regulatory Policies and Procedures (44 FR 11034; February 26, 1979); and (3) does not warrant preparation of a regulatory evaluation as the anticipated impact is so minimal. Since this is a routine matter that will only affect air traffic procedures and air navigation, it is certified that this rule, when promulgated, would not have a significant economic impact on a substantial number of small entities under the criteria of the Regulatory Flexibility Act.

This proposal will be subject to an environmental analysis in accordance with FAA Order 1050.1F, “Environmental Impacts: Policies and Procedures” prior to any FAA final regulatory action.

Accordingly, pursuant to the authority delegated to me, the Federal Aviation Administration proposes to amend 14 CFR part 71 as follows:

Authority for This Rulemaking

The FAA's authority to issue rules regarding aviation safety is found in Title 49 of the United States Code. Subtitle I, Section 106 describes the authority of the FAA Administrator. Subtitle VII, Aviation Programs, describes in more detail the scope of the agency's authority. This rulemaking is promulgated under the authority described in Subtitle VII, Part, A, Subpart I, Section 40103. Under that section, the FAA is charged with prescribing regulations to assign the use of airspace necessary to ensure the safety of aircraft and the efficient use of airspace. This regulation is within the scope of that authority as it would amend Class E airspace at De Quincy Industrial Airpark, De Quincy, LA; Homer Municipal Airport, Homer, LA; Minden-Webster Airport, Minden, LA; and Slidell, Airport, Slidell, LA.

Interested parties are invited to participate in this proposed rulemaking by submitting such written data, views, or arguments, as they may desire. Comments that provide the factual basis supporting the views and suggestions presented are particularly helpful in developing reasoned regulatory decisions on the proposal. Comments are specifically invited on the overall regulatory, aeronautical, economic, environmental, and energy-related aspects of the proposal. Communications should identify both docket numbers and be submitted in triplicate to the address listed above. Commenters wishing the FAA to acknowledge receipt of their comments on this notice must submit with those comments a self-addressed, stamped postcard on which the following statement is made: “Comments to Docket No. FAA-2016-4429/Airspace Docket No. 16-ASW-8.” The postcard will be date/time stamped and returned to the commenter.

An electronic copy of this document may be downloaded through the Internet at http://www.regulations.gov. Recently published rulemaking documents can also be accessed through the FAA's Web page at http://www.faa.gov/airports_airtraffic/air_traffic/publications/airspace_amendments/.

You may review the public docket containing the proposal, any comments received, and any final disposition in person in the Dockets Office (see the ADDRESSES section for the address and phone number) between 9:00 a.m. and 5:00 p.m., Monday through Friday, except federal holidays. An informal docket may also be examined during normal business hours at the Federal Aviation Administration, Air Traffic Organization, Central Service Center, Operations Support Group, 10101 Hillwood Parkway, Fort Worth, TX 76177.

Persons interested in being placed on a mailing list for future NPRMs should contact the FAA's Office of Rulemaking, (202) 267-9677, for a copy of Advisory Circular No. 11-2A, Notice of Proposed Rulemaking Distribution System, which describes the application procedure.

This document would amend FAA Order 7400.9Z, Airspace Designations and Reporting Points, dated August 6, 2015, and effective September 15, 2015. FAA Order 7400.9Z is publicly available as listed in the ADDRESSES section of this document. FAA Order 7400.9Z lists Class A, B, C, D, and E airspace areas, air traffic service routes, and reporting points.

The FAA is proposing an amendment to Title 14 Code of Federal Regulations (14 CFR) Part 71 by modifying Class E airspace extending upward from 700 feet above the surface within a 7.5-mile radius of De Quincy Industrial Airpark, De Quincy, LA; within a 6.5-mile radius of Minden-Webster Airport, Minden, LA; and within a 6.5-mile radius of Slidell Airport, Slidell, LA, with segments extending from the 6.5-mile radius to 9.2 miles north, and 9 miles south of the airport. Airspace reconfiguration is necessary due to the decommissioning of NDBs, cancellation of NDB approaches, and implementation of RNAV procedures at the above airports. The Class E airspace area extending upward from 700 feet above the surface within a 6.8-mile radius of Homer Municipal Airport, Homer, LA, would be removed as controlled airspace is no longer needed. Controlled airspace is necessary for the safety and management of the standard instrument approach procedures for IFR operations at the airports.

Class E airspace designations are published in paragraph 6005 of FAA Order 7400.9Z, dated August 6, 2015, and effective September 15, 2015, which is incorporated by reference in 14 CFR 71.1. The Class E airspace designations listed in this document will be published subsequently in the Order.

The FAA has determined that this regulation only involves an established body of technical regulations for which frequent and routine amendments are necessary to keep them operationally current, is non-controversial and unlikely to result in adverse or negative comments. It, therefore: (1) Is not a “significant regulatory action” under Executive Order 12866; (2) is not a “significant rule” under DOT Regulatory Policies and Procedures (44 FR 11034; February 26, 1979); and (3) does not warrant preparation of a regulatory evaluation as the anticipated impact is so minimal. Since this is a routine matter that will only affect air traffic procedures and air navigation, it is certified that this rule, when promulgated, would not have a significant economic impact on a substantial number of small entities under the criteria of the Regulatory Flexibility Act.

This proposal will be subject to an environmental analysis in accordance with FAA Order 1050.1F, “Environmental Impacts: Policies and Procedures” prior to any FAA final regulatory action.

Accordingly, pursuant to the authority delegated to me, the Federal Aviation Administration proposes to amend 14 CFR part 71 as follows:

The Commission is proposing to amend the agency's Rules of Practice for Adjudicative Proceedings. 16 CFR part 1025. The proposed rule reflects changes in civil and administrative litigation since adoption of the Rules in 1980.

The Consumer Product Safety Act (15 U.S.C. 2064(c), (d), (f); 2076(b)) (“CPSA”), the Federal Hazardous Substances Act (id. 1274) (“FHSA”), the Flammable Fabrics Act (id. 1192, 1194, 1197(b)) (“FFA”), the Poison Prevention Packaging Act (id. 1473(c)) (“PPPA”), and the Virginia Graeme Baker Pool and Spa Act, (id. 8003) (“VGBA”) authorize the Commission to initiate and conduct adjudicative proceedings related to the safety of certain consumer products, and, based on the Commission's findings, issue orders or take other action to protect the public. Under the requirements of the cited statutes, such adjudicative proceedings must be determined on an administrative record after opportunity for a public hearing.

Under the Administrative Procedure Act (“APA”) (5 U.S.C. 500 et seq.), adjudications mandated by statute to be determined on the record after opportunity for a public hearing are subject to certain procedural requirements. These requirements include notice of the time, place and nature of the hearing, information about the legal authority under which the hearing is to be held, and information on the matters of fact and law asserted. (Id. 554(a)-(b)). The Commission adopted the Rules of Practice to govern adjudicative hearings under its enabling statutes and other administrative proceedings, as determined by the Commission.

The Rules of Practice were first proposed by the Commission in 1974, for use on an interim basis. (39 FR 26848, July 23, 1974). In 1977, the Commission revised the Rules of Practice, publishing them for use on an interim basis and for public comment. (42 FR 31431 (interim rules); 42 FR 36818 (issuing correction). In 1980, after considering public comments and the Commission's experiences with the existing interim rules, the Commission adopted the Rules of Practice. (45 FR 29215, May 1, 1980). The Commission last amended the Rules of Practice in 1982 to make them applicable to hearings required by section 15 of the FHSA (47 FR 46845, Oct. 21, 1982).

On May 12, 2015, the Commission voted to direct staff to present for Commission consideration a revision of the Rules of Practice, with the goal of streamlining future adjudications and aligning the Rules of Practice with the Federal Rules of Civil Procedure.

Since the 1980s, when the Commission last amended the Rules of Practice, the Commission's model, the Federal Rules, have been substantially revised. Among other things, these changes altered the pretrial process, providing new discovery standards intended to increase the speed and efficiency of litigation.

Prominent among these changes were detailed rules requiring parties to cooperate in pre-discovery and pre-trial planning. For example, the Federal Rules now require an affirmative pre-discovery disclosure by each party of information, documents, ESI, and other evidence that the party may use to support its claims or defenses. The Federal Rules also require participation by parties in pre-discovery and pretrial conferences, with the aim of focusing the issues to be adjudicated. Along with these changes have come new limits on formal discovery tools, including interrogatories, document requests, and depositions. In addition to proposing that our Rules of Practice follow the scope of discovery stated in Rule 26 of the Federal Rules, we are proposing to follow, with certain changes, the Federal Rules' procedures on mandatory disclosures of information and the Federal Rules' limits on formal discovery tools, by adhering to the Federal Rules on interrogatories, requests for documents and things, depositions, and requests for admission. We believe that changing our Rules of Practice to require affirmative pre-discovery disclosure, mandate participation in pre-discovery and prehearing conferences, and impose limits on wasteful discovery practices will streamline the adjudicative process, and thereby, advance our goal of establishing expeditious and fair proceedings.

Recent changes in the Federal Rules have also placed substantial focus on the discretionary powers of Presiding Officers. Under these rules, the judge or magistrate may limit or expand discovery, and on motion, or on his or her own initiative, may tailor the pace of the adjudication and the scope and length of discovery based on the issues in each case. We are proposing to follow, with appropriate changes, the Federal Rules' emphasis on empowering the Presiding Officer to use his or her discretion to control the pace and progress of discovery. In our proposed Rules of Practice, the Presiding Officer would be an active participant in the discovery process, with powers to actively manage cases to avoid delays and forestall inefficient or wasteful discovery.

The Federal Rules provide substantial guidance on the discoverability and use of ESI because, increasingly, information is stored in digital form. Our proposed Rules of Practice would largely follow the Federal Rules' guidance on the discoverability of electronic evidence.

In addition to aligning our Rules of Practice with the Federal Rules, the changes we propose would increase the efficiency and decrease the burden of preparing for and litigating administrative hearings. For example, we propose to update our Rules of Practice on consolidating cases to allow the Presiding Officer to consolidate cases, fully or partially, for discovery and/or for hearing, on a party's motion, or at the Presiding Officer's discretion.

Additional proposed changes would adapt the Rules of Practice to the general needs of administrative litigation, based on the experiences of Commission staff in adjudicative proceedings. In each case, we propose to emphasize the discretion of the Presiding Officer to facilitate quick, fair, and efficient discovery and trial of adjudicative matters. Although we would vest significant discretion in the Presiding Officer, we would, nevertheless, seek to impose timelines on the adjudicative proceeding and deadlines on the Presiding Officer, requiring initial decisions to be made within set time frames.

Another important reason for updating our Rules of Practice is to clarify the process for amending complaints authorized by the Commission. We propose to update our Rules of Practice to provide clearer guidance on when amendments require Commission consideration.

We also propose to revise our Rules of Practice to permit electronic filing and service of pleadings and documents and to discourage filing of paper documents. Likewise, we propose to revise the existing requirement that the Commission's Secretariat maintain an official paper file, a practice that is cumbersome and fails to reflect significant technological advancements. We also propose to revise our Rules of Practice regarding service of process to accommodate electronic service of most documents and pleadings and to recognize the use of common carriers in the delivery of paper documents. Likewise, we propose to clarify our Rules of Practice regarding motions for summary decisions, amending that section to follow more closely the Federal Rules.

The proposal would revise § 1025.1, Scope of rules, to clarify that, in addition to adjudicative proceedings related to the CPSA, the FHSA, and the FFA, the Commission also is empowered to conduct adjudications under the PPPA and the VGBA. Specifically, our proposed revision would clarify that the Commission may conduct adjudicative proceedings under Section 4(c) of the PPPA and Section 1404 of the VGBA. We propose to add appropriate references to these statutes and make additional minor changes for clarity in our Rules of Practice.

In addition, the proposal would revise § 1025.1 to remove the existing statement that the Rules of Practice govern adjudicative proceedings for the assessment of civil penalties under section 20(a) of the CPSA. Pursuant to a statutory change, such actions are now litigated in U.S. District Court, rather than before the Commission. Therefore, the current language in our Rules of Practice is unnecessary and inaccurate, as is a statement on the limited scope of discovery in civil penalty cases, which we also propose to remove.

We also propose new language in § 1025.1 to establish the Commission's health and safety mission as a critical concern the Presiding Officer must take into account when establishing deadlines and managing cases. When a matter fails to proceed in a timely manner, it not only results in increased costs and uncertainty for the parties and participants, it can also undermine the agency's statutory obligation to protect the public against unreasonable risks of injury and death associated with consumer products. The Commission expects that the Presiding Officer shall, whenever possible, and in in the interest of protecting public health and safety, expedite proceedings by setting shorter time limitations than the maximum limits imposed by the rules, with the goal of issuing an Initial Decision within 1 year from the date of the complaint.

As part of our goal of aligning the Rules of Practice with the updated Federal Rules, we also propose to add a statement to § 1025.1, indicating that, except where stated otherwise, parties shall follow the Federal Rules on certain discovery matters. We believe that following the Federal Rules on discovery matters would streamline the discovery process, and thereby introduce increased efficiencies to advance our goal of avoiding unnecessary delay. Through this change, we would redefine the scope of discovery to encompass Rule 26 of the Federal Rules, and would follow generally, with some stated exceptions discussed below, the Federal Rules' procedures on pretrial discovery, including interrogatories (Fed. R. Civ. P. 33); production of documents, electronically stored information, and tangible things (Fed. R. Civ. P. 34); requests for admission (Fed. R. Civ. P. 36); and depositions (Fed. R. Civ. P. 30-32). We would not follow the Federal Rules on subpoenas, which by statute, requires Commission approval. We also propose additional minor and non-substantive changes to the Rules of Practice for clarity.

One of our goals in revising our Rules of Practice is to update the Rules of Practice to reflect current litigation practices and advances in technology. To recognize that ESI, i.e., information created, manipulated, communicated, stored, and best utilized in digital form, or requiring the use of computer software and hardware, has become a significant part of civil discovery, we propose in new § 1025.3(e) to follow the definition of ESI in the Federal Rules. We believe this definition would provide clarity and allow parties and participants to be guided by the developing case law and scholarship on electronic discovery.

We also propose several additional non-substantive changes, including a new § 1025.3(f) that would reference our rule on ex parte communications. We further propose to add a new § 1025.3(g) to clarify that references to the Federal Rules throughout this proposed rule refer to the Federal Rules of Civil Procedure. Because we propose additional paragraphs, we would also re-designate the paragraphs in this section to reflect these changes. Finally, we propose a clarified definition of CPSC's “Secretariat” in current § 1025.3(n).

Section 1025.11 sets out requirements for the filing of a complaint in an adjudicative proceeding. In § 1025.11(a), we propose revisions to reflect organizational changes within the Commission since adoption of the current Rules of Practice. Complaint Counsel would be authorized to sign a complaint following Commission approval, rather than the Assistant Executive Director for Compliance and Enforcement, as the current rule requires.

Currently, § 1025.11(b)(3) requires that a complaint contain “[a] list and summary of documentary evidence supporting the charges.” We propose eliminating this requirement given the mandatory disclosures of evidence set forth in Federal Rule 26(a)(1)(A), which we propose following as part of § 1025.31, General provisions governing discovery, discussed below.

We propose adding a new § 1025.11(d) to clarify that a Commission action to obtain a preliminary injunction from a federal district court pursuant to 15 U.S.C. 2064(g) shall not serve as the basis to stay proceedings under these rules. In light of the extensive time frame for resolving matters in adjudicative proceedings, it is the Commission's strong expectation that if the respondent fails to agree to stop sale and distribution of a product which the Commission has reason to believe presents a substantial product hazard, Commission staff will, within a reasonable amount of time following the commencement of proceedings under this part 1025, apply to a district court of the United States for the issuance of a preliminary injunction (pursuant to 15 U.S.C. 2064(g)) to restrain the distribution in commerce of such product pending the completion the adjudicative proceedings. For this reason, and in furtherance of its mission to protect public health and safety, the Commission strongly urges the Presiding Officer to, whenever practicable, shorten the time limitations imposed by these rules and endeavor to issue an Initial Decision as soon as possible.

We also propose several additional minor and non-substantive changes in grammar throughout this paragraph.

Section 1025.13, titled, Amendments and supplemental pleadings, currently states that the Presiding Officer may allow appropriate amendments and supplemental pleadings which do not unduly broaden the issues in the proceedings or cause undue delay. When this section was initially proposed in 1977, commenters expressed concern that granting such broad discretion risked “usurping the Commission's function” to serve as the sole source of administrative litigation seeking to compel recall of consumer products. 45 FR 29 206-207 (May 1, 1980). At the time, stating that the Rules “provide adequate procedures for the parties to argue their respective positions and an adequate framework for the exercise of the broad discretion vested in the Presiding Officer,” the Commission concluded that, under § 1025.13, “neither the Presiding Officer nor the Commission staff is usurping the Commission function.” 45 FR 29208. We now believe it may be helpful to provide additional clarity.

The Commission proposes to amend § 1025.13 to require that the Presiding Officer refer to the Commission any amendment that would (1) have the effect of adding to or removing from the litigation any party or count, (2) fall outside the scope of an authorized complaint, or (3) broaden staff's authority under a complaint.

As an initial matter, we are proposing to revise the title of this section to Form and filing of pleadings and other documents to clarify that the requirements of this section pertain to pleadings, as well as other documents. In § 1025.14(a), we propose that all pleadings and documents shall be filed electronically with the Secretariat and the Presiding Officer, unless the Presiding Officer orders otherwise. We propose this change because the rule, as written, is outdated and does not reflect current practice for filing pleadings and evidence electronically, which has become the norm in most state and federal courts. Moreover, the current rule requires the Office of the Secretary to maintain the official file, in paper format, access to which is limited by the operational hours of the Commission. Thus, our proposed change would not only reflect current technological advances, but the change also would expand public access to the official file. The proposed rule would, however, allow the Presiding Officer discretion to permit exceptions to the electronic filing requirement so that paper documents may be filed if the Presiding Officer so orders.

To emphasize our preference for electronic filing, we propose to omit existing language stating that documents “may be filed in person or by mail.” We also propose changes, consistent with our proposal on electronic filing, establishing the filing date for documents. Electronically filed documents would be deemed filed on the date of the electronic filing; however, recognizing the broad discretion afforded the Presiding Officer, we propose adding language stating that the Presiding Officer may allow alternative methods of filing, by order, and that such order shall state the applicable date on which such pleadings or documents are deemed filed.

New language in proposed § 1025.14(c) would also eliminate our current requirement that three copies of pleadings be filed, a superfluous requirement in an era where digital copies are created easily. Under our proposed change, a single electronic copy must be filed with the Secretariat and the Presiding Officer; however, we propose to add language that acknowledges that the Presiding Officer may order paper filings.

In § 1025.14(d), we would require that the original of each document that is filed electronically be signed electronically.

Section 1025.14(e) currently anticipates filing of paper documents, and sets standards for such filings. We propose to amend this paragraph to establish requirements that address the electronic filing of pleadings and documents. In § 1025.14(e)(1), we would require an electronic address in addition to a mailing address. Section 1025.14(e)(2) would require filing electronic text documents in a format that uses 12-point font with double spacing and prints on standard letter-sized paper with 1-inch margins. This paragraph also would include the requirement that electronic documents and files that cannot be readily printed, such as large spreadsheets, videos, or photographs, be identified by technical format and also include information on the program or protocol required to review the information. The font, spacing and margin requirements are consistent with Rule 32 of the Federal Rules of Appellate Procedure and Rule 102(a)(b) of the U.S. District Court for the District of Maryland.

We also propose to update § 1025.14(e)(3), which currently states: “[d]ocuments that fail to comply with this section may be returned by the Secretary.” Under the proposed § 1025.14(e)(3), documents that do not meet the filing requirements, or electronic documents that cannot be opened or read, may be returned to the filer by the Secretariat or the Presiding Officer. Lastly, we propose to add language to § 1025.14(e)(3) to allow a Presiding Officer to permit deviation from the form prescribed in this section, for good cause shown, a change that underscores our goal of vesting broad discretion in the Presiding Officer to maximize efficiency and flexibility in how an adjudication proceeds.

In § 1025.15(a) we would make several non-substantive changes, including a clarification of the title to make clear that the computation of time refers to days. We also would make clear that “day” means calendar day. We further propose to clarify the existing language to state that the day on which the event triggering the period shall not be included in the calculation of time, but each calendar day thereafter shall; and that if the last day of the time period falls on a weekend or legal holiday, the time period shall be tolled until the next day that is not a weekend or a legal holiday. We also propose to update this section to delete references to specified legal holidays in the existing rule and refer instead to the legal public holidays identified in 5 U.S.C. 6103. This revision would include Martin Luther King, Jr.'s birthday as a holiday and would allow the Rules of Practice to reflect any changes to the list of legal public holidays made in the future.

We further propose to amend § 1025.15(b) to state that whenever a party is required or permitted to do an act within a prescribed period after service of a document and the Presiding Officer permits service by mail, three (3) days shall be added to the prescribed period. This amendment recognizes that while electronic service is preferred, service by mail may be allowed by order of the Presiding Officer; if such service is made by mail, three additional days would be added to the date by which the recipient must perform a subsequent action.

In § 1025.15(c) regarding the extension of time limits, we propose to add language clarifying that initial decisions are decisions issued under § 1025.51 of the Rules of Practice.

We also propose to add a new paragraph (d), which would be titled Stay of proceedings, to clarify that if a stay of proceedings is granted by order of the Presiding Officer or Commission, the time limits specified in these rules shall be automatically tolled during the period while the stay is in effect.

We propose several changes to § 1025.16, titled, Service, to reflect current litigation practice and advancements in technology. First, we propose to revise § 1025.16(a) to reflect proposed changes to § 1025.14 that would require the Presiding Officer to maintain the official file for an adjudicative proceeding, if practicable. Second, our proposed § 1025.16(b) would remove subpoenas from the service requirements of this section because we address those requirements in § 1025.28(e), discussed below. We also propose a new § 1025.16(b)(1) that would allow service of a complaint, ruling, petition for interlocutory appeal, order, or decision to be made by electronic means if ordered by the Presiding Officer or by agreement of the parties. We also propose renumbering the subparagraphs of § 1025.16(b) to reflect this addition. Third, in proposed § 1025.16(b)(2), we would permit service by commercial carrier, a change that reflects common practice today.

We also propose in § 1025.16(b)(3) to add “a limited liability company” to the list of corporate entities that may be served, and would add “entity” in the title of the paragraph, for clarity. We propose this change to capture the types of legal entities that exist and may be the subject of an administrative complaint. Finally, we propose to add language in new § 1025.16(b)(4) that, recognizing the preference for electronic service of documents, clarifies the circumstances in which delivery of a document to an address is appropriate.

In § 1025.16(c), we would establish electronic service as the primary mode of service for other documents, unless otherwise ordered by the Presiding Officer or agreed to by the parties. Proposed changes to § 1025.16(e), which provides a form for certificates of service, and § 1025.16(f), which sets the date of service of documents, would provide for electronic filing. Consistent with the establishment of electronic filing, we propose to delete reference in § 1025.16(e) to “the original of every document,” and instead, require that “every document” be accompanied by a certificate of service.

We are proposing to revise § 1025.17(a), (b), and (c) to identify accurately the Secretariat of the Commission. We also propose to correct a typographical error in § 1025.17(c)(5). We do not intend these changes to be substantive.

We are proposing to revise § 1025.18(a)(1) for clarity. The general word “class” would be replaced with the more specific phrase “class of respondents.”

We propose to revise the title of § 1025.19, currently Joinder of proceedings, to Consolidation of proceedings because the rule, modeled on Rule 19 of the Federal Rules, actually describes consolidation, rather than joinder, a different legal concept. In addition, we propose new § 1025.19(a) to state that the Presiding Officer or the Commission may order the actions involving a common question of law or fact be consolidated for any purpose if the Presiding Officer finds that consolidation will “avoid unnecessary cost or delay.” This would change the current rule, which permits the Presiding Officer or the Commission to consolidate actions only “for the purpose of hearing or Commission review.” This proposed language expands the authority of the Presiding Officer to consolidate actions or portions of actions, as appropriate, a change that is consistent with our goal of assigning broad discretion to the Presiding Officer in the conduct of a proceeding. In practice, the current rule may lead to uncertainty about whether cases may be consolidated for limited purposes, such as discovery, where there are multiple respondents. Under the proposed rule, we make clear that the Presiding Officer may order partial consolidations on issues including, but not limited to, discovery, pretrial procedure, and/or hearing.

We propose to add a new § 1025.19(b), including insertion of a title, for clarity.

We propose changes to § 1025.21, Prehearing conferences, to reflect updated procedures in the Federal Rules. Specifically, the proposed changes would require a preliminary meeting of the parties before discovery commences, followed by an initial prehearing conference with the Presiding Officer. We believe these preliminary steps would streamline the process, focus the issues, and advance our goal of achieving a fair and expeditious proceeding.

Under proposed § 1025.21(a), the parties would be required to conduct a preliminary meeting no later than 5 days after the answer is due by the last answering party. At the preliminary meeting, the parties would be directed to discuss the nature and basis of their claims and defenses and the possibilities for settlement or resolution of the case. The proposed change also would require parties to attempt to agree on a proposed discovery plan with a schedule for depositions of fact witnesses, the production of documents and ESI, and the timing of expert discovery. In addition, the proposed revision would require the parties to seek agreement on the scope of electronic discovery, including specified time periods for which electronic information is sought, and agree on the format in which electronic discovery would be produced. The parties also would be required to develop a preliminary time estimate for the evidentiary hearing and to attempt to reach agreement on any other matters to be determined at the prehearing conference. We believe these changes would help expedite the process by setting an earlier deadline for a meeting of the parties and by having the parties resolve issues through mutual agreement.

Under proposed § 1025.21(b), which would be titled, Initial prehearing conference, we propose to modify the issues to be discussed at the prehearing conference to provide a more concise list of issues to be addressed. We believe a tailored agenda for the prehearing conference would maximize efficiency and concentrate focus on major issues. At the initial prehearing conference, the parties, with the guidance of the Presiding Officer, would address a range of issues, including their factual and legal theories, the current status of pending motions or petitions, the date for the evidentiary hearing, steps taken to preserve evidence, and the scope of anticipated discovery and a discovery plan. This list would be for illustrative purposes only and would not be intended to restrict the topics that could be discussed at the prehearing conference under the proposed revision to this section.

In § 1025.21 we also propose to re-designate existing paragraph (b), Public notice, as paragraph (c), and to re-designate existing paragraph (c), Additional conferences, as paragraph (e).

Under proposed § 1025.21(d), the Presiding Officer would be required to enter an order setting forth the results of the initial prehearing conference, establishing a timeline for discovery, motions, and any other appropriate matters. We make this proposal to address the inadequacy of the current requirement that the Presiding Officer issue a prehearing order only after the conclusion of the final prehearing conference, a point late in the process that does not provide sufficient time for potential resolution of issues. We believe that the parties and the Presiding Officer would benefit from establishing a schedule earlier in the proceedings, and we also trust that such a schedule would clarify issues and expedite the proceedings. In addition, in § 1025.21 we propose to re-designate existing paragraph (d), Reporting, as paragraph (h), and make it consistent with our proposal in § 1025.41(a) to exclude Commissioners and their staffs from attending or viewing public hearings prior to the Presiding Officer's initial decision. In paragraph (e), which we propose to re-designate paragraph (g), we would revise the title to be Final prehearing order, for clarity. We also propose to remove references to the format set forth in appendix I, because, as discussed below, we are proposing to delete the appendix.

Under proposed § 1025.21(f), we would require a final prehearing conference as close to the evidentiary hearing as practicable. Under the current rules, it is not clear that such a conference should occur; our proposed change would make clear that such a conference would be mandatory. We believe that such a conference would benefit the parties and the Presiding Officer by focusing the issues before the hearing and resolving final evidentiary matters.

We are proposing to revise this section to require the filing of prehearing briefs, which, under the current Rules, are discretionary. We believe that prehearing briefs should be mandatory because information contained in these briefs would set the necessary framework for the proceeding, clarifying the facts to be proven, the order of proof, and the issues to be decided.

We propose to change this section to clarify rules governing the filing of motions. Under the current rule, all motions, except for disqualification motions, must be addressed to the Presiding Officer. Our proposed revision to § 1025.23(a) would add subpoena applications to the list of motions that would not be addressed to the Presiding Officer. We propose this change because subpoena applications follow distinct procedures set forth in § 1025.38(c), discussed below. In § 1025.23(b), we propose a minor, non-substantive clarification, changing “Secretary” to “Secretariat.” Proposed changes in § 1025.23(c) would include a revision of the title to Response and replies, which reflects our proposed addition regarding reply briefs. We also would expand the time to respond to motions from 10 days to 14 days because, in staff's experience, 10 days does not provide adequate time to respond to a motion, particularly when weekend days are considered in the computation. We believe the addition of 4 days to respond to a motion would provide sufficient time to prepare and submit a response without burdening the process with unnecessary delay. Additionally, this paragraph would expressly permit replies, which currently are available only by leave of the Presiding Officer or the Commission. In our experience, replies are granted routinely, and this change merely recognizes that practice, eliminating the unnecessary step of seeking leave. This paragraph also would permit the Presiding Officer (or the Commission, as the case may be), to authorize the filing of additional briefs, on good cause shown, a change that reflects our belief that the broad authority to administer a proceeding should be vested with the Presiding Officer. We further propose that additional briefs, if permitted, must be filed within 5 days after service of the pleading to which the brief replies.

Section 1025.24 currently lists four exceptions to the general rule against interlocutory appeals. Proposed § 1025.24 would add a fifth exception, permitting interlocutory appeal where the Presiding Officer grants or denies a motion to amend a complaint under § 1025.13. The proposed revisions to § 1025.13 are intended to reiterate that only the Commission is empowered to issue administrative complaints and that any amendments cannot have that effect without Commission approval. This revision to § 1025.13 is intended to ensure that, if a party believes the Presiding Officer has improperly ruled on such an amendment without Commission approval, that party will have the opportunity to appeal that ruling immediately, without being compelled to litigate a matter in order to obtain a Commission decision on whether or not that party should be in the litigation at all.

We propose to revise § 1025.24(b)(1)(ii) to clarify that nature of the proceeding from which an interlocutory appeal may be filed. We propose to revise § 1025.24(b)(2) to state that the Commission may decide a petition for an interlocutory appeal based on the existing record, or the Commission may request additional briefing and oral presentation. As written, the rule currently imposes an obligation on the Commission to decide the petition or request further briefing. Our proposed change makes clear that such a binary decision is not required and that the Commission has the option of deciding the petition based on the record, or the Commission may request further briefing or oral presentation.

We are proposing changes to § 1025.25(a) to align our rule more closely with Rule 56 of the Federal Rules. Under our current Rules of Practice, the movant does not have to file a statement of material facts not in dispute, nor does the respondent have to file a statement of material facts that respondent contends are in dispute. The proposed change would require that motions and oppositions to motions be accompanied by separate statements of material facts about which the movant asserts there is no dispute and about which the opposing party contends there is a genuine dispute. We believe this change will enhance efficiency because filing statements of material fact would help pinpoint the primary issues in dispute. We also propose to revise § 1025.25(a) to conform to changes we propose to § 1025.21, discussed above, to state that a summary decision motion be filed in accordance with any prehearing order issued by the Presiding Officer. The time for filing the motion would also be defined, providing that such motions to be filed up to thirty (30) days following the close of discovery. We are proposing this change because we believe this time period would afford the Presiding Officer sufficient time to carefully consider such motions, and would encourage resolution of part or all the matter well in advance of the scheduled hearing date.

We also propose to revise § 1025.25(b) to require that a response to a summary decision motion be accompanied by a statement of material facts that the opposing party contends are in dispute, a change that will enhance focus on the main issues in dispute. We also propose to modify § 1025.25(c) to add specific items in the record that should be considered by the Presiding Officer in resolving the motion, a change that mirrors Rule 56 of the Federal Rules.

We are proposing to revise § 1025.26(b) to clarify that motions that request that the Presiding Officer transmit a proposed consent agreement to the Commission must be filed in camera. In addition, we propose to amend this paragraph to state that offers of settlement shall be served on complaint counsel. Thus, the revised rule would ensure that complaint counsel would be apprised of any non-jointly submitted offers of settlement. Under the current rule, a party may submit any settlement offer to the Commission without notifying complaint counsel. Because we are proposing in this rule to remove the ex parte prohibition on communications in the context of settlement agreements, discussed in § 1025.68, we are proposing that complaint counsel be made aware of all such offers so that complaint counsel can communicate knowledgeably to the Commission about the substance of such offers.

In § 1025.26(c)(1) through (4), we propose a number of non-substantive editorial changes. In § 1025.26(c)(5), we propose to add language that an offer of settlement should also include a list of “acts or practices that the respondent shall affirmatively undertake.” This addition acknowledges the authority of the Commission, after an opportunity for hearing, to order a firm to undertake certain actions pursuant to section 15(d) of the CPSA.

Under current § 1025.26(d), the Presiding Officer may transmit to the Commission offers of settlement that meet the requirements of form and content set forth in § 1025.26(c). We propose to revise this paragraph to require the Presiding Officer to transmit all non-frivolous, non-duplicative settlement offers to the Commission, removing the discretion provided to the Presiding Officer in the current rule. We propose this change because we believe the Commission should review all non-frivolous, non-duplicative settlements with the goal of advancing resolution of a matter, if possible. In addition, we propose that, to be transmitted, such an offer must comply with the requirements of § 1025.26(b), as well as § 1025.26(c).

We also are proposing non-substantive changes in § 1025.26(e) and (g).

The Commission proposes to revise § 1025.31(a) to require parties to conduct discovery in accordance with Rule 26 of the Federal Rules, with several exceptions, discussed below. Rule 26 imposes a number of requirements, such as requiring initial disclosures, prehearing conferences, scope of discovery, and limitations on the timing, frequency and extent of discovery. Rule 26 also sets forth provisions governing discovery of material prepared in anticipation of trial, expert discovery, and requests for protective orders. Under the current rule, methods, sequence and scope of discovery are addressed in a general fashion. We believe that adopting the detailed procedures set forth in Rule 26 will achieve earlier and more meaningful coordination between the parties and will advance the efficient progress of an adjudicative proceeding.

Although we intend largely to follow Rule 26, we propose to depart from Rule 26 procedures in a number of ways. Specifically, regarding the time periods for discovery, we will not follow Rule 26 guidance and will instead allow schedules to be set at the discretion of the Presiding Officer, unless a specific time frame is set forth in our rules. We expect the Presiding Officer to set appropriate timelines as the facts may dictate or the comparative complexity of a matter requires. We also expect that, whenever possible, the Presiding Officer will shorten schedules, particularly where expedited hearings would serve the public interest, or where issues do not require expert discovery or lengthy evidentiary hearings.

In addition, in proposed § 1025.31(a), we would require that initial disclosure of information be produced no later than 5 days after the preliminary meeting of the parties. This proposed rule shortens the 14-day time frame for such disclosures that is afforded under the Federal Rule, a step that furthers coordination among the parties and encourages expeditious resolution of issues. We also propose that our proceedings not adhere to Rule 26 requirements that experts must produce a written report (Rule 26(a)(2)(B)) because such reports may not be practicable in adjudicative matters that proceed on an expedited schedule. We also adopt the provisions governing protective orders in Rule 26(c), but we have modified the Rule to recognize that in adjudicative proceedings under part 1025, such motions shall be made to and decided by the Presiding Officer. In addition, we propose that our proceedings not adhere to Rule 26(f) regarding conference timing, content, and discovery plan because such matters are governed by the proposed revisions to § 1025.21, which allow the Presiding Officer to impose deadlines and shorten time frames, as necessary.

Additionally, we propose changes in newly designated § 1025.31(b), Completion of discovery, to state that the 150-day standard discovery period controls fact discovery but does not control expert discovery, which may extend beyond the 150-day limit. Moreover, our proposed revisions would vest the Presiding Officer with the discretion to establish a time frame for completion of expert discovery. We propose these changes because in our experience expert discovery is more efficient after fact discovery is completed. For less complex matters, the Presiding Officer is vested with the discretion to shorten deadlines and time frames under § 1025.21 of this Rule. Because we are following Rule 26 in large part, we are proposing to omit current paragraphs (a) through (i). We also note that, in following Rule 26, parties are not required to file discovery with the Secretariat and the Presiding Officer. Instead, parties would serve discovery responses on each other, thus relieving the Secretariat and the Presiding Officer of the burden of maintaining a voluminous amount of information.

We propose to revise this section to follow Rule 33 of the Federal Rules (Interrogatories to Parties), including the number, scope, and timing of interrogatories, the requirements of answers and objections, and the option to produce business records, so that we can maximize efficiency and reduce undue delay. Under the proposed change, for example, interrogatories would be limited to 25. The current rules do not impose any limits, thereby inviting overly burdensome requests and potential abuse that could impede the progress of a matter. Adopting Rule 33 of the Federal Rules would allow the Presiding Officer to alter the limits on the frequency and extent of discovery pursuant to Rule 26(b).

Because we propose to follow the Federal Rules on interrogatories, we also propose to omit § 1025.32(a) through (d) of the current rules.

The Commission proposes to revise the title to Production of documents, electronically stored information, and tangible things; access for inspection and other purposes, to reflect the expanded types of information covered by this section. In addition, we propose to revise this section to follow, with one exception, Rule 34 of the Federal Rules (Producing Documents, Electronically Stored Information, and Tangible Things, or Entering onto Land, for Inspection and Other Purposes). This provision governs the number, scope, and timing of information requests, the requirements of responses and objections, and Rule 34's treatment of production of ESI. We believe this proposed change would maximize efficiency because the proposed procedure would align our discovery practice with discovery under the Federal Rules and case law interpreting the Federal Rules, and would provide specific direction on the discovery of ESI, which is not specifically addressed in our current rules. However, we propose to depart from Rule 34 regarding requests for subpoenas, and propose instead that requests for subpoenas be governed by § 1025.38 of our Rules of Practice, as discussed below. Because we propose to follow the Federal Rules for the production of documents, we also propose to omit § 1025.33(a) through (d).

We propose to revise this section to follow, with one exception, Rule 36 of the Federal Rules (Requests for Admission). We would not follow Rule 36 regarding the award of expenses under Rule 37(a)(5) because expenses are not authorized under our Rules of Practice; rather, parties may follow the procedures set forth in § 1025.70 of the Rules of Practice. Because we propose to follow the Federal Rules, we also propose to omit § 1025.34(a) through (c).

For efficiency reasons and ease of practice, we propose largely to follow the Federal Rules on depositions, which are familiar to most practitioners. Specifically, the Commission proposes to revise this section to follow Rule 30 (Depositions by Oral Examination), Rule 31 (Depositions by Written Questions), and Rule 32 (Using Depositions in Court Proceedings) of the Federal Rules, with certain exceptions discussed below. We propose that requests for subpoenas continue to be governed by § 1025.38 of our Rules of Practice. We also propose that provisions in the Federal Rules governing award of attorney's fees and expenses shall not apply. Because we propose to follow the Federal Rules, we also propose to omit § 1025.35(a) through (h).

We propose these changes because the procedures set forth in Federal Rule 30, for example, would facilitate the noticing of depositions by the parties and encourage cooperation among the litigants during the discovery process. Under our current rule, parties are required to obtain leave of the Presiding Officer to notice all depositions, and there is no limit on the number of depositions that may be noticed. Federal Rule 30 allows parties to notice depositions without leave in most circumstances, including if the parties have stipulated to the deposition and the deposition would not result in more than 10 depositions being taken by each party. In addition, a party wishing to depose a nonparty under the current rule is required to apply for a subpoena; Federal Rule 30 has no such requirement, which will expedite the discovery process. Our current rules also do not limit the length of a deposition, which can lead to protracted and costly depositions; Federal Rule 30, however, establishes a limit on the length of a deposition, limiting depositions to one 7- hour day, unless otherwise ordered by the court.

We also propose following Federal Rule 31, titled, Depositions by Written Questions, a practice not currently authorized by our Rules of Practice. We propose this addition because this discovery tool can be more efficient and less costly than an in-person deposition, and may facilitate a more streamlined use of additional discovery methods. We additionally propose following Federal Rule 32 titled, Using Depositions in Court Proceedings because the provisions of this rule address more comprehensively than § 1025.35, the appropriate uses of depositions, the objections to such use, and the form of presentation.

The Commission proposes to revise this section to include a requirement that motions to compel discovery include a certification that the movant has, in good faith, conferred or attempted to confer with the person or party failing to make disclosure. This change is consistent with the requirements in the Federal Rules (see Federal Rule 37(a)(1)), and we believe this change would encourage resolution of the issues between parties, without intervention by the Presiding Officer.

We propose to update this section to make it consistent with our proposed changes on electronic filing, discussed above, and for clarity.

We would revise § 1025.38(b) to properly identify the Secretariat. In addition, we propose to amend § 1025.38(c) and (d) to clarify the content of, and application process for, subpoenas. Specifically, we propose to remove the paper filing requirement, eliminate the requirement that applications be submitted in triplicate, and delete other requirements related to paper filing.

Additionally, in § 1025.38(e), we propose to allow subpoena service to nonparties, as set forth in § 1025.16(b)(2) through (5), which allows for service by a variety of means, but does not permit electronic service. Because nonparties may not have verified electronic addresses, and certification of receipt is not required, service of a subpoena by the other specified methods is more reliable. For parties, we propose allowing for service in any of the methods set forth in § 1025.16(b)(1) through (5). We believe these proposed changes would increase the efficiency of subpoena service because the revisions allow for multiple methods of service, and, in particular, permit electronic service among parties, where the parties have agreed to such methods of service or the Presiding Officer has permitted these methods of service. Additionally, § 1025.38(f) would permit, in addition to mail carrier service, return of service of subpoenas by commercial carrier, a change that reflects common practice today. We also propose to eliminate the requirement that a copy of the subpoena be returned to the Secretary. In addition to other minor and non-substantive changes in § 1025.38(g), we propose to clarify that a motion to quash or limit should be ruled on by the Commission as a time critical matter in accordance with the Commission Decision Making Procedures.

We propose deleting this section and other distinctions relating to the Flammable Fabrics Act (“FFA”) throughout these rules because they are no longer necessary in light of the Commission's enhanced authority set forth in section 214 of the Consumer Product Safety Improvement Act of 2008, which permits the Commission to take action under section 15 of the Consumer Product Safety Act for violations of that statute and any other Act enforced by the Commission.

The Commission proposes to revise § 1025.41(a) to clarify that Commissioners and their staffs should not attend or view public hearings concerning matters that may become subject of review by the Commission as the appellate body. We also propose to revise § 1025.41(b) to clarify that adjudicative proceedings shall be held in one location, absent unusual circumstances. Based on staff experience and common practice in other agencies, we also propose to limit the duration of a proceeding to no more than 210 hours, absent a showing of good cause. We believe this provides ample time for the proper conduct of most hearings, but allows flexibility to alter the time frame if circumstances warrant. We propose other minor, non-substantive changes in § 1025.41(c) for clarity.

The Commission proposes to revise § 1025.42(a)(6) to state that, in addition to procedural motions, the Presiding Officer is empowered to consider and rule on evidentiary motions and other issues, as appropriate. We propose other minor, non-substantive changes in § 1025.42(a)(3) and (b), for clarity. In proposed § 1025.42(d), we make clear that, in addition to the Commission, a Presiding Officer shall not be responsible to, or subject to the supervision of, a Commissioner or a member of a Commissioner's staff in performance of the adjudicative function.

In § 1025.42(e), we propose to clarify that the Commission shall consider a motion to disqualify the Presiding Officer only if the matter has been decided and appealed to the Commission. In addition, we propose other minor, non-substantive changes.

The Commission proposes to supplement § 1025.43(a) to provide specific examples of the ways in which the Federal Rules of Evidence may be relaxed to best serve the interests of justice. More specifically, the proposal states that evidence constituting hearsay may be admitted if it is relevant, material, and bears satisfactory indicia or reliability so that its use is fair. In addition, we are proposing a minor, non-substantive change in § 1025.43(d)(1)(i) for uniformity. We also propose to remove an unnecessary “reserved” paragraph in § 1025.43(e) and re-designate paragraph (f) as paragraph (e).

The Commission proposes to revise § 1025.44(a) to align our rule on experts more closely with the standard set forth in Rule 702 of the Federal Rules of Evidence (Testimony by Expert Witnesses). We make this change to maximize efficiency by working within an evidentiary framework with which most practitioners are familiar and allowing the parties and Presiding Officer to be guided by case law interpreting the Federal Rules.

We also propose revising § 1025.44(b) to make clear that the Presiding Officer has the authority to order expert testimony to be in writing and filed on the record. In addition, we propose to clarify that the Presiding Officer has the discretion to allow live testimony in lieu of a written submission. This change would be in keeping with our goal of vesting broad discretion with the Presiding Officer in the conduct of a proceeding.

We propose to revise § 1025.44(c) and (d) to conform to our proposed revision in § 1025.44(b).

We propose to revise § 1025.45(b) to correct typographical and grammatical errors, and to clarify the standard that applies to in camera treatment of documents and testimony. We also propose to move language related to the length of time for in camera treatment from § 1025.45(b) to § 1025.45(b)(3). Additionally, we propose adding language to § 1025.45(e) to make clear that in camera materials may not be released to the public until the order granting in camera treatment expires. We propose to revise § 1025.45(f) for clarity.

The Commission proposes to revise this section to make the filing of post-hearing briefs mandatory. Under the current rule, parties may file post hearing briefs, but are not required to do so. Because we believe the public and the Presiding Officer would benefit from a concise but comprehensive summary of the matter at issue, we propose that this filing be mandatory. In addition, we propose to limit post-hearing briefs to thirty (30) pages. Currently, the rule does not impose a page limit, and we believe parties should be encouraged to file concise pleadings. We also propose to limit replies to the discretion of the Presiding Officer so that the pace of the adjudication at this juncture is not slowed unnecessarily by the filing of excessive briefing materials. We propose other non-substantive changes for clarity.

The Commission proposes to revise § 1025.47(a) of this section to delete the requirement for an “official court reporter of the Commission” because the Commission has no official court reporter. The revised language would require that a hearing shall be “recorded and transcribed by a court reporter under the supervision of the Presiding Officer.” We are proposing other non-substantive changes for clarity, including a revision to the appendix citation in the Federal Advisory Committee Act.

The Commission proposes to revise this section to require that the official docket be maintained electronically, in keeping with changes we are proposing throughout our Rules of Practice to update our procedures to reflect advances in technology. We also propose to delete the statement that the docket would be available for inspection by the public during normal business hours as unnecessary because the docket would be available electronically. We propose other non-substantive changes for clarity.

The Commission proposes to revise § 1025.49(a) to allow parties to modify this provision by agreement.

Under current § 1025.51(a), the Presiding Officer shall endeavor to file an Initial Decision within sixty (60) days after the record closes in a case, or after the filing of post-hearing briefs, whichever is later. The Commission proposes to revise § 1025.51(a) to require the Presiding Officer to file the Initial Decision within a fixed deadline of 60 days. This change is consistent with the Commission's goal of avoiding unnecessary delay and ensuring that a matter progresses in a timely manner to serve the interests of justice.

The current rules impose numerous interim deadlines, but do not explicitly provide for a total time limit from complaint to Initial Decision. Staff advises that most cases will take more than 1 year for the Presiding Officer to render an Initial Decision. The Commission believes that the Presiding Officer has considerable discretion in managing cases to ensure the timely and efficient resolution of proceedings, and the Commission expects that the Presiding Officer shall endeavor to make those proceedings as swift as practicable in the interest of due process and the protection of consumer health and safety.

The administrative procedures at sister agencies such as the Securities and Exchange Commission (“SEC”), the Consumer Financial Protection Bureau (“CFPB”), and the Federal Trade Commission (“FTC”) employ other practices on ways to make adjudicatory proceedings more efficient, including a fixed time limit from issuance of complaint to evidentiary hearing as required by FTC Rule 16 CFR 3.11 (Commencement of Proceedings), a fixed time limit from complaint to initial decision as required by SEC Rule, 17 CFR 201.360(a)(2) (Initial Decision of Hearing Officer) and CFPB Rule, 12 CFR 1081.400(a) (Recommended Decision of the Hearing Officer), and changes to the rules that limit the scope of discovery available to parties in administrative proceedings as has been adopted by the SEC and CFPB. The Commission seeks comment on whether CPSC should adopt similar practices.

We also propose to revise § 1025.51(c) to make clear that the Commission may order that an individual, other than the Presiding Officer, may make and file an Initial Decision, if the Presiding Officer is disqualified under § 1025.42(e).

We are proposing to revise § 1025.51(d) to limit the authority of the Presiding Officer to reopen the proceedings to only those circumstances “where the interests of justice so require.” We propose this change to emphasize the need for finality and to ensure timely disposition of a matter.

We are proposing a minor, non-substantive change for consistency.

The Commission proposes to revise the title of § 1025.53(a) to Notices of appeal, and we propose several additional changes for clarity.

In addition, we propose to revise § 1025.53(b) to limit appeal briefs to thirty (30) pages. Currently, the rule does not impose a page limit, and we believe parties should be encouraged to file concise pleadings. We also propose to amend § 1025.53(c) to impose the same 30-page restriction on answering briefs that applies to appeal briefs. In § 1025.53(f), we would clarify that reply briefs are not required, but if filed, they shall not exceed fifteen (15) pages.

The Commission proposes to revise § 1025.55 to remove the word “endeavor.” By doing so, the Commission commits to issue its final decision on appeal or review within 90 days after the filing of all briefs or after receipt of transcript of the oral argument, whichever is later. We are also proposing a minor, non-substantive change in § 1025.55(a) for clarity.

We are proposing minor, non-substantive changes for clarity and to correct a typographical error.

The Commission proposes to revise § 1025.57(a) and (b) to clarify that Commission orders in adjudicative proceedings under the CPSA or the FFA become effective upon receipt by the Respondent.

In § 1025.57(b)(1), we propose an additional, non-substantive change for clarity. In § 1025.57(b)(2), we propose corrections for citation errors.

The Commission proposes to revise § 1025.58(c)(2) for clarity.

In proposed § 1025.58(e)(2), we make clear that the Commission may direct the Presiding Officer to conduct additional hearings if the pleadings raise substantial factual issues. We are proposing this change because as written it is unclear under whose auspices such a hearing would be conducted and recognize that such a hearing should be conducted by the Presiding Officer as the finder of fact. We further propose to clarify in this section, consistent with proposed changes to § 1025.46, to state that post hearing briefs are mandatory. We propose one other non-substantive change for clarity.

The Commission proposes to revise § 1025.63(a) and (b) to conform the requirement for the filing of a notice of appearance to our proposed electronic filing changes to § 1025.14 of the Rules of Practice.

In § 1025.63(b), we propose other minor, non-substantive changes for clarity.

The Commission proposes to revise § 1025.65(a) for clarity.

The Commission proposes to revise § 1025.66(d) for clarity.

The Commission proposes to retitle this section to: Restrictions as to former Commission members, to align the title with the text in § 1025.67(a). We also would revise § 1025.67(a) to include additional statutory and regulatory restrictions and propose to revise § 1025.67(c) for clarity.

We propose to add a new § 1025.68(b) to state that, except to the extent required for disposition of ex parte matters authorized by law or by this part, ex parte prohibitions apply to a number of circumstances. Specifically, new § 1025.68(b)(1) would prohibit ex parte communications relevant to the merits of an adjudication by any interested person not employed by the CPSC to any decision maker during the pendency of a proceeding under the Rules. Under the current rule, an ex parte communication is defined as a communication concerning a matter in adjudication made to a decision-maker by any person subject to the Rules of Practice. Our proposed change, which is consistent with the APA, would broaden the ex parte prohibition to include any “interested person not employed by the Commission.” Additionally, new proposed § 1025.68(b)(2) would prohibit any decision maker from making an ex parte communication to any interested party not employed by the Commission. To conform new § 1025.68(c)(2)(i) and (ii) with our proposed new § 1025.68(b), we would omit language in those paragraphs limiting the prohibition to persons subject to these Rules of Practice and add language tracking new § 1025.68(b).

The Commission also proposes to revise § 1025.68(d) to add paragraph (d)(3) to state that ex parte prohibitions do not apply to communications by any party to the Commission concerning a proposed settlement agreement that has been transmitted to the Commission. We are proposing this change because we believe this would allow parties to communicate information to the Commission that might not otherwise be available to the Commission.

We also propose changes in § 1025.68(e) to clarify that the procedures for handling prohibited ex parte communications are also available to recipients of such communications who are not employed by the Commission. We make other, non-substantive changes to § 1025.68(e), as well.

In § 1025.68(g), we propose changes to be consistent with the proposed changes to this section discussed above, and we also propose that sanctions shall apply to any person or party who makes or causes a prohibited ex parte communication to be made. As currently drafted, the provision allowing sanctions applies only to persons subject to the Rules of Practice. We propose language that would allow sanctions to be imposed on a person who, while not a party, makes a prohibited ex parte communication and subsequently becomes a party. The proposed language, which is consistent with the adjudicative rules adopted by FTC, would authorize the Presiding Officer to impose sanctions allowed under this section, if that person later becomes a party to the proceeding.

We propose other minor, non-substantive changes for clarity.

To clarify that Commission staff charged with investigative and prosecutorial responsibilities may not advise a decision maker or otherwise participate in a decision in a proceeding, we propose to add a new § 1025.69 titled, Separation of functions, setting forth the separation of functions provisions of the APA, 5 U.S.C. 554(d).

The Commission proposes to revise this section to remove outdated and confusing references to the Equal Access to Justice Act (“EAJA”). As written, the rule substantially re-states EAJA requirements existing when the rule was adopted initially. Many elements of those requirements are no longer current. To avoid updating these rules each time an element of the EAJA is changed, we propose removing references to specific EAJA requirements and stating instead that the EAJA applies to certain adjudicative proceedings before the Commission. We propose stating generally that applications for fees and expenses may be made according to the EAJA, as interpreted by the federal courts and guidance provided by the U.S. Department of Justice (“DOJ”). Such interpretative case law and DOJ guidance provide ample direction for applicants, the Presiding Officer, and the Commission in the application for, and consideration of, a request for attorney's fees and other expenses. We do not believe our proceedings warrant particularized requirements regarding EAJA and that the guidance provided by the DOJ, and as interpreted by federal courts, would be sufficient for applicants to proceed with an EAJA claim. We note too that other federal agencies, such as the CFPB, have adopted rules of practice without reference to EAJA. Because we believe DOJ and federal court guidance is sufficient, we propose to omit language in § 1025.70(a) and the entirety of § 1025.70(b) through (h). We are also proposing several minor, non-substantive changes for clarity.

Consistent with our goal of following DOJ and federal court guidance on EAJA, we propose omitting this section.

Consistent with our goal of following DOJ and federal court guidance on EAJA, we propose omitting this section.

We are proposing to omit this appendix, which contains a suggested form for a final prehearing order, given our proposed revisions to the requirements for prehearing conferences and orders, discussed above.

The Commission's regulations address whether the Commission is required to prepare an environmental assessment or an environmental impact statement. 16 CFR part 1021. These regulations provide a categorical exclusion for certain CPSC actions that normally have “little or no potential for affecting the human environment.” 16 CFR 1021.5(c)(l). This proposed rule falls within the categorical exclusion.

Under section 603 of the Regulatory Flexibility Act (“RFA”), when the APA requires an agency to publish a general notice of proposed rulemaking, the agency must prepare an initial regulatory flexibility analysis (“IRFA”), assessing the economic impact of the proposed rule on small entities. 5 U.S.C. 603(a). As noted, the Commission is proposing to update its Rules of Practice for Adjudicative Proceedings. Although the Commission is choosing to issue the rule through notice and comment procedures, the APA does not require a proposed rule when an agency issues rules of agency procedure and practice (5 U.S.C. 553(b)). Therefore, no IRFA is required under the RFA. Moreover, the proposed rule would not establish any mandatory requirements and would not impose any obligations on small entities (or any other entity or party).

The Paperwork Reduction Act (“PRA”) establishes certain requirements when an agency conducts or sponsors a “collection of information.” 44 U.S.C. 3501-3520. The proposed rule would amend the Commission's Rules of Practice to adopt modern adjudicative procedures. The proposed rule would not impose any information collection requirements. The existing Rules of Practice and the proposed revision do not require or request information from firms, but rather, explain procedures for adjudicatory hearings. Thus, the PRA is not implicated in this proposed rulemaking.

According to Executive Order 12988 (February 5, 1996), agencies must state in clear language the preemptive effect, if any, of new regulations. Section 26 of the CPSA explains the preemptive effect of consumer product safety standards issued under the CPSA. 15 U.S.C. 2075. The proposed Rules of Practice do not set consumer product safety standards. Rather, the proposed Rules of Practice is an adoption of updated rules of agency procedure and practice. Therefore, section 26 of the CPSA would not apply to this rulemaking.

In accordance with the APA's general requirement that the effective date of a rule be at least 30 days after publication of the final rule, the Commission proposes that the effective date be 30 days after the date of publication of a final rule in the Federal Register. 5 U.S.C. 553(d).

The Commission requests comments on all aspects of the proposed rule. Comments should be submitted in accordance with the instructions in the ADDRESSES section at the beginning of this document. Written comments must be received by June 13, 2016.

For the reasons set forth in the Preamble, the Commission proposes to amend 16 CFR part 1025 to read as follows:

The additions and revisions read as follows:

The revisions and addition read as follows:

Background and Explanation of Provisions 1. Overview

This document contains proposed regulations that amend 26 CFR part 1 under sections 305, 860G, 861, 1441, 1461, 1471, 1473, and 6045B of the Internal Revenue Code of 1986 (Code) concerning deemed distributions that are or result from adjustments to rights to acquire stock.

Final regulations under section 305 were published in the Federal Register on July 12, 1973 (TD 7281, 38 FR 18531), and amendments to those final regulations were published in the Federal Register on October 15, 1974 (TD 7329, 39 FR 36860), and in the Federal Register on December 21, 1995 (TD 8643, 60 FR 66134).

Final regulations under sections 1441 and 1461 were published in the Federal Register on October 14, 1997 (TD 8734, 62 FR 53387), and the following amendments to those final regulations were published in the Federal Register on: December 31, 1998 (TD 8804, 63 FR 72187); December 30, 1999 (TD 8856, 64 FR 73412); May 22, 2000 (TD 8881, 65 FR 32186); August 1, 2006 (TD 9272, 71 FR 43366); July 14, 2008 (TD 9415, 73 FR 40172) (corrected on August 6, 2008 (73 FR 45612)); January 23, 2012 (TD 9572, 77 FR 3109); December 5, 2013 (TD 9648, 78 FR 73081); March 6, 2014 (TD 9658, 79 FR 12726) (corrected on July 1, 2014 (79 FR 37175)); and, September 18, 2015 (TD 9734, 80 FR 56866). Final regulations under sections 1471 and 1473 were published in the Federal Register on January 28, 2013 (TD 9610, 78 FR 5874) (corrected on September 10, 2013 (78 FR 55202)), and the amendments to those final regulations were published as temporary regulations in the Federal Register on March 6, 2014 (TD 9657, 79 FR 12812) (corrected on July 1, 2014 (79 FR 37175)).

Final regulations under section 6045B were published in the Federal Register on October 18, 2010 (TD 9504, 75 FR 64072), and amendments to those final regulations were published in the Federal Register on April 18, 2013 (TD 9616, 78 FR 23116).

Section 305 and the regulations thereunder apply to actual and deemed distributions by a corporation of its own stock and rights to acquire its own stock. Section 305(a) provides the general rule that the receipt of these distributions is not included in the gross income of the recipient; however, under section 305(b)(1) through (b)(5) certain actual and deemed distributions of stock and stock rights are treated as distributions of property to which section 301 applies. For example, under section 305(b)(2), if a distribution (or series of distributions) by a corporation has the result of a receipt of property by some shareholders and an increase in the proportionate interests of other shareholders in the assets or earnings and profits of the corporation, all the distributions are treated as distributions of property to which section 301 applies.

Section 305(c) authorizes the Secretary to prescribe regulations to treat changes in the conversion ratio of instruments convertible into stock and other events having similar effects as distributions to shareholders whose proportionate interests in the assets or earnings and profits of the corporation are increased by such events.

Under section 305(d)(1) and current § 1.305-1(d), for purposes of section 305 and the regulations thereunder, the term stock includes rights to acquire stock, and under section 305(d)(2), for purposes of section 305(b) and (c) and the regulations thereunder, the term shareholder includes a holder of rights to acquire stock. For purposes of this preamble:

The term actual shareholder means a holder of stock (not including rights to acquire stock).

The term deemed shareholder means a holder of a right to acquire stock.

The term deemed distribution means a transaction or event, other than an actual distribution of stock, money, or other property, that is a distribution under section 305(b) and (c).

The term applicable adjustment means an adjustment to a right to acquire stock, including an increase or reduction in conversion ratio, conversion price, option price, or number of shares the holder would receive upon conversion or exercise.

The term right to acquire stock means any right to acquire stock, whether pursuant to a convertible instrument (such as a debt instrument that is convertible into shares of stock), a warrant, subscription right, or stock right issued by the corporation that issued or will issue the underlying stock, or any other right to acquire stock of the corporation issuing such right (whether settled in stock or in cash).

Under current § 1.305-1(b)(1), when a distribution of stock (including a right to acquire stock) is a distribution of property to which sections 305(b) and 301 apply, the amount of the distribution is the fair market value, on the date of the distribution, of the stock or right to acquire stock that is distributed.

A corporation may issue rights to acquire its stock in a number of forms, including warrants, subscription rights, options, convertible instruments that give the holder a right to convert the instruments into shares of stock in the issuing corporation, and similar instruments. In any of these forms, rights to acquire stock may provide for applicable adjustments that grant deemed shareholders economic benefits that correspond to distributions of stock, cash, or other property made to actual shareholders. Similarly, rights to acquire stock may provide for adjustments to prevent actual shareholders' interests from being diluted as a result of distributions of stock, cash, or other property to deemed shareholders (that is, holders of rights to acquire stock).

An applicable adjustment to a convertible instrument may consist of an increase in the number of shares of stock a holder would receive upon conversion. Similarly, an applicable adjustment to a warrant, subscription right, stock right, option, or similar right to acquire stock may consist of an increase in the number of shares the holder would receive upon exercise. In either situation, the applicable adjustment may have the effect of increasing the deemed shareholders' proportionate interests in the assets or earnings and profits of the corporation. If this increase has a result described in section 305(b), then under section 305(c) the applicable adjustment is a deemed distribution to the deemed shareholder, and section 301 applies to the deemed distribution.

Under current § 1.305-7(b)(1), an applicable adjustment made pursuant to a bona fide, reasonable adjustment formula that has the effect of preventing dilution of a shareholder's interest is not a deemed distribution of stock to which sections 305(b) and 301 apply. However, also under current § 1.305-7(b)(1), an applicable adjustment to compensate for a distribution of cash or property to actual shareholders that is taxable under section 301, 356(a)(2), 871(a)(1)(A), 881(a)(1), 852(b), or 857(b) is not considered as made pursuant to such a bona fide, reasonable adjustment formula, and therefore may be a distribution to which sections 305(b) and 301 apply.

The Treasury Department and the IRS have concluded that, under section 305(b) and (c) and the regulations thereunder, it is clear that an applicable adjustment is a deemed distribution to which section 301 applies, if: (i) The applicable adjustment increases the proportionate interest of an actual shareholder or a deemed shareholder in the corporation's assets or earnings and profits; (ii) such increase in proportionate interest has a result described in section 305(b); and (iii) the anti-dilution exception of § 1.305-7(b)(1) does not apply. For example, it has been the position of the Treasury Department and the IRS for over forty years that, under section 305(b) and (c) and the regulations thereunder, an increase in the conversion ratio of a convertible debt instrument may be treated as a deemed distribution to the deemed shareholder that holds the instrument, and, if so treated, section 301 applies to the deemed distribution. See Rev. Rul. 75-513 (1975-2 CB 114) (section 301 applied to deemed distribution where conversion ratio of convertible debentures increased due to payment of cash dividend to common shareholders); and Rev. Rul. 76-186 (1976-1 CB 86) (same; basis of the convertible debentures was increased by the value of the deemed distribution); cf. Rev. Rul. 77-37 (1977-1 CB 85) (no deemed distribution because anti-dilution exception of § 1.305-7(b) applied where distribution to actual shareholders was tax-free under section 355).

The current regulations are unclear, however, as to the amount of a deemed distribution to a deemed shareholder. The current regulations may reasonably be interpreted as providing either that such a deemed distribution is treated as a distribution of a right to acquire stock (the amount of which is the fair market value of the right), or that such a distribution is treated as a distribution of the actual stock to which the right relates (the amount of which is the fair market value of the stock). Accordingly, for deemed distributions to deemed shareholders occurring before final regulations are published, the IRS will not challenge either position.

The current regulations are also unclear as to the timing of such a distribution. Under the proposed regulations, such a distribution generally would be deemed to occur at the time the applicable adjustment occurs, in accordance with the instrument setting forth the terms of the right to acquire stock, but in no event later than the date of the distribution of cash or property that results in the deemed distribution (taking into account § 1.305-3(b)).

These proposed regulations would amend the current regulations under section 305(b) and (c) only to clarify the amount and timing of such deemed distributions, not the fact of their occurrence, which is clear under current law.

After studying this area, the Treasury Department and the IRS have concluded that a deemed distribution of a right to acquire stock is more accurately viewed as a distribution of additional rights to acquire stock, the amount of which is the fair market value of the right.

Under the terms of a convertible instrument, a distribution of cash or property to actual shareholders may increase the number of shares the holder of the convertible instrument would receive upon conversion. Similarly, a distribution of cash or property to actual shareholders may increase the number of shares the holder of other rights to acquire stock, such as warrants or options, would receive upon exercise. In either case, the increase is an applicable adjustment and a deemed distribution of additional rights to acquire stock to the holders of the rights to acquire stock. Under the proposed regulations, the amount of the deemed distribution would be the excess of (i) the fair market value of the right to acquire stock immediately after the applicable adjustment over (ii) the fair market value of the right to acquire stock without the applicable adjustment. In determining the fair market value of a right to acquire stock, any particular facts pertaining to the deemed shareholder's rights, including the number of actual shares of stock or rights to acquire stock held by such deemed shareholder, would be disregarded.

Also, under the terms of a convertible debt instrument or other right to acquire stock, a payment of cash or property to the holder may cause a reduction in the number of shares the holder would receive upon conversion or exercise. Such a reduction is an applicable adjustment that increases the actual shareholders' proportionate interests in the assets or earnings and profits of the corporation. Thus, the applicable adjustment results in a deemed distribution of stock to the actual shareholders, and section 301 applies to the deemed distribution. Under the proposed regulations, the amount of this deemed distribution would be the fair market value of the stock deemed distributed, determined in accordance with § 1.305-3(e), Examples 8 and 9 (relating to deemed distributions to shareholders resulting from certain redemptions of stock from other shareholders). See also Tax Revenue Act of 1969: Hearings on H.R. 13270 Before the House Ways and Means Comm., 91st Cong. 1st Sess., pt. 14, 5196-98 (1969).

When an applicable adjustment is or results in a deemed distribution under proposed § 1.305-7(c)(1) or (2), the deemed distribution occurs at the time such applicable adjustment occurs, in accordance with the instrument setting forth the terms of the right to acquire stock, but in no event later than the date of the distribution of cash or property that results in the deemed distribution (taking into account § 1.305-3(b)). For such an applicable adjustment relating to a right to acquire publicly-traded stock, if the instrument setting forth the terms of such right does not set forth the date and time the applicable adjustment occurs, the deemed distribution would occur immediately prior to the opening of business on the ex-dividend date for the distribution of cash or property that results in the deemed distribution. For such an applicable adjustment relating to a right to acquire non-publicly traded stock, if the instrument setting forth the terms of such right does not set forth the date and time the applicable adjustment occurs, the deemed distribution occurs on the date that a holder is legally entitled to the distribution of cash or property that results in the deemed distribution.

This section provides a discussion of the proposed rules regarding deemed distributions under section 305(c). Section 4 of the preamble provides a discussion of the proposed rules regarding substitute dividend payments that are deemed payments determined with respect to a deemed distribution under section 305(c). The proposed rules that would apply for deemed payments are analogous to the proposed rules that would apply to deemed distributions.

Sections 1441 and 1442 (referred to herein as “chapter 3”) require all persons having the control, receipt, custody, disposal, or payment of items of income subject to withholding of any nonresident alien, foreign partnership, or foreign corporation to withhold tax at a 30-percent rate unless a reduced rate of withholding applies. Amounts subject to withholding include amounts from sources within the United States that are fixed or determinable annual or periodical income, which generally includes, among other things, interest, dividends, and similar types of investment income. § 1.1441-2(b)(1)(i). Under § 1.1441-2(e)(1), “a payment” is considered made to a person “if that person realizes income whether or not such income results from an actual transfer of cash or other property.” For this purpose, a payment is considered made when the amount would be includible in the income of the beneficial owner under the U.S. tax principles governing the cash basis method of accounting. § 1.1441-2(e)(1).

On March 18, 2010, the Hiring Incentives to Restore Employment Act of 2010, Public Law 111-147 (H.R. 2847), added chapter 4 to the Code (sections 1471 through 1474, commonly known as “FATCA”). Chapter 4 generally requires a withholding agent to withhold tax at a 30-percent rate on a “withholdable payment” (as defined in § 1.1473-1(a)) made to a foreign financial institution (FFI) unless the FFI has entered into an agreement described in section 1471(b) to obtain status as a participating FFI or the FFI is deemed to have satisfied the requirements of section 1471(b). Chapter 4 also generally requires a withholding agent to withhold tax at a 30-percent rate on a withholdable payment made to a nonfinancial foreign entity (NFFE) unless the NFFE has provided information to the withholding agent with respect to the NFFE's substantial U.S. owners or has certified that it has no such owners. See section 1472.

These proposed regulations would provide guidance to withholding agents regarding their obligations to withhold under chapters 3 and 4 on deemed distributions under section 305(c). Withholding agents have commented that ambiguities in the current law have made it difficult for them to satisfy their withholding obligations. In particular, withholding agents have commented that these deemed distributions often occur when there is no cash payment that corresponds to the deemed distribution, which makes it difficult for them to satisfy their withholding obligation on the date of the deemed distribution. In addition, withholding agents commented that they often lack knowledge of the fact that a deemed distribution on a security has been made and are therefore unable to withhold on the date of the deemed distribution.

Proposed § 1.1441-2(d)(4)(i) would clarify that a withholding agent has an obligation to withhold on a deemed distribution (as defined in § 1.305-1(d)(7)) that is made on a security. Proposed § 1.1441-7(a)(4) would clarify that an issuer of a security upon which a deemed distribution is made and any person that holds directly or indirectly (for example, through an account maintained for an intermediary) a security on behalf of the beneficial owner of the security, or a flow-through entity that owns directly or indirectly (through another flow-through entity) a security, is considered to have custody of or control over the deemed distribution made on the security and, therefore, is a withholding agent with respect to the distribution.

Under current § 1.1441-2(d)(1), a withholding agent does not have an obligation to withhold on a payment when it lacks control over, or custody of, money or property of the recipient, or knowledge of the facts giving rise to the payment (the general exception). This general exception does not apply when, in relevant part, the payment is a distribution with respect to stock. The proposed regulations, however, would allow a withholding agent (other than the issuer of the specified security) to benefit from a new exception to withholding in proposed § 1.1441-2(d)(4) for deemed distributions (as defined in § 1.305-1(d)(7)) of stock or a right to acquire stock on a specified security (as defined in § 1.6045-1(a)(14)). Under this new exception, a withholding agent (other than the issuer of the specified security) would have an obligation to withhold on such a deemed distribution only if, before the due date (not including extensions) for filing Form 1042, Annual Withholding Tax Return for U.S. Source Income of Foreign Persons, with respect to the calendar year in which the deemed distribution occurred, either (i) the issuer meets its reporting requirements under § 1.6045B-1 (by furnishing an issuer statement or publicly reporting the information required under that section) or (ii) the withholding agent has actual knowledge that a deemed distribution has occurred, in which case the obligation to withhold would not arise until January 15 of the year following the calendar year of the deemed distribution.

Once the requirements of proposed § 1.1441-2(d)(4)(i) have been satisfied, a withholding agent would have an obligation to withhold on a deemed distribution. Except as provided in § 1.1441-5 regarding the time to withhold for partnerships and trusts, under proposed § 1.1441-2(d)(4)(ii), a withholding agent would be required to satisfy its withholding obligation by withholding on the earliest of (i) the date on which a future cash payment is made with respect to the security; (ii) the date on which the security is sold, exchanged, or otherwise disposed of (including a transfer of the security to another account not maintained by the withholding agent or a termination of the account relationship); or (iii) the due date (not including extensions) for filing Form 1042 with respect to the calendar year in which the deemed distribution occurred. Under this approach, a withholding agent that continues to directly or indirectly hold or own the security when the requirements of proposed § 1.1441-2(d)(4)(i) are satisfied generally would be able to satisfy its withholding obligation by withholding on future cash payments on the security (for example, an interest payment on a convertible bond). If, however, the security is disposed of before sufficient future cash payments have been made on the security, the withholding agent would be required to withhold at the time of disposition and generally would be expected to do so by, for example, withholding on the proceeds from the disposal, liquidating other property held in custody for the beneficial owner, or obtaining other funds directly or indirectly from the beneficial owner to satisfy the withholding.

If there are not sufficient future cash payments on the security and the security has not been disposed of or transferred before the due date (not including extensions) for filing Form 1042 with respect to the calendar year in which the deemed distribution occurred, then, to avoid having to pay the tax out of the withholding agent's own funds, the withholding agent may apply current § 1.1461-2(b) in order to collect the underwithheld amount. Under these rules, the withholding agent can satisfy the tax by withholding on other cash payments made to the same beneficial owner or by liquidating other property held in custody for the beneficial owner or over which it has control. The proposed regulations would amend current § 1.1461-2(b) to clarify that a withholding agent may obtain the property from which to withhold under these rules through additional contributions obtained directly or indirectly from the beneficial owner. The proposed regulations also would add a sentence to current § 1.1461-2(b) to clarify that a withholding agent that satisfies its obligation to withhold under § 1.1461-2(b) will not be subject to any penalties for failure to deposit or failure to pay under sections 6656, 6672, and 7202 when it deposits the amounts obtained in this manner by the due date (not including extensions) for filing Form 1042 with respect to the calendar year in which the deemed distribution occurred. These clarifications reflect the IRS interpretation of current § 1.1461-2(b) in applying these penalties, and thus no penalties will be imposed for withholding agents that apply these rules to satisfy their obligations to withhold before the effective date of these regulations.

When the requirements of proposed § 1.1441-2(d)(4)(i) are satisfied after a withholding agent has terminated its relationship with the beneficial owner of the security, the withholding agent would remain liable for any underwithheld amount with respect to the deemed distribution. In order to avoid having to pay the tax due out of the withholding agent's own funds, before terminating an account relationship, a withholding agent should make arrangements with the beneficial owner to ensure that the withholding agent can satisfy any tax due, such as by retaining funds or other property of the owner.

Proposed § 1.1441-2(d)(4)(iii) would provide that a withholding agent may treat certain foreign entities (qualified intermediaries, withholding foreign partnerships, withholding foreign trusts, and U.S. branches treated as U.S. persons) as assuming primary chapter 3 withholding responsibilities for a deemed distribution on a specified security only if (i) the withholding agent provides the foreign entity with a copy of the issuer statement described in § 1.6045B-1(b)(1) within 10 days of the issuer furnishing the statement to the holder of record or its nominee, or (ii) the issuer has met the public reporting requirements under § 1.6045B-1(a)(3). The foreign entity would have an obligation to withhold on the deemed distribution only if it receives a copy of the issuer statement or if the issuer has met the public reporting requirements by the due date (not including extensions) for filing Form 1042 with respect to the calendar year in which the deemed distribution occurred. A withholding agent that fails to provide a copy of the issuer statement to a foreign entity (in the absence of public reporting) would not be permitted to treat the foreign entity as having assumed primary withholding responsibilities for the deemed distribution and would therefore have to withhold and report based on the information that it has regarding the recipient of the deemed distribution. The purpose of this proposed rule is to ensure that foreign entities that assume primary withholding responsibilities for deemed distributions will possess the information described in § 1.6045B-1 to meet their withholding and information reporting obligations, as these entities (or their nominees) may not be holders of record that otherwise would receive the issuer statement described in § 1.6045B-1(b)(1).

Under proposed § 1.1441-3(c)(5), a withholding agent (other than the issuer of the specified security) would be permitted to rely on the information that an issuer provides on an issuer statement described in § 1.6045B-1(b)(1) or on a public Web site described in § 1.6045B-1(a)(3) to determine the proper amount of withholding on a deemed distribution on a specified security unless it knows that the information is incorrect or unreliable. Additionally, a foreign entity that has assumed primary withholding responsibilities would be permitted to rely on the copy of the issuer statement described in § 1.6045B-1(b)(1) that it receives from another withholding agent under the circumstances described in proposed § 1.1441-2(d)(4)(iii) unless it knows that the information is incorrect or unreliable.

The proposed regulations would add language to § 1.1441-2(d)(1) to clarify that a withholding agent does not lack control over money or property if it directs another person to make a payment, and that a withholding agent does not lack knowledge of the facts that give rise to a payment merely because the withholding agent does not know the character or source of the payment for U.S. tax purposes. The proposed regulations also would add an example to § 1.1441-2(d)(1) of when a withholding agent lacks knowledge of the facts that give rise to a payment. These clarifications and the example are consistent with similar rules in current § 1.1471-2(a)(4)(i) that apply for chapter 4 purposes.

The proposed regulations also would make nonsubstantive changes to reorganize the structure of current § 1.1441-2(d)(1).

The proposed regulations would modify the regulations under chapter 4 to provide guidance similar to the rules described in proposed §§ 1.1441-2(d)(1), 1.1441-2(d)(4), 1.1441-3(c)(5), and 1.1441-7(a)(4) for withholding on a deemed distribution (as defined in § 1.305-1(d)(7)) that is a withholdable payment under chapter 4. The amendment to proposed § 1.1461-2(b) that clarifies that a withholding agent may obtain additional contributions of property directly or indirectly from a beneficial owner and the new sentence added to proposed § 1.1461-2(b) regarding penalties also would apply to withholding agents adjusting underwithholding under chapter 4 through cross-reference in § 1.1474-2(b). The proposed regulations also would make nonsubstantive changes to reorganize the structure of current § 1.1471-2(a)(4)(i), which are consistent with the organizational changes proposed for current § 1.1441-2(d)(1).

Section 1.861-3(a)(6) provides that a substitute dividend payment made to a transferor in a securities lending transaction or sale-repurchase transaction is sourced in the same manner as a dividend on the transferred securities. The regulations define a substitute dividend payment as “a payment, made to the transferor of a security in a securities lending transaction or a sale-repurchase transaction, of an amount equivalent to a dividend distribution which the owner of the transferred security is entitled to receive during the term of the transaction.” These proposed regulations would modify § 1.861-3(a)(6) to clarify that a substitute dividend payment includes a deemed payment made in the amount (as determined under § 1.305-7(c)(4)) of a deemed distribution (as defined in § 1.305-1(d)(7)).

These proposed regulations would provide that the general exception to withholding in § 1.1441-2(d)(1)(i) does not apply for deemed payments (as defined in § 1.861-3(a)(6)). However, proposed § 1.1441-2(d)(4) would allow a withholding agent to benefit from the same exception to withholding that would apply to deemed distributions (as defined in § 1.305-1(d)(7)) on a specified security for deemed payments (as defined in § 1.861-3(a)(6)) that are determined with respect to a deemed distribution on a specified security. Thus, a withholding agent would have an obligation to withhold on such a deemed payment only if, before the due date (not including extensions) for filing Form 1042, Annual Withholding Tax Return for U.S. Source Income of Foreign Persons, with respect to the calendar year in which the deemed distribution on a specified security occurred, either (i) the issuer meets its reporting requirements under § 1.6045B-1 (by furnishing an issuer statement or publicly reporting the information required under that section) or (ii) the withholding agent has actual knowledge that a deemed distribution has occurred, in which case the obligation to withhold would not arise until January 15 of the year following the calendar year of the deemed distribution or the deemed payment. If a withholding agent has an obligation to withhold on a deemed payment (as defined in § 1.861-3(a)(6)) under § 1.1441-2(d)(4)(i), it would be required to withhold subject to the rules regarding when and how to withhold in proposed § 1.1441-2(d)(4)(ii) and the rules regarding foreign entities that assume withholding responsibilities in § 1.1441-2(d)(4)(iii). These proposed regulations also would modify the regulations under chapter 4 to provide similar guidance with respect to deemed payments that are withholdable payments.

To facilitate broker reporting of a security's adjusted basis to the holder of the security under section 6045, section 6045B provides that, according to the forms or regulations prescribed by the Secretary, an issuer of a specified security (for example, stock, a convertible debt instrument, or a warrant) must report certain information relating to an organizational action that affects the basis of the security to both the IRS and the holders of the security. Under section 6045B and current § 1.6045B-1, an issuer must file an issuer return (Form 8937, Report of Organizational Actions Affecting Basis of Securities) with the IRS by the earlier of 45 days after the organizational action or January 15 of the calendar year following the organizational action. In addition, the issuer must send a written statement (for example, a copy of the issuer return) to holders by January 15 of the calendar year following the organizational action. In lieu of filing the issuer return with the IRS and furnishing the written statement to holders, current § 1.6045B-1(a)(3) permits an issuer to post the required information on its public Web site by the due date for reporting the issuer return to the IRS. Under current § 1.6045B-1, however, an issuer is not required to send a statement to exempt recipients, such as C corporations and foreign persons, nor is an issuer required to file an issuer return if the issuer reasonably determines that all of the holders of the security are exempt recipients. An issuer must comply with current § 1.6045B-1 for an organizational action that occurs on or after the applicability date prescribed in current § 1.6045B-1(j). For example, an issuer of a convertible debt instrument must comply with current § 1.6045B-1 for an organizational action that occurs after December 31, 2015.

An applicable adjustment, including a conversion ratio adjustment, is an organizational action that often will affect the holder's basis in a specified security. For example, the instructions to Form 8937 provide that if a conversion ratio adjustment on a convertible debt instrument occurring after December 31, 2015, results in a distribution under section 305(c) (for example, because it is made in conjunction with a cash distribution to shareholders), the issuer of the debt instrument must file Form 8937.

Brokers and withholding agents have expressed concerns about the difficulty of complying with their reporting and withholding obligations in the absence of information about the fact and amount of a deemed distribution under section 305(c), including a deemed distribution under section 305(c) resulting from an applicable adjustment. Even after December 31, 2015, when issuers are generally required to report an applicable adjustment on a convertible debt instrument, brokers and withholding agents may not have the necessary information to comply with their reporting and withholding obligations because of the exempt recipient exception for providing a written statement (and assuming that the issuer does not choose the public reporting alternative). In response to these concerns, § 1.6045B-1(i)(2) of the proposed regulations would require that an issuer provide an issuer return to the IRS and a written statement to each holder of record of a specified security (or to the holder's nominee) relating to a deemed distribution under section 305(c) on the security, without regard to any of the general exceptions in the current regulations under section 6045B or in the instructions to Form 8937. The proposed regulations, like the current regulations, permit an issuer to not provide an issuer return to the IRS or a written statement to the holders regarding the deemed distribution if the issuer satisfies the public reporting requirements in current § 1.6045B-1(a)(3).

Section 1.6045B-1 generally applies when a deemed distribution affects the basis of a specified security. It is expected that similar principles would apply under section 6042 with respect to reporting of deemed distributions made to U.S. persons on Form 1099-DIV. Comments are requested on the implementation of Form 1099-DIV reporting on these amounts.

The proposed regulations under section 305 would apply to deemed distributions occurring on or after the date of publication of the Treasury decision adopting these rules as final regulations in the Federal Register. A taxpayer, however, may rely on these proposed regulations for deemed distributions under section 305(c) that occur prior to such date. For purposes of determining the amount of a deemed distribution to a deemed shareholder occurring prior to the date of publication, a taxpayer may determine the amount of the deemed distribution by treating such distribution either as a distribution of a right to acquire stock or as a distribution of the actual stock to which the right relates.

The proposed regulations under sections 860G, 861, 1441, 1461, 1471, and 1473 would apply to payments made on or after the date of publication. A withholding agent, however, may rely on the proposed regulations under sections 861, 1441, 1471, and 1473 for all deemed distributions under section 305(c) or, to the extent applicable, deemed payments (as defined in § 1.861-3(a)(6)) occurring on or after January 1, 2016 until the date of publication. No inference as to the application of these provisions under current law is intended by permitting reliance on these proposed regulations. A withholding agent also may rely on the proposed regulations under section 1461 for any payments occurring on or after January 1, 2016 until the date of publication, including for any deemed distribution under section 305(c) or deemed payment (as defined in § 1.861-3(a)(6)) for which the withholding agent failed to withhold.

Section 1.6045B-1(i)(2) would apply to a deemed distribution under section 305(c) occurring on or after the date of publication. In addition, an issuer would report the amount and timing of a deemed distribution in accordance with the proposed regulations under section 305 for a deemed distribution occurring on or after the date of publication. For purposes of reporting the amount of a deemed distribution occurring prior to the date of publication, an issuer may determine the amount of the deemed distribution by treating such distribution either as a distribution of a right to acquire stock, or as a distribution of the shares of stock that would be received upon exercise of the right. In addition, an issuer may rely on § 1.305-7(c)(5) of the proposed regulations to determine the date of a deemed distribution occurring prior to the date of publication.

IRS Revenue Rulings cited in this preamble are published in the Internal Revenue Bulletin (or Cumulative Bulletin) and are available from the Superintendent of Documents, U.S. Government Printing Office, Washington, DC 20402, or by visiting the IRS Web site at http://www.irs.gov.

The IRS will modify, clarify, or obsolete publications as necessary to conform to these proposed regulations as of the date of publication of the Treasury decision adopting these rules as final regulations in the Federal Register. See, e.g., Rev. Rul. 75-513 (1975-2 CB 114) and Rev. Rul. 76-186 (1976-1 CB 186). The IRS solicits comments as to whether other publications should be modified, clarified, or obsoleted.

Certain IRS regulations, including this one, are exempt from the requirements of Executive Order 12866, as supplemented and reaffirmed by Executive Order 13563. Therefore, a regulatory impact assessment is not required. It also has been determined that section 553(b) of the Administrative Procedure Act (5 U.S.C. chapter 5) does not apply to these regulations.

Pursuant to the Regulatory Flexibility Act (5 U.S.C. chapter 6), it is hereby certified that the proposed regulations under section 6045B in this document will not have a significant economic impact on a substantial number of small entities. Any effect on small entities by the rules in the proposed regulations flows directly from section 403 of the Energy Improvement and Extension Act of 2008, Division B of Public Law 110-343 (122 Stat. 3765, 3854 (2008)) (the Act).

Section 403(d) of the Act added section 6045B, which requires an issuer, including an issuer that is a small entity, to report certain information relating to any organizational action by the issuer that affects the basis of a specified security. In general, an issuer reports the information required under section 6045B to the IRS and to holders or nominees on Form 8937. The proposed regulations limit reporting to the information necessary to meet the Act's requirements. In addition, the proposed regulations retain the rule in the current regulations under section 6045B that permits an issuer to report each action publicly on its Web site instead of filing a return and furnishing each holder or nominee a statement about the action. The proposed regulations therefore do not add to the statutory impact on small entities but instead eases this impact to the extent the statute permits. Moreover, any economic impact on small entities is expected to be minimal.

Therefore, because the proposed regulations in this document will not have a significant economic impact on a substantial number of small entities, a regulatory flexibility analysis is not required.

Pursuant to section 7805(f) of the Code, this notice of proposed rulemaking has been submitted to the Chief Counsel for Advocacy of the Small Business Administration for comment on its impact on small business.

Before the proposed regulations are adopted as final regulations, consideration will be given to any comments that are submitted timely to the IRS as prescribed in this preamble under the “Addresses” heading. The Treasury Department and the IRS request comments on all aspects of the proposed regulations. All comments will be available for public inspection and copying upon request, or at www.regulations.gov. A public hearing will be scheduled if requested in writing by any person that timely submits written comments. If a public hearing is scheduled, notice of the date, time, and place for the public hearing will be published in the Federal Register.

The principal authors of these regulations are: With respect to the regulations under section 305, Maurice M. LaBrie of the Office of Associate Chief Counsel (Corporate); with respect to the regulations under sections 860G, 861, 1441, 1461, 1471, and 1473, Subin Seth of the Office of Associate Chief Counsel (International); and with respect to the regulations under section 6045B, Pamela Lew of the Office of Associate Chief Counsel (Financial Institutions and Products), all within the Office of Chief Counsel, IRS. Other personnel from the Treasury Department and the IRS participated in developing the regulations.

Accordingly, 26 CFR part 1 is proposed to be amended as follows:

The revisions and addition read as follows:

The revisions and addition read as follows:

The additions read as follows:

The revisions and addition read as follows:

The addition reads as follows:

The addition reads as follows:

The revisions and addition read as follows: